AirLiquide; Market Cap: $39.84bn (as of 20/11/15)
Airgas; Market Cap: $10.00bn (as of 20/11/15)

Introduction

On November 17, the French industrial gases specialist Air Liquide announced it had reached an agreement to acquire the U.S. supplier Airgas for a total consideration of $13.4bn, including debt. The deal would create the largest industrial gases supplier. It is the biggest industrial-gases deal in the last 9 years and is expected to close within nine months.

Air Liquide

Air Liquide is a French multinational company, the world’s second largest supplier of industrial gases and services to several industries including medical, chemical and electronic manufacturers. It can boast of a global footprint, comprising of 80 countries, where its core activities are related to oxygen, nitrogen and hydrogen.

Its momentum, with consolidated revenue up by 4.5% in 2014, is particularly driven by expansion in APAC (+11.6%), with a particular focus on emerging economies, such as China (+20%). Even if Europe still accounts for approximately half of the total revenue figure (€15.3bn), the reference market for short-medium term growth is clearly North America. In the region, Air Liquide is far from being the most prominent player, but in 2014 the market reported a 7.9% growth mainly supported by the increased oxygen and nitrogen volumes. Furthermore, Air Liquide’s Electronics business is becoming far more important, reporting a 30% improvement in revenues during the last fiscal year, which was mostly the result of realized synergies and integration with Voltaix, the semiconductor materials’ manufacturer acquired by the French company in 2013. Moreover, the company has always been at the cutting edge of innovation in the industry, filing 287 patents only in 2014 and having launched in 2011 a €12bn investment program, primarily to outsource industrial gas production and to perform strategic acquisitions.

As of Thursday 19, Air Liquide traded at 22x its LTM EPS, and its share price is up 18% on an annual basis, even after its 7% price drop after the acquisition announcement. These figures probably convinced its management to undertake a stock issuance, instead of raising a huge amount of debt that could have possibly deteriorated its credit standards.

Airgas

Airgas is currently one of the largest U.S suppliers of industrial and medical gases, as well as safety products and refrigerants. The company’s distribution division supplies its customers with gases (atmosphere gases, nitrogen, oxygen, argon, etc.) delivered in packaged and bulked quantities, which are produced in the company’s gas labs. Airgas also offers hard goods, such as welding equipment, and supply chain management services.

The U.S player has reported modest growth in 2014 sales, which increased by 2% to $5.1bn. The company showed record FCF generation of $441m, which allowed it to make eleven strategic acquisitions with aggregate annual sales of $82m and to increase its Q1 2015 dividend by 15%. Airgas’ unaffected share price of c.$94 was down 18% on an annual basis, trading at a LTM EPS multiple of 19x, but still 34% higher than the $70 per share bid received by Air Products in 2011. As of November 19, the company trades at $138, close to the announced transaction price of $143 per share. The EV paid by Air Liquide of $13.4bn represents an EBITDA multiple of 14.4x, based on the adjusted EBITDA figure reported by Airgas in 2014 (c. $930m), way higher than the 8.8x multiple that Air Products would have paid on Airgas’ 2010 adjusted EBITDA (c. $660m).

Deal Structure

Air Liquide is going to buy Airgas for $13.4bn, paying the company’s shareholders $143 per share in cash for all outstanding shares. This price implies a premium of 50.6% to Airgas’ one-month average share price prior to the announcement of the transaction and a premium of 20.3% over its 52-week high share price. The offer values Airgas at 12.8x 2016e EV/EBITDA, a multiple higher than the peer group’s average of approximately 11.5x. The deal is expected to be accretive in EPS from year one by Air Liquid’s management.

A further consideration might explain the huge premium that Air Liquide has offered for Airgas. In late 2010, the Pennsylvania based company fought off a takeover from Air Chemicals because the board of directors thought that the offer was too low. Its strategy was to enact the so-called poison pill, i.e. to exercise the right to sell new shares at a discounted price to its current shareholders to increase the cost of the acquisition. The company then said that it was willing to negotiate a deal starting from a higher price, but Air Products withdrew its offer. Considering this episode, it seems plausible that Air Liquide made a higher bid right from the start fearing that Airgas would react as it did in 2010.

Air Liquide has committed bridge financing for the transaction and is planning to refinance through a capital increase in the range of €3bn to €4bn, and a combination of U.S. dollar and Euro long-term bonds. The firm’s objective is to maintain its S&P’s A^-/A rating. The transaction was approved by the Boards of Directors of both companies but its success is subject to the approval of Airgas shareholders and of the relevant antitrust authorities.

Source: Company Presentation

The Industry

The global industrial gas market is dominated by three major chemical companies: Air Liquide, Linde and Praxair which account for c.75% of the industry in terms of sales. 2015 has been affected by a fall in commodity prices, and more particularly in oil and gas prices. Demand for drilling equipment and petrochemical plants has decreased consequently. The industry is trying to reshape to fight this trend.

Air Liquide planned to grow externally and to develop its activity in the packaged gas in the US. Competitors are intensifying their strategies as well: the German Lindeis developing its healthcare activity especially in China; Praxair, last September, announced it will acquire Yara, a supplier of carbon dioxide in Europe.

Rationale

Despite the high price offered, Air Liquid could deeply benefit from the acquisition of Airgas. Air Liquide can now fulfil its ambition to become the leader of the industrial gas market instead of Linde, with $17.8bn of pro-forma sales (+30%). But more than just a leadership, it was a complementary business that the petrochemical company was looking for.

Geographical complementarity first, this transaction will allow Air Liquid to reshape its international presence. Air Liquide’s investments in emerging countries seem to have been delayed by the economic downturn in Asia and South America. The gas company wants to strengthen its presence in the US, which is recovering and therefore seems attractive. Its turnover will rise from 24% to 42%, originating from Americas. This would reduce Air Liquide’s exposure to country risk with a more diversified presence.

In September 2015, Airgas announced the spin-off of its technology-material business. The remaining activity, Airgas’s distribution of packaged gases, generates strong and growing cash flows. Combined with Air Liquide’s gas production, the activity of the new entity will benefit from economies of scale due to this horizontal integration and from the new distribution network in the US.

Finally, Air Liquide expects to benefit from Airgas’s savoir-faire in innovation. The industrial internet, led by General Electrics that started developing management data applications, could create long term productivity gains. Airgas’ powerful e-business platform could boost Air Liquide’s results.

Overall, this transaction is expected to generate $300m synergies arising in 2019 from cost reductions with a more efficient distribution network and sales improvements from Airgas’s customer basis.

Market Reaction

Investors weren’t pleased by the news of the acquisition, and on the day of the announcement the share price of Air Liquide dropped by 7%. They fear that Air Liquide might be overpaying for Airgas, and they are concerned about the increased exposure to the US manufacturing industry that Air Liquide will obtain after the transaction. Moreover, the company will considerably increase its exposure to debt and it may fail to maintain an S&P 500 A-/A rating despite its confidence.

Financial Advisors

Barclays Bank Plc and BNP Paribas are acting as financial advisors to Air Liquide and Goldman Sachs and Bank of America Merrill Lynch are acting as financial advisors to Airgas.

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Liberty Global plc; Market Cap: $35.46bn (as of 20/11/2015)
Cable Wireless Communications; Market Cap: £3.3bn ($5.5bn) (as of 20/11/2015)

Introduction

On November 16, Liberty Global plc agreed to buy Cable & Wireless Communications plc in a transaction worth $5.3bn, thus strengthening its strategic footholds in the emerging markets. The deal will imply the end of one of the oldest companies listed on the LSE, but at the same time, it will allow Liberty Global to expand its telecom business in Latin America and in the Caribbean. Liberty could create a company that would be able to face competitors such as Denis O’Brien’s Digicel, Telefònica and American Movìl, by combining the Cable Wireless Panama and Caribbean businesses with its operation in Puerto Rico and Chile.

Cable & Wireless Communication plc

Cable Wireless Communication plc is a UK-based telecommunications company with operations in the Caribbean and Central America. The company was born in 2010 from the split of Cable and Wireless plc in two companies, the other being called Cable & Wireless Worldwide plc. Depending on the region, the British firm offers triple-play and quad-play services (mobile, fixed voice, broadband and TV services). It operates through four segments: Panama, LIME, BTC and Seychelles.

• Panama: Cable and Wireless Panama (CWP) is a telecom operator that offers several services to Panama, that includes digital pay-TV and Internet data centers
• LIME: Brand used by 13 Caribbean businesses that provides landline, Internet, Mobile and entertainment services
• BTC: Bahamas Telecommunications Company that provides mobile and Long Term Evolution services
• Seychelles: The company offers fixed line, mobile and broadband services in the Seychelles area

In 2010, the company had a global portfolio of telecom operators in small and medium-sized markets. However, due to such a diversified portfolio, it was difficult to reach the economies of scale needed in the telecom industry, thus the Board decided to focus on the business in the Pan-America region. Namely, Cable & Wireless Communications started divesting several businesses including those in Bermuda, Channel Island, Maldives, South Atlantic and Macau.

Liberty Global plc

Liberty Global plc is an American telecommunications and television company based in the UK. The firm, formed in 2005 from the merger between Liberty Media and UGC (UnitedGlobalCom), with its operations in 14 countries is the largest international cable company. The American giant provides services through next-generation networks and innovative technology platforms that connect approximately 27 million customers subscribing to 56 million television, broadband internet and telephony services (as of 30/06/2015). The company also offers Wifi access through 6 million access points to c.5 million customers. Liberty Global’s portfolio includes brand as Virgin Media, Unitymedia, Telenet, UPC, VTR and Liberty Cablevision.

Deal Structure

Liberty Global agreed to acquire Cable and Wireless Communications in a stock and cash transaction worth $5.3bn, extending Malone’s European cable empire further into Latin America area. Including proportionate net debt of $2.7bn (as of 30/09/2015), the transaction corresponds to an attractive LTM EV/EBITDA of 12.3x.

According to the Recommended Offer, CWC’s free-float shareholders will receive an indicative value of 86.82p per share (assuming no LiLAC shares are elected) overall: the offer is made up of a combination of new Liberty Global stock plus a special dividend of 3p per share, representing a premium of c.47.9% on the company’s closing share price before talks were disclosed (October 21), and approximately 18% premium on CWC’s share price on Friday, November 13. It is reported that the non free-float shareholders (John Risley, John Malone and Brendan Paddick) have already accepted an alternative offer, resulting in blended offer price of 81.91p per share.

Shareholders will be able to choose among three different combinations of Liberty Global and LiLAC shares – the latter being a tracking stock, a sophisticated financial instrument that tracks the performance of Liberty’s Latin America and Caribbean’s holdings, distributed first in July 2015. All the alternatives will include the aforementioned fixed special dividend of 3p. In the Recommended Offer to free-float shareholders, CWC’s management suggested choosing the first alternative, without including tracking stock, and electing for only new Liberty Global Class A and Class C ordinary shares, because it is considered the least risky.

The other two alternatives available for shareholders include a combination of new Liberty Global and LiLAC Class A and C shares in different proportions in exchange for each share of CWC – on top of which the special dividend is to be added on the transaction close.

Cable & Wireless stock rose 6.6% after the announcement, to $1.24 (£0.79). Ordinary Class A and Non-voting Class C Liberty’s shares were down roughly 2.2% on the deal announcement day.

Upon completion, expected in the second quarter of 2016 and pending on regulatory approval, Liberty Global expects to attribute CWC to the LiLAC Group. On a pro forma basis, existing LiLAC Group shareholders will own 25.44% of the shares in the LiLAC Group, 7.21% will be owned by existing CWC Shareholders, and 67.35% will be represented by the inter-group interest in favor of the Liberty Global Group. In addition, existing CWC Shareholders will hold approximately 11% of the total Liberty Global Class A Ordinary Shares, and 11% of the total Liberty Global Class C Ordinary Shares.

Deal Rationale

In recent years, Liberty Global has managed to expand its European platform via several acquisitions across the area, spanning the broadband industry in Ireland, Belgium, the UK, and the Netherlands in particular, in an attempt to generate income from the regional demand for bundles of television, broadband, telephone, and mobile services. Until last year, their drive was mostly directed towards incorporating competitors in an attempt of horizontal consolidation, acquiring mostly fixed networks; in 2014, instead, Liberty CEO reported that the company’s inorganic growth appetite would switch to a vertical integration strategy. The most noteworthy deals Liberty completed include the investment in UK broadcaster ITV, the acquisition of production outfit All3Media, the purchase of Dutch cable operator Ziggo, and the acquisition of Virgin Media.

However, their latest consolidation move, the planned acquisition of BASE, the third-largest Belgian mobile-phone operator for $1.4bn, to be merged with Liberty’s Telenet mobile business, attracted an investigation on behalf of the European Union antitrust regulators on the grounds of the potential for higher prices and narrower choice for customers in the region.

In the meantime, Liberty Global has also gradually started to focus on developing its business in Latin America and the Caribbean: for instance, Liberty’s Chilean business, VTR, is now the largest cable operator in Chile, and the company also counts a 60% interest in the largest cable company in Puerto Rico, Liberty Cablevision. This year Liberty Global also completed its acquisition of Choice, a large cable and worldwide player in Puerto Rico. In July 2015, Liberty Global announced the completion of the announced distribution of the LiLAC tracking stock for its operations in the region, in order to best position itself to exploit the low broadband and pay TV penetrations of the area.

