Mergers & Acquisitions Insight – Q3 2017
A recent report from Credit Suisse highlighted that overall global merger and acquisition activity is down during 2017 despite the excellent corporate backdrop. Global GDP growth is expected to be ahead of expectations in the current year, with low volatility and continued low level of interest rates. With the financial sector in good shape, there should also be ample supply and appetite for the funding of deals. There is some evidence that US corporates are delaying deals until they have greater clarity of the tax reforms yet to be implemented by President Trump. It could see large cash piles being repatriated to the US from overseas but executives are understandably cautious on speculating on the changes. True, some deals have simply not been firmed up or the target company have turned the suitor down. A huge attempted deal that falls into this camp, was the £125 billion proposed acquisition of Unilever by Kraft Heinz.
Unilever forced Kraft Heinz to abandon its bid for the company after the Anglo-Dutch maker of Marmite and Flora said it would use every tool at its disposal to fend off a deal. Unilever, led by Dutch chief executive Paul Polman, is understood to have warned the aggressor that there was no appetite for the offer at boardroom level and that investors were highly unlikely to be swayed. Kraft’s offer was made partly in shares but mostly in cash, about £70bn, a sum that would have been funded by debt. This heavily leveraged business model would have dragged down Unilever’s credit rating, leaving the combined company laden with a huge debt pile incurring substantial repayment costs. There is a feeling that a hostile bid could still be made with some analysts claiming that a £150 billion increased offer could still be attractive for Kraft Heinz.
About $1.5 trillion in M&A has been announced so far this year, down 2.2% from the same period last year, according to data compiled by Bloomberg. Announced deals involving Chinese companies are down 22%, while overseas acquisitions of U.K. targets have fallen 14%. The uncertainty of Brexit is clearly an issue here, despite some attractions of the weaker Sterling. Continental Europe seems to be bucking this trend with deals announced so far up 22% when compared to 2016. A recent survey of European businesses by Credit Suisse showed 33% of those questioned were intending to increase their spending on M&A activity in the year ahead. This is up sharply from 24% in the prior survey they conducted. High equity valuations and the change in monetary policy could further slow activity as the year progresses.
The research also noted the rise of the activist investor and their increasing influence on the European deal scene. Indeed, the number of European businesses targeted by activist investors has doubled between 2014 and 2016 and that figure could grow substantially higher if the pace of activism in the second half of 2017 matches that seen in the first. Indeed, in late June a notable example was US owned Third Point LLC which took a 1% stake in food giant Nestle and called for sweeping changes to the way the business was run and its finances were managed. Nestlé’s management were sufficiently concerned by these events to organise a $21.00 billion buyback of its own stock to keep other major shareholders on side.
Another major UK deal that trundles on is the proposed acquisition of Sky by Twenty First Century Fox to buy the 61% of the company it does not own already at £10.75 per share, valuing the whole company at £18 billion. The deal comes five years after an attempted takeover of the British broadcaster had to be abandoned at the height of the phone hacking scandal. There is a plethora of regulatory hurdles to clear and given the delays, so far a payment has already been triggered to Sky shareholders. Sky has warned that uncertainty and delays to the deal could damage its ability to invest in the UK.
Other notable deals we have seen in the UK has been the takeover of Jimmy Choo, the luxury shoe company, by Michael Kors of the US in a £896m deal. Michael Kors, once the hottest name in affordable luxury with a hugely popular handbag range, has been struggling in recent quarters with declining same-store sales as fewer people visit its shops. In response, it has expanded into dresses and menswear, and invested in its online business. It said Jimmy Choo would continue to operate as it does today, under its existing management team.
In the financial sector, Standard Life and Aberdeen Asset Management have announced a merger with both groups recommending an all-share deal to shareholders, with the deal creating Europe’s second largest fund manager with £660 billion in assets under management (AuM). The deal value is £12 billion and there are likely to be over £200m of cost savings with the loss of 800 jobs in the first three years post-merger. The enlarged company, to be called Standard Life Aberdeen, will be headed up by Keith Skeoch and Aberdeen boss Martin Gilbert with a 16-member board.
US payments company, Vantiv, in a colossal £8.5 billion deal, has bought FTSE constituent Worldpay Group. The takeover underlines the boom in the electronic payments industry, as more people shift from cash to paying online and in store card transactions switch from chip and pin to contactless. In January, we saw the surprise deal of Tesco to acquire the Wholesale giant, Booker Group for £3.7 billion. The deal is expected to generate significant synergies and boost cross selling opportunities. As well as raising concerns over competition issues, Tesco's move for Booker has also been criticised by some of its shareholders.
The most surprising deal in the US this year was arguably the $14 billion takeover of Whole Foods by Amazon.com. This caught most analysts and investors by surprise, Whole Foods, after all is a food retailing company with thin margins and slowing growth. The Amazon CFO has implied that the acquisition is part of a broader experiment to test out different store formats that most appeal to its customers. Amazon has a better understanding of the customer than any other retailer does. The Motley Fool estimates that over 80 million people are Amazon Prime members. With this data, it is capable of building analytic models which can predict what these consumers will want, how much they will want, and when they will want it. The deal is clearly part of a long-term plan.
We expect companies to continue with deals at a similar pace in the second half of the year but politics seems to be one area, which could slow activity. Central Banks will also drive sentiment with how quickly QE is phased out and what happens to bond yields will be vital. Despite the duration of the current bull market, there remains scope for one last ‘animal spirits’ spending splurge.