 Following up on these ambitions, the acquisition of Cable & Wireless Communications will add scale to the regional operations, combining and enhancing B2C and B2B strong platforms. B2B will be particularly revamped taking advantage of CWC’s comprehensive product portfolio and extensive terrestrial and submarine network. According to Liberty CEO, the combined business will serve 10 million video, data, voice and mobile subscribers; over the medium term, the company plans to achieve a double-digit rebased operating cash flow growth and to create value with their high-quality networks, while leveraging on the group’s management expertise as well. LTM estimated operating cash flow for the combined entity would amount to $1.4bn, while combined revenue would top $3.5bn.

The combination easily positions itself as a powerful investment vehicle, as it shows the potential both for attractive organic growth and for further consolidation in the area. Indeed, Liberty Global first expects to exploit the target’s fixed and mobile networks and product leadership with the goal of tapping the unexplored demand for broadband, pay TV and mobile products and drive customer take-up in Latin America and in the Caribbean.

As far as cost synergies are concerned, Liberty Global will push for a successful integration of Columbus, a recent acquisition by CWC, in the business, while quantifying at least $125m of financial benefits from scaling-up. By the first quarter of 2018, CWC and Columbus are also expected to generate overall synergies in one-time capital expenditures amounting to $145m. Furthermore, savings opportunities are present in administrative areas for LiLAC and CWC. Namely, public company expenses will be eliminated, cutting other corporate and administrative expenses when overlapping, especially on procurement and product development.

Advisors

Goldman Sachs International and LionTree Advisors acted as financial advisors to Liberty Global. Shearman & Sterling LLP served as legal counsel to Liberty Global.Evercore Partners International LLP is acting as Lead Financial and Rule 3 Advisor, J.P. Morgan Cazenove is acting as Financial Advisor and Corporate Broker, and Deutsche Bank AG is acting as Corporate Broker to CWC.

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Starwood Hotels & Resorts Worldwide Inc.; Market Cap: $12.18bn (as of 19/11/2015)
Marriott International Inc.; Market Cap: $ 18.64bn (as of 19/11/2015)

Introduction

On November 16, Marriott International, Inc. (NASDAQ:MAR) and Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) announced that the boards of directors of both companies unanimously approved a definitive merger agreement, creating the world’s largest hotel company. The $12.2bn deal, $11.9bn in stock and $340m in cash, will give birth to a new hotel conglomerate with over 1.1 million rooms in more than 5,500 hotels spanning the globe in over 100 countries.

About Starwood Hotels & Resorts Worldwide, Inc.

Starwood Hotels & Resorts Worldwide, Inc. is an American hotel and leisure company headquartered in Stamford, Connecticut. It is one of the world’s largest hotel companies: managing, operating, franchising, and owning hotels under its ten brands. Some of its most popular brands include Westin, W, Sheraton, Le Méridien and St. Regis.  In 2014 Starwood owned, managed, or franchised more than 1,200 properties employing over 180,400 people. Starwood generated about $6bn in revenue and $643m in net income in 2014.

About Marriot International, Inc.

Marriot international, Inc. is an American diversified hospitality company that manages and franchises a diverse portfolio of hotels and lodging facilities. Founded in 1993, Marriott was the first hotel company worldwide to offer guests the option to book reservations online. Marriott has more than 4,087 properties in over 80 countries around the world with over 697,000 rooms. Marriot generated $13.8bn in revenue and $753m in net income in 2014.

Industry Background

The hotel segment is a wide-ranging category within the hospitality industry that globally generates approximately between $400-500bn in revenue each year, one third of which is attributable to the United States. It is a highly competitive industry with the major players being InterContinental Hotels Group, Marriott International Hilton Worldwide, Accor, Starwood Hotels & Resorts, and the Wyndham Hotel Group.

Hotels are classified based on services they offer into 1 Star, 2 Star, 3 Star, 4 Star, 5 Star, and unrated. The 3 Star segment holds the largest market share in the global hotels market; increasing domestic tourism and demand for luxurious lifestyles drive its popularity. The unrated segment is expected to be the fastest growing segment due to increasing demand in budget hotels. Geographically, North America is the largest as well as fastest growing market for hotels globally.

The hotel industry has been demonstrating strong growth as indicated by their hotel occupancy rates – a key performance indicator for the industry. Currently occupancy rates are averaging 65% in the US, but according to Morgan Stanley rates are expected to rise to 69.1% in 2017. Despite strong growth, the hotel industry is under pressure from the room-sharing start-up Airbnb, which is disrupting traditional market dynamics and stealing market share. Airbnb currently has over 50% of 3-5 night travelers and is aggressively trying to expand its presence in the industry.

Marriott’s decision to buy Starwood is an indicator that modern hospitality companies view mass scale as essential to their success, given that the internet is removing old barriers to entry. Traditional hotel companies, like Marriott and Starwood, are being compelled to increase their global footprint for fear of losing market share to more nimble competitors.

Terms of the Deal

Marriott announced that it would acquire Starwood for $11.9bn in stock and $340m in cash. Starwood’s shareholders will receive approximately $72.08 per share. Cash portion will amount to $2.00, while the biggest part, $70.08, will come in the form of 0.92 shares of Marriott Class A common stockbased on the 20-day VWAP (volume weighted average price) ending on November 13 ($76.17), giving Starwood investors 37% of the combined company. Another $7.80 will come from the previously announced spin-off of Starwood’s timeshare business, which should close prior to the Marriott-Starwood merger closing.

The offer of $72.08 per share represents a 4% discount to the closing price on Friday 13. Yet, after adjusting for the value of consideration to be separately received by Starwood shareholders in the timeshare transaction, the merger consideration represents a premium of approximately 6.5% and a premium of approximately 19% using the 20-day VWAP ending October 26, before acquisition rumors.

Deal Rationale

Marriott expects to deliver at least $200m in annual cost savings in the second full year after closing.  This will be accomplished by leveraging operating and G&A efficiencies. Marriott expects the transaction to be earnings accretive by the second year after the merger, not including the impact of transaction and transition costs, which, as indicated by Starwood CEO, are anticipated to be in range of $100m to $150m.

Earnings will mainly benefit from: post-transaction asset sales as Marriott expects Starwood to continue its capital recycling program, generating an estimated $1.5-2.0bn of after-tax proceeds from the sale of owned hotels over the next two years; increased efficiencies by leveraging economies of scale in reservations, procurement and shared services, and accelerated unit growth of Starwood’s brands leveraging Marriott’s worldwide global footprint.

Furthermore, Marriott and Starwood generated $2.7bn in revenue in the last 12 months. As the combined company will bring two of the most expert and innovative teams in the industry and gather a clientele of over 75 million customers, it expects to return over $2.25bn in share repurchases and dividends to shareholders in both 2015 and 2016.

One final consideration is to be made regarding potential clashes between different customer types. Today, both companies adopt various loyalty programs: Marriott Rewards, with 54 million members, and Starwood Preferred Guest, with 21 million members, are among the industry’s most-awarded loyalty programs, driving significant repeat business.  Marriott expects the positive impact on revenues of these loyalty programs to be even stronger when the companies merge. Yet, some factors may push in opposite direction. In fact, loyalty programs are far from similar; Starwood “Preferred Guest” confers considerable perks to the company’s most frequent customers. For instance, even a short staying of 25 nights a year would guarantee 4 p.m. checkouts at most Starwood’s hotels, a benefit that is only offered subject to availability at Marriott. To exaggerate, clients staying at least 100 nights a year are assigned a personal travel ambassador to handle their bookings, and arrange customized perks. Members worry it will become harder to get perks, and this worry is not unreasonable if we consider the notable reduction in frequent flyers advantages after the consolidation in the airline industry triggered by low-cost carriers – may Airbnb represent a similar catalyst for hotels?

Market Reaction

Marriott’s share price positively reacted to the deal with a 1.4% increase after announcement (from $72.49 on Nov. 13 to $73.47 on Nov. 16). However, Starwood’s share price experienced a 3.6% drop from $74.99 per share on November 13 to $72.27 per share on November 16. The fall in Starwood’s shares is indicative of investors’ dissatisfaction with Marriott’s offer, which represented a 4% discount to the stock’s price on November 13, excluding value of spin-off proceedings. Much speculation took place over how much the company would be valued for in a sale and investors were hopeful for a higher price. Moreover, cash as a source accounted for insignificant 2.8% of the deal, which is the seventh-lowest percentage on record for noteworthy, greater than $10 billion, cash-and-stock deals, as per information gathered by Dealogic. In addition to that, merger agreement includes no-shop clauses, which prevents Starwood to negotiate with the companies such as Hyatt Hotels Corp and a Chinese consortium, and break-up penalty is set to $400m.

Financial Advisors

Deutsche Bank Securities is serving as financial advisor to Marriott International, Inc., while Lazard and Citigroup are the financial advisors to Starwood Hotels & Resorts Worldwide Inc.

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Enel S.p.A.; Market Cap: $39.10bn (as of 27/11/2015)
Enel Green Power S.p.A.; Market Cap: $9.96bn (as of 27/11/2015)

Introduction

Under an agreement announced in mid-November, Enel, which owns 69% of Enel Green Power (EGP), plans to reintegrate EGP back into its corporate portfolio. Enel, Italy’s largest utility provider, plans to issues €3.1 billion of shares to repurchase EGP which it sold through an initial public offering in 2010. Enel’s reintegration plans are a sign of its increasing prioritization and investment in renewable energy.

About Enel S.p.A

Enel S.p.A. (ENEL) is a multinational generator and distributor of electricity and gas. It was first established in 1962 as a public body and originally stood for Ente Nazionale per L’Energia Elettrica (National Entity for Electricity). It was converted into a limited company in 1992 and in 1999, after the liberalization of the Italian electricity market, was privatized. As of February 25th, the Italian government still owned 25.5% of the company’s shares.

In 2014 Enel employed approximately 70,000 people in 30 countries. It has 13 listed subsidiaries and roughly two-fifths of its earnings are handed over to minority investors, substantially higher than the 12% average for the European sector. Enel’s highly complicated business structure has prompted executives to look into restructuring of their Latin American operations, which include Endesa Chile, involved in power generation, and Chilectra, the main distributor in the Santiago de Chile area. Enel has $76.9bn in revenues and $660m in net income. The company in 2014 has generated 283.1TWh of electricity (34% from renewables, 29% from coal, 14% from nuclear, 13% from gas combined cycle and 10% from oil and gas turbines) and concentrated most of its capex (in total €6.7bn) in Iberia and LATAM (€2.6bn). As the data clearly reports, Enel has been a leader among large European utilities in investing in renewable energy, with total capex for renewable source generation in 2014 amounting to €1.7bn. Most notably, the company has led the corporate effort for a climate deal in the upcoming Paris talks.

Currently Enel trades at 93x its TTM EPS, way higher compared to peers like GDF SUEZ (8x) and SSE plc (29x), moreover it is one of the very few players in the industry that has positive TTM EPS. Its share price performance in the last twelve months was rather flat, with only a 7% improvement to €4.15 as of Friday. However its performance, compared to Amundi’s ETF MSCI European Utilities, which showed a 100bp decline in the last twelve months, can be viewed as a positive sign and it is mainly driven by the group’s reorganization both in EMEA and LATAM.

About Enel Green Power S.p.A

Enel Green Power S.p.A. (EGPW) is an Italian multinational renewable energy corporation headquartered in Rome. EGP was created as a subsidiary of Enel in December 2008 in an effort to group its global renewable energy interests. EGP has operations in over 16 countries across 3 continents (Europe, North America, and South America); however, more than half of its plants are located in Italy. Its assets are primarily focused on wind, solar power, geothermal electricity, hydroelectricity, and biomass sources.  In November 2010, a 30.8% stake in the company was floated on Borsa Italiana and Bolsa de Madrid; raising €2.6 billion. It was the largest IPO in Europe since Iberdrola Renovables in December 2007.

In the first 9 months of 2015 the company added 1,000MW of installed capacity and entered the Indian market, to improve the FY 2014 figures of $2.4bn in revenues and $208m in net income.

Its stock price has been characterized by high volatility in the last twelve months and an uptick in the low single digits, however, if we look at the two months before the deal was announced, EGP’s share price went from €1.60 to the current figure close to €2, an upsurge of around 25%.

The deal

Italian utility giant – Enel has decided to acquire the remaining shares of its subsidiary company Enel Green Power (EGP) in order to boost the growth of the entire group. This growth has been envisaged through the increase in investment capability of EGP, the implementation of the target’s best practices to Enel, better integration of renewables and both commercial and financial synergies.

With this deal, Enel is seeking control over the remaining 30% of EGP that it did not own before, and for this strategy it needs to give to target’s shareholders 0.48 of group shares for each EGP share it acquires. Therefore, EGP and its subsidiaries will become the integral part of the entire group. This deal has been dubbed a “partial non-proportional spin-off” of EGP into Enel. As a result, Enel shareholders will become the sole owners of EGP, whose shares will be discontinued.  Moreover, the Italian government’s stake in Enel will consequently drop from 25% to 23.569%.

The spin-off is subject to the approval of the extraordinary shareholder’s meeting of both EGP and Enel that will be organized on January 11th, 2016. Consequently, the deal will be closed by the end of Q1 2016.

The reasons for this deal could be the financial performance of both Enel and EGP. The latter has seen quite good results, and it shows great progress from first and second stage (being government support and cheap funding) into a third stage of growth, thus becoming a fully profitable company that can be a crucial part of Enel group. The growth of its operations since listing has been very significant, as it doubled its capacity from 5.8GW to 10.6GW. Moreover, its EBITDA has showed noticeable growth of 38% from 2010 value. On the other hand, Enel is dragged down by the high amount of debt that it possesses and it could thus see EGP as a further strategy for growth and better positioning. Another reason for which Enel seeks the complete ownership in EGP is the changing of the needs of the customers that are increasingly seeking for integration of renewables and traditional resources. Moreover, Enel has already announced plans for the increase in investments in renewable energy summing to 50% of new capex of the entire group in next four years. Thus, having the entire stake of EGP, it could fully profit from the investments it plans to make.

Market reactions

The market has not been convinced that this deal will create value for shareholders as both Enel and Enel Green Power has seen a decline in the value of their shares subsequent to the announcement (2.5% and 2.6% respectively.) The main reason for this is the fact that the deal was executed thanks to Enel’s majority holding in EGP, which under Italian legislature made it possible to impose its decision over the minority shareholders – and perform this deal.

Advisors

Credit Suisse and J.P. Morgan acted as the financial advisors for Enel, while Enel Green Power for their advisory has hired Barclays and Mediobanca.

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Pfizer Inc.; market cap as of 27/11/2015: $202.7bn
Allergan plc; market cap as of 27/11/2015: $126bn

Introduction

On November 23, 2015, Pfizer Inc. (NYSE: PFE) and Allergan plc (NYSE: AGN) announced that their boards of directors have unanimously approved a definitive merger agreement under which Pfizer will combine with Allergan in a stock transaction currently valued at $363.63 per Allergan share, for a total enterprise value of approximately $160bn, based on the closing price of Pfizer common stock of $32.18 on November 20, 2015. Allergan shareholders will receive 11.3 shares of the combined company for each of their Allergan shares, and Pfizer stockholders will receive one share of the combined company for each of their Pfizer shares. The combination is the biggest-ever pharma merger and it will give birth to a pharmaceutical giant with a global footprint, based in Ireland and with a corporate tax rate between 17% and 18%.

The deal did not come as a surprise as we are witnessing a record year for healthcare mergers and acquisitions, taking their cumulative value in 2015 to more than $600bn. However, this would be the first full-scale combination between two top-20 pharma groups since Pfizer bought Wyeth and Merck acquired Schering-Plough in 2009. Pfizer has been hungry for another transformational deal and this one just might feed it.

Pfizer Inc.

Pfizer Inc. is a global biopharmaceutical company, currently headquartered in New York. The Company’s portfolio includes medications and vaccines, as well as consumer healthcare products. Pfizer’s commercial operations mainly consist of two businesses:

• Innovative Products, which include the Global Innovative Pharmaceutical segment (GIP) and the Global Vaccines, Oncology and Consumer Healthcare segment (VOC).
• Established Products, consisting of the Global Established Pharmaceutical segment (GEP). Its research focuses on six areas, which include immunology and inflammation, cardiovascular and metabolic diseases, oncology, vaccines, neuroscience and pain, and rare diseases. In addition, it focuses on biosimilars.

Its key biopharmaceutical products include known brands like Lipitor and Viagra. Pfizer also counts popular over-the-counter consumer health products such as Emergen-C, Advil, Centrum and Imedin. The Consumer Healthcare business focuses on various geographic markets, such as the United States, China, Canada, Germany, Italy and Brazil.

In the last 15 years, Pfizer spent $257bn for acquisitions to boost its R&D and pipeline, starting with the $112bn takeover of Warner-Lambert in 2000. In this period, Pfizer also purchased Pharmacia for $60bn, and it was involved in the last combination between two top-20 pharma groups, in 2009, when it paid $68bn to buy Wyeth. In this last case, even though today Pfizer’s revenues are the same as they were before the deal, Pfizer hit the savings target for the deal and offset patent expiries losses. Considerations on the less than 10% increase in Pfizer’s market cap can however raise shareholders’ concerns. More recently, Pfizer acquired Hospira for $17bn in an all-cash transaction, which could confer the company a leading position in the sterile injectable business. Before confirming talks with Allergan, Pfizer unsuccessfully considered the takeover of GlaxoSmithKline, which would have been roughly on the same scale as the current deal because of GSK’s market cap at $105bn, and its status as largest drug maker in the UK. A year and half earlier Pfizer had attempted a $118bn hostile bid for the number 2 group in the country, AstraZeneca, which failed mainly because of political opposition in Britain and concerns for its hostile nature.

Allergan plc

Allergan plc is a diversified global pharmaceutical company headquartered in Dublin, Ireland. It is considered to be a leader in “growth pharma”, after its newfound focus on branded pharmaceuticals. In late 2014 Actavis announced the purchase Allergan for $66bn and in June 2015, three months after completion, it changed its name from Actavis plc to Allergan plc, and began its rebranding campaign.

Allergan’s brand portfolio is made up of products in the categories of dermatology and aesthetics (Botox being among the best known), CNS, eye care, women’s health and urology, GI and cystic fibrosis, cardiovascular and infectious disease

Over the last years, Allergan has been very active in the M&A landscape, completing its transformation in a specialist branded drugs. Actavis (now Allergan as previously explained) completed a $23.6bn acquisition of Forest Laboratories in 2014, as well as a $8.5bn takeover of Warner Chilcott in 2013. In October 2015, it bought Kythera Biopharmaceuticals for $2bn.

Most importantly, in July 2015, the company had announced the sale of its generics business to Teva for $40.5bn in cash and stock, which provided Allergan with cash to pay down debt and will allow the company to strategically focus more on brand-name drugs. Allergan’s Generics portfolio comprises more than 1,000 generics, branded generics, established brands and over-the-counter products.

Deal structure

As previously stated, Pfizer is paying $160bn, including debt. Namely, Allergan shareholders will receive 11.3 shares of the combined company for each of their Allergan shares, and Pfizer stockholders will receive one share of the combined company for each of their Pfizer shares.

Although the transaction is completed on a share by share basis, Pfizer’s stockholders can choose to receive cash instead of stocks of the combined company. This option is subject to the condition that the aggregate amount of cash paid for the transaction is between $6bn and$12bn. If the amount of cash requested by the shareholders is greater than $12bn, it will be distributed proportionally among them. Additionally, if all of the $12bn of cash is used, it is expected that Pfizer’s stockholders will hold a portion accounting for roughly 56% of newly formed entity which actually makes this inversion doable.

It is predicted that the transaction will not impact Pfizer’s EPS in 2017 and that it will have a modest accretive effect in 2018. In 2019 the accretion will account for a 10% increase in EPS, while in 2020 the impact is expected to be between 15% and 20%. However, these bullish estimations include the effect of the accelerated share repurchase program that will take place in Q1/Q2 of 2016, as Pfizer can still buy back shares for $5.4bn according to its repurchase authorization.

This merger would give Pfizer better access to billions of cash it holds overseas and allow for more share buybacks, dividend payments and business development. It is worth mentioning that the transaction is not expected to have an impact on Pfizer’s existing dividend level on a per share basis as the combined company intends to use its combined cash flow to continue the support of an attractive payout ratio of approximately 50%. Another thing to note is that the deal includes $8bn in debt.

The completion of the transaction is still subject to the approval of both the regulators of U.S. and of the E.U. and the approval of the shareholders of the companies.

Deal Rationale and Political Implications

The key driver of the deal is the benefit from tax savings that Pfizer could achieve by moving its domicile to Ireland, where Allergan is based. Indeed, the deal, which represents the biggest ever “tax inversion”, is structured in a way that allows the U.S. company and its counterpart to reincorporate overseas as a consequence of the merger in order to avoid American corporate taxes. By doing so, Pfizer would benefit from a reduced effective tax rate of 17% to 18% compared to around 25.5% in 2014. Indeed, beacuse the US tax system makes companies pay extra tax when they repatriate foreign profits, the inversion will help Pfizer to unlock offshore profits accounting for at least $128bn, causing the company to save potentially tens of billions of dollars of tax. Moreover, the deal is likely to generate a one-off earnings windfall of up to $21bn and help the company escape from potentially big US tax bills in the future. The shareholders of Allergan, on the other hand, were satisfied with the profit forecasts provided by Pfizer and Allergan and the scope for share buybacks, which could be huge given that the combined company will have access to an estimated $66bn of cash. Also, many investors expect the combined company to generate annual cash flow in excess of $25bn from the start of 2018.

The bid for Allergan is the second attempt for a tax inversion deal after the company abandoned an offer for Anglo-Swedish AstraZeneca for $118bn just 18 months ago because of a fierce pressure coming from British politicians.

Why then did Allergan become the most interesting solution available on the market for Pfizer? There are two the main features that caused the company to be so attractive. First of all, the fact that it is based in Ireland provides the opportunity, long sought by Mr Read, Pfizer’s chief executive, for the company to move its domicile out of the U.S. to a jurisdiction characterized by a lower tax rate. The way Ireland’s tax system works is that tax is due only on business conducted in the country. This means that Pfizer would not face any extra tax bills on its foreign profits in the future. Any extra tax paid at Ireland’s 12.5% rate would depend on whether the tie-up resulted in extra activity in Ireland, where Pfizer will have its principal executive office, while its global operational headquarters will be in New York..

The second reason is to be found in the rules that govern the so-called “inversions” which impose that the original shareholders of the non-U.S. company must own a stake of at least 40% in the combined entity. Under these conditions, Allergan represents one of the few overseas firms big enough to allow Pfizer to accomplish such an ambition.

Apart from tax reductions, the two companies declared that they expect to benefit from $2bn per year of increased efficiencies within the next three years. Furthermore, the combined company will benefit from a broader innovative portfolio of leading medicines in key categories and a platform for sustainable growth with diversified payer groups. A combined pipeline of more than 100 mid-to-late stage programs in development and greater resources to invest in R&D and manufacturing is expected to sustain the growth of the innovative business over the long term. Moreover, the CEO of Allergan said the combination would provide access to about 70 additional worldwide markets for Allergan products, such as Botox wrinkle treatment, Alzheimer’s drug Namenda and dry-eye medication Restasis.

The announcement of the deal and the implications it carries raised a political debate over the ethics of this decision.

However, there is still some uncertainty around the regulatory approval of the deal as the Obama administration is pushing for the implementation of anti-inversion measures aiming atfuelling a negative reaction of the investorswith respect to the transaction. In case the Obama administration firmly opposes the deal, it is realistic to expect that the deal will be structured as a reverse merger, with Allergan technically buying Pfizer as opposed to the original intentions according to people close to the group. Indeed, considering that the vast majority of profits generated by the company come from activity outside of the US, it is easy to understand the commitment that Pfizer will put into the realization of the inversion.

What’s next?

After completing the deal, presumably in the second half of 2016, the new merged company may decide to carve out a business and split into a value and a growth company: one will focus on highly profitable branded drugs while the other would sell older medicines that face fierce competition. As a consequence, after carving out andits older medicines’ divisions, the branded part of the company would behigly divesified, thus it will have to struggle against a large number of rivals on several fronts. It would produce top-selling drugs pertaining to different therapeutic fields, from Allergan’s wrinkle treatment Botox, to medicines that treat major illnesses such as cancer, Alzheimer’s and inflammatory conditions such as arthritis.

Expectations Vs. Reality

Ian Read claims this deal would benefit the American science; it would position the company better worldwide by making it more competitive and would, therefore, create more value for the shareholders. One might wonder about the market’s negative reaction, with Pfizer closing down 2.7% and Allergan falling by 3.6% to $301.7. The fact is, many got disappointed by the way this deal was finalized.

To begin with, the investors were expecting Pfizer to separate its branded drugs business sooner. With this immense acquisition, it would take years before it would be ready for such a move. The reason is that the companies will need time to integrate. Both of them are big and so are their cultures. You can put two people in the same bed but will they have the same dreams. And so, Pfizer announced that the separation would probably happen in 2018 and not sooner. The second point is that many analysts have been expecting larger synergies and so the $2bn announced synergies sound very humble. Also, the company will be making cuts in R&D budget by approximately $666,000 over the next three years to reach those synergies, which does not create real value. Moreover, the investors were hoping for extra buybacks, but they got disappointed fast as there was no added buyback on top of what Pfizer is already doing. Instead Pfizer said it would begin a relatively modest $5bn buyback in the first half of next year.

Is this Behemoth likely to spur more megamergers?

The Allergan deal fits into Pfizer’s plan to have a more focused business in the future. Namely, the company announced that it plans to separate its branded drugs from the generic, easy-to-copy ones. This deal would allow the company to improve and enrich its branded drugs portfolio before the planned separation. This could mean that the deal itself would not influence the mega-merger spree. On the other hand, Pfizer’s competitors such as Johnson & Johnson, Merck and Amgen, would be left at disadvantage with their high tax rates if the deal goes through. Indeed, there are some interesting candidates for more inversion deals such as GSK, which rebuffed a takeover approach from Pfizer in recent months, and an obvious one, AstraZeneca. Even so, it does not seem that those companies are willing to go for such deals as they believe that there will be a tax reform after next year’s presidential election. Namely, in September 2015, Jeb Bush, the current presidential candidate, has unveiled tax reform proposals to cut the number of income tax bands, eliminating loopholes and lowering the US corporate tax rate from 35% to 20%.

Even if they might not plan to make similar deals, pharmaceuticals are not ready to give up their merger streak yet. Last month, J&J said it was open to deals as it wants to deploy its $17bn of net cash, while Amgen is looking for an acquisition of up to $10bn. Moreover, there are other top biotech groups such as Gilead, Biogen and Celgene which are also likely to strike a deal in search of assets that would boost their growth.

Financial Advisors

Guggenheim Securities, Goldman Sachs Group Inc., Centerview and Moelis & Co. worked with Pfizer on the transaction. Allergan was advised by Morgan Stanley MS and J.P. Morgan Chase JPM & Co.

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We all know the strong changes that Internet has brought to our everyday lives; the way people are connected and communicate has changed dramatically over the past years. Phone calls and standard text messages are becoming less and less popular, as alternative communication services and apps like WhatsApp or Messenger take over. Customers’ demand has changed and supply has had to adapt – new trends strongly affected telecom markets all over the world including the Italian one.

In this article we will first provide an overview of the current trends in the telecommunication market in Italy, we will then focus more in detail on two of the hottest deals that have been shaping the industry recently:

• The Joint Venture between Wind and 3 Italia
• Vivendi increasing its stake in Telecom Italia

Finally, we will introduce Enel’s new project and its potential disruptive effect in the broadband market.

Italian telecom market overview

The Telecom (Tlc) market accounted for €34bn in 2014, which represents around 2% of the Italian GDP, almost equally split between fixed and mobile telephony.

Telecommunication prices declined sharply in recent years: the following graph compares the CPI Index with the average price of telecommunication services.

In order to understand the drivers of this rapid decline in prices, it is useful to analyse how the revenue decomposition of Tlc companies has changed in the recent past. Revenues coming from voice telephony have been declining rapidly, while the ones coming from data traffic have been increasing but not enough to offset the declining path of the voice revenues. The dynamic is quite similar both for mobile and fixed telephony.

Among fixed telecommunications, it is possible to see a significant decline in voice revenues due to the reduction in rates and the progressive shift of voice traffic to mobile. Many of the fixed operators have dealt with this new challenge by offering more integrated services (Broadband, voice and other services) replacing voice services with more value added contents based on the Internet protocol.

For what concerns mobile telecommunication, revenues from traditional service components as voice and messaging, heavily impacted by the strong competition of communication apps, continued to decline in the recent years. On the other hand, Mobile Broadband has been growing and, although yet unable to offset the drop in revenues from traditional services, it represents the main strategic and business opportunity for the mobile Tlc industry.

In other words, Tlc companies have had to move away from their extremely profitable voice and messages services, cutting prices and slushing margins – while entering a new, more competitive and lesser profitable market: traffic data; in order to keep generating revenues. Whit such a difficult environment for organic growth, it is not surprising that the main industry players are trying to sustain margins by realizing cost synergies also through mergers and acquisitions.

M&A opportunities: Wind and 3 Italia

In August 2015, the parent companies of the third and the fourth largest mobile operators in Italy, VimpelCom Ltd. (Wind) and CK Hutchison Holdings Ltd. (3 Italia), announced the agreement to form a 50/50 joint-venture, which will become the major player of mobile telecommunication industry with a market share of 33.5% in terms of customers, followed by Telecom Italia (32.3%) and Vodafone Italy (27%). The new company is expected to generate €6.4bn of revenues and an operating profit of more than €2bn and will be run by Maximo Ibarra, currently the CEO of Wind. Hutchinson’s move needs to be contextualized in its overall strategy: the company already acquired other mobile carriers in Ireland, Austria and the UK, trying to become one of the major players of the European mobile telecommunication industry.

Given the substantial reduction of players involved in the market, the deal is subject to the approval of the European Competition Authority, expected to release a judgment about the feasibility of the deal within May 2016. Even though the same commission has recently rejected the merger between the second and the third Danish mobile operators, there is optimism about the final decision as the number of significant players in the Italian market will eventually be three and not two, as there would have been in the Danish market.

The deal will have two major implications for the market. Firstly, it is expected to generate an overall amount of €5bn of synergies, mainly driven by operating cost savings and reduction of the capital expenditure. This would allow the new operator to be more aggressive in terms of pricing, trying to further increase its customer market share. The second important point is that the merger could be the first step towards a broader consolidation of the industry in terms of potential convergence between mobile and fixed telephony. In other European markets the consolidation has led the players to offer more integrated services including mobile, fixed telephony and, in some cases, even pay-tv services.

A Potential Takeover? – Telecom Italia’s case

The most important websites and newspapers all over the world have drawn quite a lot of attention on Telecom Italia in the past couple of months. The company has been facing many problems ever since its privatization in 1997, and is now dealing with the consequences of the recent financial crisis and recession. With a steadily declining EBITDA over the last 5 years, Telecom Italia is one of the best examples of a European company with good profitability prospects (because of the strategic assets it owns) but still troubled due to the recession and unable to find a way out of the tunnel. In other words, Telecom Italia today is cheap and needs both fresh capital injections and an internal reorganization. This makes it an interesting target for strategic and financial acquirers looking to buy low and restructure the company, namely Vivendi and Xavier Niel.

Vivendi SA is a Paris-based multinational company operating in the content and media sector, focusing primarily on digital entertainment. The company acquired its first stake in Telecom Italia as a result of a deal with Telefonica SA, then increased its holdings to almost 20% through purchases made in recent months. Vivendi has recently asked to add 4 of its highest executives to Telecom Italia’s board. The proposal would increase the company’s influence on Telecom Italia’s governance, and must be interpreted in light of an Italian provision that obliges any acquirer who has exceeded the 25% ownership threshold to make a bid on all of a target’s shares. It is likely that Vivendi wants to avoid the risky and expensive full takeover offer, and is looking for alternative paths to gain control. Telecom Italia’s infrastructure and customer base could strategically justify the acquisition, though the shadow of an opportunistic investment is just around the corner. Vivendi’s objective could be to secure a good stake now in order to be a player in the future, under the perspective of further consolidation in the European telecom industry.

In the meantime, another big player has stepped in. French billionaire Xavier Niel, founder of broadband provider Iliad SA, currently owns options on Telecom Italia for a total of 15.1% of the company’s capital. Once exercised, these securities could reward Niel with about 10% of Telecom Italia’s voting shares. Nevertheless, both Vivendi and Niel have repeatedly reassured that their actions are not coordinated, even though their combined stake could effectively add up to at least 30% of Telecom Italia’s total capital, giving them great influence over the company.

Enel: a game changer in the broadband market

Finally, on the Internet side, 2015 has seen a new and potentially game changing player making its first steps into the Italian Broadband market. Enel, the €38bn Italian utility giant, has approved the launch of a five-year strategic plan according to which it would be setting up a new venture to help build a national fiber-optic telecoms network using its existing infrastructure. This option has been estimated to be approximately 40% cheaper than laying down a brand-new network. The new subsidiary will be directed by Tommaso Pompei, former CEO of Wind, who has already confirmed that all operators in the Italian market will be offered access to the network in order to distribute broadband services.

Enel’s venture comes just at the perfect time. Earlier this year, the Italian government announced a €12bn investment plan to improve the national broadband network, lifting Italy from the bottom of the European ranking for broadband infrastructures. As a result, Enel, committed to install 33 million smart meters of fiber-optic over the next four years, will largely benefit from government’s financing. Furthermore, the capital of the new company will be open to all operators, with Vodafone and Wind having already confirmed that they are prepared to join forces with Enel, while Fastweb and Metroweb may also come on board. It remains to see whether Telecom Italia, the largest Italian broadband distributor, will support the venture.

Earlier this month Francesco Starace, Enel’s CEO stated in an interview that the company is assessing the viability of expanding the plan outside of Italy as well.

Given the magnitude of the project, its effect on prices and on the future distribution of “power” between Enel and the leading operators deserve to be monitored carefully. If successful, Enel’s project is likely to have a dramatic impact on the Italian broadband market allowing a significant proportion of the population to access connections as fast as 100 Mbps.

Conclusion

The dynamics described above result in lower prices, lower margins and higher pressure on operators in the Italian Tlc market. As a response to changing customer demand, operators have shifted their business model towards traffic data and integrated services. Moreover, in order to sustain margins, they are trying to realize cost synergies and to leverage their customer base via consolidation.

The Joint venture between 3 and Wind this year is the latest example of this trend and is set create the largest mobile operator in the market. Separately, Telecom Italia seems to be a favorite target of foreign investors trying to feast on its cheap shares and quality assets. Finally, a watchful eye should be kept on Enel’s broadband venture, which might have the potential to change the balances of the sector.

The telecom market is evolving, becoming more integrated and “European” than ever before, also in view of the abolition, starting in 2017, of roaming charges within the EU territory. Thus, we certainly expect further interesting developments, and hope these will lead to value creation on the side of operators as well as to improved customer experience.

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Anheuser-Busch InBev; market cap as of 13/02/2016: $187.70bn
Asahi Group Holdings Ltd; market cap as of 13/02/2016: $20bn

Anheuser-Busch InBev NV said it has received a binding offer valued at about $2.9 billion in cash from Japan’s Asahi Group Holdings Ltd. for the Peroni and Grolsch brands. The sale is contingent on the successful completion of the SABMiller/AB InBev deal (Megabrew) and would represent the largest acquisition by a Japanese beverage company abroad since the purchase of Jim Beam by brewer Suntory.

About Anheuser-Busch InBev

AB InBev is a major brewing company based out of Belgium. The company operates in more than 100 countries worldwide and employs over a hundred thousand people. As a result, AB InBev is the largest global brewer; controlling a quarter of global market share and generating $47.1 billion total sales. The company has built itself up over the years through a series of M&A activity led by 3G Capital, the largest shareholder of the company. These acquisitions have culminated in a portfolio of more than 200 brands with 16 of these exceeding sales figures of $1 billion such as Corona, Skol, Brahma and Budlight. Despite this, the company has managed an organic growth rate of 5.9% which excludes the impact of currency movements and M&A activities.

AB InBev has been an outstanding player in the industry achieving a 60% gross margin, 32% EBIT margin and a 20% profit margin: all attractive figures to shareholders.

About Asahi

Founded in Osaka in 1889 as the Osaka Beer Company, and originally employing German prisoners of war from the first world war, Asahi Breweries is the largest brewing company in Japan, controlling approximately 38% of the market share; only slightly larger than its next closest competitor: Kirin. Asahi operates breweries in 11 countries and has offices in many more nations around the world. Asahi Group also owns and distributes several other brands in the beverages industry including coffee, tea and water brands. In 2015 Asahi had net Sales of 1,857,418 million yen ($16.4bn) and a gross margin of 37.76%.

“Megabrew”

In October of last year, Anheuser-Busch InBev agreed to purchase SABMiller, for almost $106bn, making it not only the second biggest deal of 2015, but the third biggest deal in history. Because of the sheer immensity of the new consolidated entity, the deal has already gained attention of the media and anti-trust authorities.

In order to overcome the competition issues that would arise in many of the markets in which it would operate, the company (that would sell every third bottle of beer in the world) will have to strategically dispose of certain assets and brands. The sale of Peroni and Grolsch brands represent some of these strategic sales and divestments.

The Deal

In compliance with the divestment strategy agreed with the regulators AB InBrev decided to shed off some of their brands. The ones at stake are Peroni, Grolsch and Meantime whose next owner is already on the horizon. Namely, Japanese Asahi Group Holdings Ltd. The Japanese company entered in an exclusive negotiation period after offering the most favorable terms, outbidding other interested parties such as Thai Beverage and a number of private equity firms including Bain Capital and PAI Partners.

Asahi has valued the three brands at €2,550m on a cash free, debt free EV basis, which is approx. 14 times the EV/EBITDA multiple, jumping from the multiple of 11 to 12 times the EV/EBITDA previously estimated by the analysts. The deal is expected to be cash only and will be financed entirely with bank loans. The completion of the acquisition is planned for the second half of 2016, and it is further conditioned on the finalizing of AB InBev’s merger with SABMiller.

The Rationale

SABMiller/AB InBev’s rationale is straightforward. The disposal of Peroni, Grolsch and Meantime was required by regulators and is propaedeutic to their merger. Furthermore, the sale price is believed by several analyst to be a “very full” one. Indeed, the sheer amount of interest received in the latest months by a number of potential bidders, including Thai Beverage and private equity firms KKR and EQT, drove the price up to the $2.9 bn offer by Asahi.

On the other hand, Asahi’s strategy is more interesting. As the incoming President Akiyoshi Koji said last Tuesday his ambition is to become a global company.

The acquisition would be Asahi’s biggest, giving the brewer a foothold in Europe, where it currently has no presence. Asahi is Japan’s biggest brewer with a 38% market share but the company has sought growth outside Japan where beer sales have fallen over the past two decades, as the population shrinks and wine becomes increasingly popular. Indeed, Asahi has been facing a slow but constant decline in revenues from beer over the past 4 years.

Asahi’s idea is to generate stable cash flows from their operations in Japan making it the “cornerstone of earnings”, while the acquisitions in the new markets will give them the much needed possibility to grow. Together with the brands, the Japanese brewer is planning to acquire also the manufacturing and distribution branches of Peroni, Grolsch and Meantime located in Italy, Netherlands and the United Kingdom respectively.

The acquisition will expand Asahi’s presence globally. The firm will be able to import the Grolsch and Peroni brands into Japan, Southeast Asia and Australia, benefiting from the historic brands as consumer spending has been shifting to premium products. At the same time Asahi will leverage its broader distribution network for its domestic brands, Asahi Super Dry in particular.

Asahi is expected to generate ¥90bn ($780mn) in combined revenue, boosting the overseas sales ratio to a total of 18% and marking a 4% increase. Furthermore, the financing of the deal will be facilitated by the cheap borrowing costs stemming from the low interest rates in Japan.

In addition, the Nikkei newspaper reported in December rumors according to which Asahi, which also sells spirits and non-alcoholic beverages, was considering entering the American market as well, with a ¥50bn ($436mn) bid for the U.S. soft drinks company Talking Rain.

Financial Advisors

Lazard and Deutsche Bank and the law firm Freshfields Bruckhaus Deringer are advising Anheuser-Busch InBev on the Asahi transaction. Rothschild is advising Asahi.

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Syngenta AG; market cap as of 12/02/2016: $37.43bn
China National Chemical Corporation; market cap as of 12/02/2016: N.A.

Introduction

On February 3, 2016, China National Chemical Corporation (ChemChina) and Syngenta AG (NYSE: SYT), a Swiss crop protection and crops producer, reached the acquisition agreement with the Board of Directors of Syngenta unanimously recommending the offer to the shareholders. The largest China’s outbound deal, valuing Syngenta at $43.8bn, represents an increasing desire of Chinese corporations to secure strategic assets in the time of economic slowdown and complements the series of cross-border acquisitions made by Chinese corporations. The deal would strengthen the agricultural portfolio of ChemChina and is considered to be vital for the food availability issues and country’s development. It will also enable Syngenta, faced with low crop prices and global currency turmoil, to continue its growth strategy and expand in emerging markets, particularly in China.

About China National Chemical Corporation

ChemChina is China’s largest state-owned chemical company with revenues of $45bn in 2015, which operates in six business sectors: new chemical materials and specialty chemicals, basic chemicals, agrochemicals, tire rubber, petrol processing and refinement, and chemical equipment. In agrochemical segment ChemChina represents the largest non-patented manufacturer of pesticides, which are chemical substances used as crop protection products. The segment receives substantial support from the plant growth regulators, as agricultural industry is crucial for the Chinese economy.

While ChemChina might not be as well recognized globally as other Chinese firms tapping into the overseas market, such as Alibaba, Lenovo or Huawei, company’s CEO Mr. Jianxin is said to be an experienced international acquirer. In fact, ChemChina has a track record of overseas deals, most notable of which include the acquisition of French Adisseo Group and Qenos Holding Limited in Australia in 2006, Rhodia Global Silicone in France in 2007, Norway’s Elkem and Israel’s MakhteshimAgan in 2011. In 2015 ChemChina continued to expand its presence abroad with the acquisition of world’s fifth largest tire manufacturer, Italy’s Pirelli, for $7.9bn that marked the return of China’s state-owned companies to global deal-making. ChemChina’s motivation to secure strategic assets and gain access to leading technologies has not changed ever since. In January 2016, ChemChina-led consortium agreed to acquire German industrial machinery maker, KraussMaffei Group, for $1bn. In the same month, the company also acquired a 12% stake in Mercuria Energy Trading, a Swiss commodity-trading house.

About Syngenta AG

Syngenta is a leading agricultural company, headquartered in Switzerland and operating in two main businesses: crops and crops protection, with sales of $13.4bn in 2015. The company was in talks with a publicly traded American multinational agrochemical corporation Monsanto (NYSE: MON) in June 2014, and a year later the latter approached Syngenta again, offering c. $486 per share in cash and stock on 8 May, 2015. Syngenta had been successfully withstanding this and all subsequently revised offers deeming the price as significantly undervaluing Syngenta’s technological capabilities and possible synergies, as well as being unsatisfied with the payment structure. Eventually, Monsanto had to walk away after its final bid of c. $502 per share in cash and stock on 24 August 2015, which represented a rumor date bid premium of c. 41% (based on Syngenta’s closing price on 21 August, 2015).

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Mylan N.V.; market cap as of 12/02/2016: $20.54bn
Meda AB; market cap as of 12/02/2016: kr52.44bn ($6.24bn)

Introduction

On February 10, Mylan NV (NASDAQ: MYL.O) announced its acquisition of Meda AB (STO: MEDAa.ST) in a deal worth $7.2bn made of cash and stock, while the latter reported an unexpected slowdown in growth in the fourth quarter. Still good news for Mylan’s board, which has been trying to expand and diversify through deals in the past years. The agreement was reached after Mylan’s first two fruitless attempts to buy the Swedish company, and only three months following its seven-month pursuit of smaller rival Perrigo (TLV: PRGO.N).

The acquirer will fork out $19.62 per share, which represents a 92% premium over Meda’s closing price of $10.22 per share on February 10. This premium fits among the highest premiums in pharmaceutical deals worth over $5bn. Nevertheless, the transaction merely places itself in the center of the pack in terms of earnings multiples, in fact the total $9.9bn value of the transaction (which considers also Meda’s net debt) represents a multiple of approximately 8.9x 2015 adjusted EBITDA with synergies.

About Mylan N.V.

Mylan N.V. is one of the world’s leading generics and specialty pharmaceutical companies, catering to over 165 countries. It was founded in 1961 by Don Panoz in the Netherlands, although its operational headquarters are located in Hatfield, Hertfordshire in the United Kingdom.

In 2007, Mylan took over India-based Matrix Laboratories for $736m in cash. The deal turned Mylan overnight into one the world’s largest manufacturers of active pharmaceutical ingredients (API) and significantly helped it vertically integrate the production of its finished dosage form (FDF) medicines. Through this acquisition, Mylan grew from the United States’ third to the world’s second-largest generic and specialty pharmaceuticals company.

Today, Mylan’s global manufacturing platform continues to grow, reaching the United States, Brazil, France, Hungary, Ireland, the United Kingdom, India, Japan, and Australia. It has a 65-billion oral solid dose manufacturing capacity, 80% of which are produced internally, through the involvement of approximately 30,000 employees who make over 1,000 distinct products and pharmaceutical ingredients.

About Meda AB

Meda AB is also a leading international specialty pharmaceutical company, with a broad product portfolio reaching more than 80% of the global pharmaceutical market. It was founded in 2001 by Jorg-Thomas Dierks and is headquartered in Solna, Sweden. Its sales at the end of 2014 amounted to more than $1.78bn, placing it 48th in the list of the world’s largest pharmaceutical firms.

The Swedish company never conducts early-stage pharmaceutical developments. Meda combines proprietary production with contract manufacturing of drugs. Its proprietary production takes place in Germany, France, Ireland, Italy, the United States, and India.

It focuses on reducing the cost of goods through its heavy investments in its sales and marketing departments. In fact, the latter employ over 60% of its workforce and the company has its own sales organizations scattered in more than 60 countries across the world.

Meda has been listed since 1995 at the Stockholm Stock Exchange (STO) and is now part of the Nasdaq OMX Nordic 120 index, however not of the OMX Nordic 40.

Industry Background

In 2015, the transaction sizes of mergers and acquisitions in pharma have reached an all-time high and the revenue multiples displayed by the deals in this sector have been much higher than those of other industries. As an example, 2015 bills as Valeant’s purchase of Salix ($15bn), Mylan’s failed hostile acquisition of Perrigo ($53bn), and Pfizer’s maxi takeover of Allergan were among the biggest ever in the pharmaceutical industry.

There has been plenty of peer pressure to make deals. Indeed, some investors have been criticizing pharmaceutical companies that have stayed on the sideline during the last M&A wave. However, others have criticized those companies that may have paid too high prices for their targets. The high valuations have probably been boosted by pharma companies’ low borrowing costs and deep market liquidity but it doesn’t seem likely that the M&A exuberance will go on for long.

In the future, pharma companies will have a hard time restructuring especially in response to a lower healthcare spending from governments. The need to reshape will also rise as analysts have predicted that the cost of R&D expenses will become prohibitively expensive for medium-sized enterprises. It is possible to forecast four main strategies that pharma companies may implement according to their characteristics when adjusting their structure: large pharma firms that excel in R&D will act as developers of innovative drugs and will be likely to outsource manufacturing; large manufacturers will use M&A to gain market access and expand their production capacity; players that focus on a niche competence and develop a strong market share in one particular area will also be likely to outsource manufacturing.

Deal structure

At announcement (February 10), Mylan’s cash-and-stock offer consideration valued each Meda share at 165 Swedish Kronas (SEK, around $19.6), for a total equity value of approximately SEK 60.3bn, or $7.2bn. Mylan will also take on Meda’s net debt, leading to a total deal value of about $9.9bn. The premium offered on the shares is as high as 92% when looking at the closing share price of SEK 86.05 per Meda share on the last trading day before announcement (February 10). It goes down to 68% when looking at the volume-weighted average share price over the last 90 trading days up to February 10, and to only 9% when taking as a reference the intraday high in the 52-week period up to the day prior to the announcement. The premium paid is among the highest in pharmaceutical deals worth over $5bn, especially considering that Meda is an established company with good growth opportunities, but it is not in possession of any strategic asset in development/approval phase that could justify such a high consideration. Considering the value offered to Meda’s shareholders through the premium, Meda’s board has unanimously recommended acceptance.

As noted above, the tender offer consists of both cash and stock. Specifically, Mylan is offering SEK 165 per Meda share in cash for 80% of the shares tendered by each shareholder, while for the remaining 20% the consideration will be made up of Mylan’s shares, in an amount to be calculated on the basis of the “Offeror Average Closing Price” (OACP). The latter refers to the volume-weighted average sale price per Mylan share on the NASDAQ Global Select Stock Market for the 20 consecutive trading days ending on and including the second trading day prior to the offer being declared unconditional (i.e. at least 90% of shares tendered, under Swedish law). If the OACP is greater than $50.74, Mylan will offer SEK 165 divided by the OACP of own stock for each Meda share, at an exchange rate of SEK/USD 8.4158. If the OACP is between $30.78 and $50.74, then each shareholder will get 0.386 Mylan Shares per Meda share. Finally, if the OACP is below $30.78, each Meda share will be converted into Mylan shares for an amount equal to SEK 100 divided by the OACP, again at a SEK/USD exchange rate of 8.4158.

The deal is not subject to any financing conditions. The cash portion will be fully financed through a new bridge credit facility arranged by Deutsche Bank Securities Inc. and Goldman Sachs Bank USA.. With respect to the stock portion of the consideration, Mylan is planning to list the new shares to be issued in the offer on the NASDAQ Global Select Market in the U.S. and on the Tel Aviv Stock Exchange in Israel.

Under Swedish law, the offer will become unconditional when at least 90% of Meda’s shares have been tendered, in which case Mylan plans to freeze out the remaining minority and finalize the full merger. The deal is expected to close by the end of the third quarter of 2016, with the acceptance period of the offer running from 20 May 2016 to 29 July 2016. Under recommendations of the board, two of Meda’s largest shareholders have already undertaken commitments to tender their stakes. These are Stena Sessan Rederi AB and Fidim S.r.l., which own approximately 21% and 9%, respectively, of the outstanding shares and votes of Meda. The offer is not subject to the approval of Mylan’s shareholders, but its completion is conditional on clearance from the relevant competition authorities.

Deal Rationale

As noted in the company’s description, Meda is a large, well-established company with world-scale operations and a strong focus on three key therapeutic areas: respiratory (allergy-related), dermatology, and pain. Meda has a strong presence, especially in Western Europe, in the over-the-counter (OTC) market, with about 40% of its sales revenue coming from such products. Mylan and Meda had also previously engaged in a partnership for the commercialization of EpiPen® Auto- Injector, a medical device for injecting, in case of anaphylactic shock from allergies, a measured dose or doses of epinephrine (adrenaline) by means of auto-injector technology.

Before moving on to the analysis of the pros and cons of the deal, it is useful to make a distinction, quite blurry in reality but helpful in this case, between two different “types” of pharma deals, belonging to different M&A strategies and with different final aims, but both indifferently employed by big pharmaceutical companies. The first strategy consists of identifying small targets, either start-up companies or firms with just a few years of life whose main strength is the in-house development of innovative drugs for the treatment of rare diseases, and acquire them when the time is right, that is, when the drugs under development have passed at least the first or second stage of regulatory approval (whatever the regulatory authority, depending on the country in question). This is done because the costs and time that in-house development requires are incredibly high, especially considering that all this comes with great risk of rejection by the regulatory authority. Thus, it becomes much easier to proceed with acquisitions of the kind just described for companies that have the scale and resources to do it (an example of this kind of deal is the Shire-Dyax acquisition). The second strategy is instead a much more “sterile” one, that is, it is one dictated by the need to keep up profits through increases in scale. In these deals, which because of their nature occur primarily among established companies with a defined market share, the only purpose is to benefit from the increased scale, geographical reach, and market share resulting from the acquisition. These moves permit large companies to keep growing, although at very low rates and with limited perspectives, if not to close another deal in the next few years. With the introductory lines to this paragraph and the company description in mind, it is clear that the Mylan-Meda deal falls within the second category.

Proceeding to the merits of the deal, according to both companies the transaction has a compelling strategic fit, and indeed there seems to be reasonable grounds to believe so. The combined company will be a diversified pharmaceutical leader, with a strong presence across geographies and therapeutic categories. The acquisition will allow Mylan to build a strong presence in the European market, and to grow stronger in the OTC market (the deal should create an approximately $1bn OTC business at close) as well as in the dermatology, pain, and respiratory/allergy areas. With regard to the latter, the transaction will also help consolidate EpiPen® Auto-Injector in Europe, providing greater opportunities to build the brand in this region. The combined business will have a balanced portfolio of more than 2,000 products across the branded/specialty, generics and OTC segments, sold in more than 165 markets around the world for a total sales value exceeding $11bn. Mylan expects to extract, starting from year four, an annual $350m of pre-tax operational synergies, arising from cost savings (removing redundant general and administrative costs and exploiting economies of scale and scope from the combined commercial platform) and cross-fertilization opportunities of the combined product portfolio.

The deal is expected to be immediately accretive to Mylan earnings, creating an opportunity to achieve $0.35 to $0.40 in accretion in 2017, accelerating the achievement of Mylan’s previously stated $6.00 in adjusted diluted EPS target in 2018.

Mylan’s leverage at the close of the transaction is expected to be approximately 3.8x debt-to-adjusted EBITDA and according to the company’s management, the significant cash flows generated by the company will allow for rapid deleveraging.

Overall, the deal appears to be reasonable in strategic terms, insofar as it allows both companies to achieve scale and scope benefits thereby stimulating growth, at the same time not precluding further M&A activity in the near future thanks to the rapid elimination of debt. Meda’s shareholders are the ones getting the most value out of the transaction, as they are being offered (mostly in cash) almost double the value of their holdings.

Market Reaction

Meda shareholders welcomed the deal, driving up shares traded in Stockholm by 70% to $17.4. Wednesday Meda’s shares closed at 86.05 crowns and on Thursday they closed at 143.9. Mylan shares instead closed at $50.54 Wednesday on the Nasdaq and on Thursday at $41.42, losing 18%.

It has to be said that the Netherlands-based company had also reported fourth-quarter earnings that missed Wall Street’s expectations, but it was the deal announcement that upset investors. Moreover, because Mylan made repeated bids for Meda back in 2014 but was rejected even after raising its offer, what disappointed investors was not the choice of the target which, after the failure of the bid for Perrigo, was not totally unexpected. Rather, analysts’ reaction was due to the 92% premium over Meda’s market value before the acquisition was announced which represents the biggest premiums ever paid in the M&A pharma industry.

Advisers

Mylan hired Centerview Partners as a financial adviser for the deal with Meda, and Cravath, Swaine & Moore LLP, Vinge, and NautaDutilh as its legal advisers. Rothschild & Co. was Meda’s financial adviser. Deutsche Bank and Goldman Sachs are providing financing to Mylan for the cash portion of the deal via a bridge credit facility.

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Ingram Micro Inc.; market cap as of 19/02/2016: $5.44bn
Tianjin Tianhai Investment Co., Ltd.; market cap as of 19/02/2016: $2.58bn 

Introduction

On February 17, 2016, Tianjin Tianhai Investment Co., Ltd. (Tianjin) (SSE A Share: 600751 and SSE B Share: 900938), a container shipping and freight agency company, entered into a definitive agreement to acquire Ingram Micro Inc. (Ingram) (NYSE: IM), a California-based Information technology product wholesaler, in an all-cash transaction at an offer price of $38.90 per share. Ingram’s attractive valuation of $6bn entails a 31% premium to its closing price on February 17 and would make it the largest takeover target of a US information technology company, once cleared by the US authorities. The deal has been approved by both companies’ board of directors and is expected to be completed in the second half of 2016. Ingram Micro would become the largest member enterprise of HNA Group in terms of revenue, and facilitate the internationalization process of the group. The deal represents the rush of Chinese corporations for high-quality assets and the need to upgrade IT capabilities.

About Ingram Micro

Ingram Micro is a Fortune 100 company, which operates 4 main businesses: Technology Solutions, Mobility, Supply Chain Solutions, and Cloud Solutions, and delivers a full spectrum of technology and supply chain services to businesses around the world. It is the largest wholesale technology distributor based on revenues and a global leader in supply chain management and mobile device lifecycle services. Ingram distributes and markets products from such leading companies as Acer, Apple, Cisco, Citrix, Hewlett-Packard (“HP”), IBM, Lenovo, Microsoft, Samsung, Symantec and VMware and has operations in 38 countries. Ingram has completed many acquisitions over the years. It launched a cloud-computing-services portfolio in 2007. Revenues in 2014 amounted to $46.5bn (+9.2% YoY), out of which c. 61% were generated outside the US. Moreover, it had Q3 2015 revenues of $10.52bn which missed the forecasts of $10.77bn. Ingram has produced nearly $1bn in operating cash flow and $31.7bn in sales in the first 9 months of 2015 ended October 3. Based on Ingram’s press release, since 2012, they have generated a 28% revenue growth and their gross margin improved by 48 basis points. Ingram’s expansion into cloud services makes it a perspective player in a highly demanded field of IT solutions.

About Tianjin Tianhai Investment

Tianjin, formerly Tianjin Marine Shipping Co., Ltd., is a Shanghai-listed company, primarily engaged in marine transportation services. It is a part of HNA group which also represents its largest shareholder. The company operates its businesses through international and domestic shipping container transportation and related business. The major routes include International liner cargo shipping routes to South Korea and Southeast Asia, as well as domestic trade routes. Tianjin has now developed from a traditional marine shipping company into a modern logistic industry investor and operator, focusing on investment in logistic market segments, supply chain investment and management based on upstream and downstream of the logistic industry, as well as financing service for the logistic industry.

HNA Group is a Hainan-based Fortune Global 500 (464^th) enterprise group, comprised of HNA Aviation, HNA Holdings, HNA Capital, HNA Logistics, HNA Tourism and Other Businesses (HNA Culture). It has more than $90 billion in assets, includes 11 listed companies and has c. 180,000 employees worldwide. In 2015, HNA Group declared revenues of c. RMB 190bn ($92bn). The conglomerate emerged from a local airline company, Hainan Provincial Airlines, which, under Mr. Chen, today’s Chairman of the Board of Directors of HNA Group, was actively expanding from the transportation to logistics and tourism. It has a history of successful multinational acquisitions, including U.S-based businesses. Namely, in 2015 it acquired Avolon (Aircraft leasing company), Swissport (Ground handling services) and Azul (a Brazilian airline). Moreover, in 2011, it acquired Seaco (Marine container leasing), part of General Electric.

Deal Structure

As previously stated, Tianjin Tianhai will acquire Ingram Micro for $38.90 per share. The deal is structured as an all-cash transaction which gives Ingram an equity value of approximately $6.0bn. Moreover, the price represents a premium of c. 39% over the average closing share price of Ingram Micro for the 30 trading days ended February 16, 2016. The market reacted positively with Ingram’s shares rising 23.6% to $36.65 in after-hours trading on the day the deal was announced. Viewed against peers, the valuation is one-third above Taiwan’s Synnex, but less than Chinese domestic peer Digital China on 22x. On the other hand, Ingram has more globally diversified revenues than its Asia-centric rivals. Ingram and Tianjin Tianhai Investment are to have $100bn in combined assets.

Following the completion of the deal, Ingram will be consolidated under Tianjin’s parent company HNA Group Co. Ltd and will operate as a subsidiary of Tianjin. As part of the merger agreement, Ingram Micro agreed to suspend their dividend and share repurchase program. On the other hand, the headquarters and the management team are expected to remain the same.

There is no go-shop provision included in the deal: a provision that would allow the public company that is being sold to seek out competing offers even after it has already received a firm purchase offer. The duration of a go-shop period is usually about one to two months. The initial bidder may match the new bids if it wishes to do so.

On the other hand, there is an “interloper” break-up fee of $120m. Moreover, the merger agreement provides that upon termination of the agreement under certain circumstances, Tianjin Tianhai would be obligated to pay Ingram Micro a termination fee which could, depending on the time that passes, range from $200m to $400m.

Tianjin Tianhai/HNA Group will fund the merger using its own funds as well as proceeds from financing. Tianjin Tianhai/HNA Group has good relationships with a number of financing institutions and Chinese banks, but the exact amount of the loan has still remained undisclosed. As previously stated, the merger would have to clear the regulatory approval but also the shareholder one. The merger must be approved by at least two-thirds of the stockholders of Tianjin Tianhai voting on the transaction at a special meeting called for that purpose. HNA Group will not be permitted to vote its shares in favor of the transaction.

Deal Rationale

One of the most interesting features of Ingram Micro is represented by its leading role and reputation established over the years as a leading distributor and a global provider of IT products and services. The California-based firm is considered unrivaled in its ability to offer innovative, differentiated and easy-to-manage solutions to vendors and customers all over the globe.

The deal is likely to benefit shareholders of both companies. Becoming part of the HNA Group will deliver short-term cash value to Ingram Micro’s stockholders and it will bring along a number of new opportunities for the company’s vendors, customers and associates. Indeed, HNA’s strategy is based on continuous innovation, the development of new services, brand management and, most importantly, it ensures the stability and continuity of the firms that take part to their group. Additionally, Ingram Micro would access a large organization meaning that it will benefit from complementary logistics capabilities and from a strong established presence in China that can further sustain its growth and profitability and accelerate its investments and execution.

For HNA, Ingram Micro represents a key acquisition not only because it would become the largest member enterprise of group in terms of revenue, but also because it could facilitate the internationalization process of the group. Indeed, the incorporation of the US company represents a unique opportunity for HNA to access emerging markets, which are characterized by higher growth rates and better profitability. Furthermore, integrating Ingram Micro would aid the logistics sector of HNA Group to transmute from a logistics operator to a supply chain operator, to provide one-stop services and maximize efficiency.

Another positive aspect of the deal is the approach HNA Group intends to use towards the target company after the post-acquisition implementation which is aimed at maintaining the leadership teams and core values that have made Ingram Micro a trusted partner and industry leader. The company will work on converging strategies and interests, while maintaining the culture of the target. Moreover, once the acquisition is completed, the Board of HNA Group plans to back Ingram Micro’s management team and strategies enabling the target to continue to distinguish itself among competitors and meet the needs of its vendor and customer partners better than ever before.

Considering the current macroeconomic environment, we can say that the acquisition is additional evidence of China’s willpower to acquire overseas technology assets to enhance its domestic potentials and replace imports. It is not a surprise that given the economic situation in China, domestic players will invest in quality assets in the US and Europe.

Regulatory impediments and fears

The deal is the latest in a series of investments by Chinese companies in U.S. tech companies. Especially interesting are the deals involving U.S. makers of computer chips that have attracted scrutiny on national-security grounds. As China’s economic growth is weakening, Chinese companies have become more aggressive in pursuing deals and increasing their interest in the overseas companies. Just a couple of weeks ago, ChemChina agreed buy Swiss agricultural company Sygenta for c. $44bn in what would be the largest outbound deal in China’s history. And although China’s appetite to acquire abroad is growing, it started to face regulatory issues which pose a potential problem. Namely, two potential takeovers were hindered which brought to light the obstacles Chinese companies might face in closing the deals abroad. In December, a group including China Resources Microelectronics Ltd. and Hua Capital Management Co. made a bid for Fairchild Semiconductor International Inc., which already had a deal with U.S. chip maker ON Semiconductor Corp. Fairchild rejected the Chinese proposal, stating a preference for the ON transaction. The reasons Fairchild cited, among other factors, were the risks that the deal would be rejected by U.S. authorities on national-security grounds. Another example is Royal Philips NV. In January the company terminated the planned $2.8bn sale of most of its lighting components and automotive-lighting unit to a Chinese buyer. It was not the first time the U.S. Committee on Foreign Investment blocks the deal; this time on national-security grounds. This concerns Ingram as well, as its move away from IT hardware middleman to provider of software solutions, which made it interesting to China in the first place, might also make it a sensitive deal for the US. Ingram provides services that offer the company access to industrial information across a wide range of US businesses.

Even with the regulatory issues, the Chinese companies are on their way to break their record for outbound acquisitions. The value of this year’s Chinese acquisitions overseas is equal to c. $80bn. In the full year of 2015, the value of attempted acquisitions amounted to a total of $112bn, according to Dealogic. This is to say that should these regulatory challenges be surpassed, the Chinese dealmaking could potentially be the 2016 driving force of mergers and acquisitions.

Financial Advisors

China International Capital Corporation Limited and Bravia Capital jointly acted as lead financial advisors to HNA Group. Weil, Gotshal & Manges LLP acted as HNA Group’s legal counsel.

Morgan Stanley & Co. LLC acted as financial advisor to Ingram Micro and Davis Polk & Wardwell LLP acted as Ingram Micro’s legal counsel.

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Apollo Global Management; market cap as of 19/02/2016: $2.70bn
ADT Corporation; market cap as of 19/02/2016: $6.59bn

Introduction

US private equity firm Apollo Global Management has agreed to buy ADT, an American home-security company, paying c.$11bn for a total enterprise value in the so far biggest leverage buyout of this year. Apollo aims to merge ADT with its subsidiary Protection 1, a small security player the private equity firm bought last year in a move into the alarm monitoring services industry.

About Apollo Global Management

Apollo Global Management (NYSE: APO) is a New-York based private equity firm specialized in leveraged buyouts and purchases of distressed assets. The company has three main business segments: the Private Equity business, which had $38bn of assets under management as of September 2015, the Credit business which invests mainly in Structured Credit, Opportunistic Credit, Non-Performing Loans and the Real Estate segment which focuses mainly on acquisition and recapitalization of real estate portfolios, platforms and operating companies and distressed for control situations.

With its Private Equity managed funds Apollo invests mainly in industrial, media, leisure, distribution, consumer and services companies. Among the most notable companies in its portfolio are Core Media Group (American Idol), the gaming company Harrah’s Entertainment and McGraw-Hill Education unit.

About ADT Corporation

The Florida based ADT Corporation (NYSE:ADT) is the largest security business in the US, providing electronic security, automation, monitoring services, video surveillance systems and fire protection for homes and businesses. With a 6.5m customer base, ADT boasts a market share of 25% for the residential market and 13% for the small business market in the US.

Having a long history of M&A, the company’s management was prone to the buyout crafted by Apollo.
In 1997 the company was acquired by Tyco International, in 2010 ADT acquired its competitor Broadview Security while in 2011 Tyco decided to split its company in three different businesses, with ADT ending up being one of the three. Despite ADT’s recent loss of its M&A head, the company’s most recent sizeable acquisition was last year’s purchase of Reliance Protection, a monitored security services provider based in Canada, in a $500m deal.

About Protection 1

Protection 1 is another US company which operates in the same business as ADT, providing security systems both for businesses and residential units with more than 2m customers. The company positions itself as a player in the smart-home market, which aims to connect consumers wirelessly to various household devices. Protection 1, as its rival ADT, has a relevant track record of M&A: it was first merged with IASG (another security systems company) in 2007 and three years later it was acquired by GTCR, a private equity fund, which delisted the company. In May 2015 Apollo Global Management acquired Protection 1 for an undisclosed amount.

Deal Rationale

ADT has been an appealing target for private equity firms given its steady stream of monthly income. In fact, it has contractual agreements with its customers, which guarantee its cash flow to be relatively stable over time. The adjusted EBITDA was $1.6, $1.7 and $1.8bn during the last three years while the Cash Flow from Operating Activities was $1.6, $1.5 and $1.6bn during the same periods. Moreover, given that people get used to using a certain kind of security and monitoring system, they are not prone to changing it for long periods of time, showing a great loyalty with respect to the product, once again helping the company to have stable cash generation.

The proposal of Apollo is to merge ADT with the other security business in its portfolio, Protection 1, which will operate under the name of ADT and will be based in Florida. ADT is expected to benefit from Protection 1’s robust commercial presence, which should speed up company’s expansion into the sector. According to the company, the newly created company will generate a combined $318m in recurring monthly revenue and total annual revenue in excess of $4.2bn, placing the businesses in a strong position to drive innovation and to capitalize on growth opportunities in the future.

Deal Structure

Apollo has agreed to acquire ADT for $6.94bn (equity value), offering $42 per share, which represents a premium of 56.3% over the closing share price of $26.87 as of February 15^th, and a premium of 45.5% over the share price as of one month before. As of February 2016, ADT reported $4.7bn of net debt, representing a total enterprise value of c.$11bn. For FY 2015 the EV paid by Apollo represents 6.4x EBITDA.

The merger agreement includes a “go-shop” period of 40 days, during which ADT may consider alternative proposals. In fact, if ADT receives a better offer from another buyer, Apollo will have 3 days to make adjustments to the current equity value offered and the former will be subject to a termination fee of $230m (around 3% of the implied equity value) in case of a break-up. In such a scenario, the deadline for the closure, which is now scheduled for mid July, could be extended to November.

The offer made by Apollo is all cash, which is going to be financed through $4.7bn in new debt ($1.56bn in new first lien term loans and $3.14bn in second lien loans), an equity contribution of $4.5bn by Apollo and co-investors and via an issuance of $750m in preferred securities to its affiliate of Koch Equity Development LLC. Amid current market volatility, the high-yield debt funds, which used to back LBOs, are lacking liquidity. Therefore, it is not a wonder why Apollo is turning to a more expensive alternative of raising debt, mainly issuing equity. Moreover, such a deal structure makes the purchase of ADT feasible without refinancing $3.75bn of existing bonds, something that would be not an easy task in current market conditions.

Conclusion

On the one hand, Apollo’s deal could be seen as a renewed interest from private equity investors in seizing assets at better valuations, following recent fall in public markets. On the other hand, the deal comes at a time of increased competition in the home security market, which is forecast to grow globally from $31.4bn last year to $47.5bn in 2020, according to global research firm Marketsandmarkets. Therefore, given that the US home-security market represents 60% of the total figure, the deal seems to be strategically well thought out. If the deal goes through, only with the time we will know if a more powerful ADT will manage to withstand the arrival of recent entrants (AT&T, Comcast, Verizon, Google with its own Nest Cam security camera) and prove to be a lucrative investment.

Financial Advisors

Financing will be provided by a syndicate of investment banks advising Protection 1 including Barclays, Citigroup, Deutsche Bank and RBC, while the financial advisors for ADT are Goldman Sachs and Bank of America Merrill Lynch.

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Zoomlion Heavy Industry Science and Technology Co., Ltd.; Market Cap HK$17.24 bn (as of 19/02/2016)
Terex Corporation; Market Cap: US$2.4 bn (as of 19/02/2016)

Introduction

Zoomlion has made a US$3.3bn non-binding offer to buy US-based company Terex in hopes of foiling the proposed merger between Terex and Konecranes. Zoomlion’s unsolicited offer is currently under consideration according to Terex, although Terex’s board of directors has not altered their position on the proposed merger with Konecranes. Terex, which has 97 priority-rated contracts with the U.S. government and provides mobile harbour cranes in critical U.S. ports, would create a strong foothold for Zoomlion to enter the U.S. market.

Zoomlion is one of the many Chinese companies eager to make deals with foreign companies and invest abroad as China’s economy weakens; however, as Chinese investors’ foreign appetites increase concerns are increasing abroad. The case of Zoomlion is no exception. The Committee on Foreign Investment in the United States (CFIUS) may decide to block the deal citing national security threats as the reason (given Terex’s dealings with the U.S. government). Whether CFIUS’ concerns are valid or simply a new form of protectionist policy against Chinese investors is still up for debate.

Zoomlion Heavy Industry Science and Technology Co., Ltd

Zoomlion (1157.HK) is a Chinese based industrial company founded in 1992. It is mainly involved in developing and manufacturing high-tech equipment in the areas of agriculture, building, energy, environmental, and transport engineering. Essentially it makes everything from cranes to pile-drivers. It had revenues of almost US$4.2bn in 2014 and is the largest equipment manufacturing company in China and the sixth largest in the world. Zoomlion has subsidiaries in more than 40 countries around the world and particularly excels in concrete and hoistingmachinery.  In 2013 they adjusted their development strategy from solely focusing on construction machinery to invest in four sectors simultaneously: construction machinery, agricultural machinery, environmental sanitation, and financial sectors.

Terex Corporation

Terex Corporation (TEX) is a lifting and material handling solutions company founded in 1925 in Connecticut, and built through a chain of acquisitions starting in the mid-1990s. It focuses on providing solutions for five key segments: aerial work platforms, construction, cranes, material handling and port solutions, and materials processing. Terex also provides financial products and services to help customers acquire equipment through Terex Financial ServicesTM. Though based in the U.S., Terex operates globally and has manufacturing facilities in North America, South America, Europe, Asia, and Australia. In 2014 Terex had revenues of US$7.3 bn.

Deal structure

Zoomlion has offered to pay Terex US$30 per share valuing the company at around UD$3.3bn; which represents a 41% premium over the current stock price of about UD$21.22, and a 100% premium over the closing price on the day before the announcement.

Zoomlion will finance the transaction with its own cash on hand and with bank debt, accounting respectively for 40% and 60% of the financing plan. Zoomlion’s investors, however, are not enthusiastic about the debt to take on for this acquisition – by September 2015, Zoomlion’s net debt had gravitated to 43 times its EBITDA, soaring from 7.4 times at the end of 2014. Zoomlion’s shares fell 7% in Hong Kong after the announcement.

At the same time, the all cash offer from Zoomlion generated positive market reaction for both Terex and Konecranes. After Terex made a statement about the offer its shares rose 36% and Konecranes shares rose by 9.1%. Accepting the offer would mean that Terex has to pay Konecranes a US$37m termination fee under the merger agreement.

Deal Rationale

Zoomlion has a successful track record in its sales of machinery and equipment, as the largest company in the sector in China, but it is encountering trouble when it comes to penetrating markets outside of its main geographical focus. Indeed, they have had a challenging time gaining more than a small presence in the U.S. over the past decade. The main barrier for Zoomlion, and other Chinese companies, is the lack of a dealer network for repairs and other services. This is a significant challenge for Zoomlion because customers cannot afford to wait for long periods of time for repairs. Creating a dealer network has proved challenging because most seasoned dealers are loyal to more established equipment suppliers like Caterpillar Inc.

In this context, Zoomlion eyed how Terex’s market – and its corresponding dealer network – is mainly concentrated in the United States and in the European markets, which would be complementary to Zoomlion’s presence in China and emerging markets. Zoomlion cites the potential to achieve a global footprint as a driver of the offer. At the same time, Terex and Zoomlion are complementary from an operational perspective: Terex can count on manufacturing expertise and technology, while Zoomlion can leverage its cost advantages and production capacity when it comes to manufacturing. Zoomlion believes that the merger could realize synergies from a production and cost perspective. The merged company would also feature a wider array of products, as well as a comprehensive product chain. As of now, Terex’s main products are aerial work platforms, cranes and material handling equipment, while Zoomlion’s main products include construction machinery, environmental equipment and agricultural machinery.

It is necessary to keep in mind that Terex was also looking at complementary geographies and corporate and operational synergies when agreeing to the all-stock merger with Konecranes. When the two companies announced their merger last August the goal was to create a company with a combined market value of US$5.7bn and annual revenues of more than US$10bn. Terex’s need for a partner comes from challenging economic conditions spurring after the 2008 recession: the number of skyscraper construction and major infrastructure projects drastically declined in Europe and the U.S. For example the S&P 1500 Industrial Index has dropped 8.4% in the past year. It is important to underline that the deal was structured as a tax inversion, since the combined company would have been domiciled in Finland, but that investors’ sentiment was not as favorable to their merger due to growing concerns on demand of industrial equipment.

Now with Zoomlion’s offer on the table the future of Terex is not as certain. While the board of directors still recommends the merger with Konecranes, Terex is conducting confidential talks with Zoomlion regarding the proposal. As far as the structure and the conclusion of this transaction are concerned, on one side the Chinese government’s “going out” strategy – encouraging to buy foreign assets and technology – might be the basis for speculation on the 100% premium in the proposal. On the other side, U.S. concerns on national security will be cause for thorough scrutiny of the transaction. These hurdles present another significant issue and could be considered a significant reason why at the end Terex might not end up agreeing to Zoomlion’s offer. The markets fear this and Terex’s shares are still trading well below the offer price of US$30.

Protectionism

Over the last decades China has built up significant reserves and claims on the rest of the world, due to its abundant, cheap labor, and artificially devalued currency. More recently however, a transition away from an export led economy to one based on domestic consumption has begun. One of the results of this transition is that capital flows have begun to reverse; with large Chinese investors beginning to exercise their claims abroad. In 2015 Chinese firms closed overseas deals worth $61 billion last year.

Many foreign nations have not taken too well to this new economic balance, and there has been a renewed wave of proposals for protectionist policies. Despite WTO regulations meant to block traditional protectionist policies such as tariffs, quotas, subsidies, embargoes and administrative barriers, there have been many alternative methods used to circumvent these blocks.

Several notable examples include the EU’s common agricultural policy that at times has led to farmers being paid not to cultivate land, or the banning of cheaper American beef on the grounds of GMO driven health concerns. Other examples would be Russia’s similar ban of certain European foods, or the UAE’s indirect subsidy to Emirates airlines through access to discounted fuel supplies.

The Zoomlion-Terex Case; a New breed of Protectionism

The security concerns raised by the potential acquisition of Terex Corp by Zoomlion are a good example of a new wave of protectionism: That of blocking key domestic firms from being acquired by foreign parties on the basis of national security.

In recent years, several high-profile strategic investments by Chinese companies have been blocked by the U.S. on national security grounds. These failed deals included, most recently, the controversial purchase by Huawei Technologies Co. of certain assets of 3Leaf Systems (“3Leaf”), a California-based server technology company.

Both Terex Corp and 3Leaf Systems deals were blocked by the powerful and opaque Committee on Foreign Investment in the United States (“CFIUS”).

The US, however has not been the only country engaging in such practices. Australia recently also blocked the entry of Huawei. Australia’s conservative government upheld a ban on Huawei Technologies Co Ltd from bidding for work on the country’s $38 billion National Broadband Network (NBN) out of concerns that the company with close ties to the People’s Liberation Army (PLA) was collaborating with the Chinese government to spy on foreign powers.

This M&A cold war of sorts has not been entirely one sided however, with the Chinese government protecting many of its industries from outside entrants such as in the tech space and in industrials and natural resources. The large presence of State owned enterprises (SOEs) has in itself been a method to provide cheap financing and to protect many infant industries from competition. In cases such as the Asian Tigers, the protection of infant industries has proved successful and a boon to their respective economies. Nevertheless, the situation is very different on the scale of the Chinese economy.

Despite the accumulation of tremendous financial capital, the Chinese might just find themselves out of luck: what good is all the money in the world if no one wants to sell to you?

Financial Advisors

Credit Suisse Securities (USA) LLC and Moelis & Company are serving as financial advisors to Terex, Zoomlion is advised by Goldman Sachs, according to a person familiar with the matter.

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Sysco Market Cap: $24.43bn (as of 26/02/2016)

The companies

Sysco

Founded in 1969 and headquartered in Houston, Sysco (Systems and Services Company), together with its subsidiaries and 200 distribution facilities (US, Bahamas, Canada, Ireland), focuses on marketing and distributing a range of food and related non-food items to the foodservice and food-away-from-home industry, serving restaurants, hospitals, schools, hotels and other foodservice customers. Throughout their history they developed into one of the largest broadline food distributors thanks to their geographical expansion and acquisitions that included “SERCA Foodservices” (Now Sysco Canada), “Asian Foods” in North America and “Pallas foods” – Ireland’s largest food distributor as well as “Crossgar Services” that enabled them to expand to Ireland. In second quarter of 2014, Sysco wanted to merge with US Foods for a $3.5bn. The deal was subject to regulatory approval. However, in June 2015 the US Court ruled out the possible merger on the grounds of the 75% control of US market that combined entities would have, which couldstifle the competition. This caused some disruptions in the company, but Sysco continued to show healthy financial results:

The company has generated, in FY 2015, $48.7bn in total revenue and $1bn in FCF, compared with $46.5bn in FY 2014 sales, with a CAGR of 4.36% in the last five years. With the FCF of $1bn and 46^th consecutive increase in dividends, the company appears to be quite stable, while their growth comes from the acquisitions.

Brakes Group

Brakes Group was founded in 1958 by three brothers that supplied poultry to caterers. Soon, the company started further development and did not seek away from investments. Starting from the few French acquisitions in the 1990s, the further expansion continued also in 2000s with acquisition of M&J Seafood and the merger of their company “Cearns & Brown” with “Watson & Philip” to form Brake Grocery. In 2002 Brakes was delisted and taken private. However, this did not impede the continuation of its acquisitions, including “Pauleys,” “Wild Harvest” and others. Finally, Brakes was acquired by Bain capital in 2007 for €1.3bn in order to consolidate its food and distribution businesses. Its growth is rather strong, having its sales and EBITDA 5-year CAGR of 5%. Furthermore, with EBITDA margin of 5.6% it shows better results than Sysco with 4.8%. Most of the turnover that Brakes generate comes from large chains (70%) while the rest comes from the independents. However, with respect to Sysco, Brakes is a rather small player, having $5bn of sales, which is approximately 10% of what Sysco generates.

Present also in France, Sweden and Ireland, Brakes Group has been generating strong cash flows in these countries during the last years consolidating its position in the food and transportation industry.  In Sweden the company covers 50% of the foodservice market and in France almost 20%.

The deal

Earlier this week, the US player Sysco, announced it had reached an agreement to acquire Brakes Group, in a transaction that values the UK player formerly owned by Bain Capital $3.1bn in Enterprise Value (EV), which includes $2.3bn in net debt to be refinanced. The deal, which is still subject to regulatory approval, is expected to close by July 2016, and implies a valuation multiple of 12x the target’s FY 2015 EBITDA of $260m, which will be financed through a combination of new debt issuance and cash on Sysco’s balance sheet ($5.1bn as of FY2015 end).

Overall, after the integration process, the merged group will have annualized sales of around $55bn.

The foodservice market

Currently the broader foodservice market in UK is estimated to be worth c. £50bn and is dominated by three companies: the unlisted Brakes, which boasts 22% market share, the South African Bidvest, a bigger conglomerate with operations in EMEA and 21% market share in UK, and the smaller Booker Group that, in the foodservice segment, has £0.4bn in revenues (10% of the group sales), which the management wants to double before 2018. Other small specialty players are currently eroding leaders’ market share, but overall the sector is expected to grow steadily in the coming years.

Sysco has been looking for a UK foodservice player since 2011, when it approached the South African conglomerate Bidvest to acquire its food distribution business, in a deal that could’ve been worth $4bn. Back in time Bidvest was also target of Brakes Group, and the two have been trying to merge several times, in order to create the largest UK player in the industry.

From a preliminary valuation standpoint, we compared the exit multiple achieved by Bain Capital in its sale of Brakes to the current trading EV/EBITDA multiple of one its competitors, Booker, which currently trades 17.5x its EBITDA. If this was to be applied to Brakes’ $260m EBITDA, would give an implied valuation of $4.6bn. However Booker participates only marginally in the same business of Brakes, so the metric is hardly applicable.

Deal rationale and market reaction

Even if the deal is expected to be immediately accretive after the integration of Brakes Group, the market reacted with Sysco’s share price down 5% after the announcement. This is mainly because the deal is rather conflicting with the overall group’s strategy, and will only provide the company with a foothold in the UK market.

Few synergies are expected from the integration, given the minimal geographical overlap between Sysco and Brakes, basically determining only a change in the ownership structure of the target and a marginal threat for its UK competitors.

Also Sysco’s management declared the minimal synergies achievable post-integration, however we believe that Brakes’ group will benefit quite a lot from the transaction as it will shift from a financial buyer – Bain Capital, to a strategic buyer and industry leader – Sysco.

Brakes’ capital advantage

The UK company will maintain a certain degree of independence, pursuing the actual’s management strategy and retaining its top executives, but it will gain higher flexibility to pursue its goals. Looking at Brakes’ capital structure it is remarkable how the company was a levered player (5.8x leverage ratio), but through the acquisition it will decrease its leverage, as well as have access to cheaper capital. This will allow the company to better compete with players that have a net cash position, such as Booker, reporting a cash surplus of £147m in FY2015.

Market reactions

Probably the unfavorable market reaction is due to Sysco’s shareholders perception: the company will have to borrow extra $1.5bn, mainly to complete the planned $3bn buyback, thereby increasing its leverage. Furthermore, the minimal integration and the lack of overlap are a major driver of the stock’s underperformance: Sysco only operates a small business in Ireland, so Brakes will remain a standalone company. Last but not least, the operational risk, in a country that faces economic and political uncertainty, could have been a catalyst for the 5% plunge.

Sysco’s perspective and potential upside

Sysco’s investors ultimately were focused on improving performances in the company’s home market, with the strategic goal of 3% growth in volumes compared with flat growth in the last 5 years.

We believe that Sysco’s management is looking at the big picture: with spending at hotel, restaurants and bars in the UK growing at 5% CAGR in the last three years and food-away-from-home, representing only 40% of the market in UK vs 52% in US, giving room for significant upside.

Moreover, from a more company specific view, EBITDA margins at Brakes – probably due to the cost cutting action by the financial owner – show better efficiency compared to Sysco (5.6% vs 4.8%), difference that could also be explained by the greater complexity of a bigger conglomerate like the US company. This could allow Sysco to integrate efficiency measures and improve its low margins, which will be further eroded by smaller players in US.

Advisors

Deutsche Bank has provided financing and sole financial advisory to Sysco, while Goldman Sachs advised Bain Capital and Brakes Group on the transaction.

The post “Merger Without a Cause” – Starring Sysco and Brakes appeared first on BSIC | Bocconi Students Investment Club.

Samsonite Market Cap: $24.43bn (as of 12/03/2016)
Tumi Market Cap: $1.83bn (as of 12/03/2016)

Introduction

Last week, the world’s biggest luggage company, Samsonite, zipped up a deal to acquire luxury rival Tumi for around $1.8bn.  This acquisition will be the largest one for Samsonite since its IPO in 2011.

After getting the shareholder approval, the deal is expected to close in the second half of 2016, meaningfully expanding Samsonite’s presence in the attractive premium segment of the global business bags, travel luggage and accessories market. This transaction is also expected to offer Tumi distribution channels in Asia and Europe, which are the acquirer’s fastest-growing markets.

Samsonite will pay $26.75 per share in an all-cash transaction, which represents a 33% premium to Tumi’s closing price on last Wednesday.

About Samsonite International S.A.

Samsonite International S.A. (SEHK: 1910) is an American luggage manufacturer and retailer, with products ranging from large suitcases to small toiletries bags and briefcases. It was founded in Denver, Colorado in 1910 by Jesse Schwayder.

Mr. Schwayder initially named one of his cases Samson, after the Biblical strongman, and began using the trademark Samsonite in 1941. The company changed its name to Samsonite in 1966.

The company’s registered office is in Luxembourg and it is listed on the Hong Kong Stock Exchange.

About Tumi Holdings, Inc. 

Tumi Holdings, Inc., (NYSE: TUMI) is a New Jersey-based manufacturer of suitcases and bags for travel. It was founded by Charlie Clifford in 1975 and is named after a Peruvian ceremonial knife used for sacrifices. The company has been a unit of Doughty Hanson & Co. since 2004, when the London-based private equity firm took over Tumi for $276mln.

Tumi is available at department stores and specialty stores, but it also has over 120 stores named after itself and 200 shop-in-shops around the world. It also supplies accessories such as electronic equipment, pens, and belts.

The company teamed with designer Anish Kapoor in 2006 to produce the PowerPack Backpack that incorporated solar technology for charging phones and PDAs. The company also had a licensing agreement with Italian motorcycle manufacturer Ducati, launching a collection of eight co-branded pieces in 2006 sold through both of the brands’ retail outlets.

Deal Structure

Under the terms of the agreement Samsonite will buy Tumi in a $1.8bn deal (including Tumi’s $94m of net cash). The deal will be an all cash transaction set at $26.75 per share, and it is expected to be completed in 2nd half of 2016. The official date will mostly depend on the antitrust review.

Tumi is subjected to a no-shopping provision. This means that during the pendency of the merger, the company will not be able to solicit other bidders. The breakup fee was set at $54.7m.

Samsonite, whose cash balance is c.$200m, will finance the acquisition mostly with loans, taking advantage of the current low interest rate environment. With regard to this matter the company has already secured financing from Morgan Stanley, HSBC, SunTrust and MUFJ.

Price analysis

The price offered ($26.75 per share) represents a premium of 33% on Tumi’s share price on March 2 ($20.13), the day before the deal was announced.

In order to better assess the magnitude of the premium we looked at the multiples of the transactions. Samsonite is paying about 3.1x TTM revenue, when the median for acquisitions on the apparel, footwear and accessories sector is 1.5. Furthermore, the purchase price values Tumi’s EV at 14.5x EBITDA. Considering that Samsonite’s own EV/EBITDA is 11.7, the acquisition cannot be considered cheap by any standard. That said, there is consensus between analysts that the merger offers considering revenue-boosting opportunities and cost saving thus explaining the high multiples.

According to Samsonite CEO, Ramesh Tainwala, the current valuations of the 2 companies are more favorable to Samsonite than they have been in the past years. Indeed, looking at the graph below, we can see that the gap between Tumi and Samsonite’s valuations has been shrinking considerably.

Tumi’s revenues increased last year at the slowest rate since 2009 as a result of currency fluctuations and weaker traffic from Chinese tourists. The setbacks sparked a decline in Tumi shares that reduced its valuation advantage over Samsonite to about half of what it was in 2012 (based on the multiple of price to sales).

Market reaction

After the deal was announced Samsonite shares rose as much as 6.3% to HK$25.20 in Hong Kong, the highest intraday level in four months. Tumi shares jumped 30% to $26.20 at the close of trading day on Thursday 10.

Deal Rationale 

The acquisition of the premium luggage brand Tumi comes as part of Samsonite’s continued global acquisition strategy. In fact, since 2012 Samsonite has announced nine acquisitions, aiming to double its annual sales to c.$5bn in the six years ending 2020, as it expands into distributing and selling other travel and non-travel bag brands. To name a few, in the past two years Samsonite purchased French luggage brand, Lipault, a US-based cellphone case maker Speck, and Germany leather goods manufacturer, Hartmann.

One of the main reasons behind the hunt of the luggage giant Samsonite for the premium luggage-maker Tumi is its complementarity with Samsonite’s portfolio of brands. A core-brand as Samsonite is very widely distributed and as a result does not have the attraction a premium brand would need to have. Therefore, the acquisition of a high-end brand Tumi should help the company rebalance its portfolio of baggage brands.

The deal seems to have upside potential for both companies. On the one hand, Samsonite will gain from diversification of its product portfolio, expanding its presence in the highly attractive premium segment of the global business bags, travel luggage and accessories market. On the other hand, the New Jersey-based Tumi with two thirds of its net sales in the US market (as of 2015) will benefit from Samsonite’s growing global infrastructure when expanding further into key markets such as Asia, Europe, and South America, where the latter has a substantial clout.

Conclusions

Ramesh Tainwala, the CEO of Samsonite, stated that at the moment his focus is on the integration of two companies. In addition, he emphasized the importance of retaining Tumi’s design team, as the backbone of its successful premium product in order to ensure the quality of the brand remains intact post acquisition. Both statements provide some confidence that the companies are on the same page in terms of the future development of the combined entity. Despite the fact that the acquisition does seem to create a company with a great mix of products, distribution channels and plenty of synergies to be unlocked, there is still a lot to be done to justify the premium paid. However, the surge in both companies’ share prices after the announcement indicates that the markets trust Mr. Tainwala experience in pursuing inorganic growth strategies without underestimating the importance of innovation.

Financial Advisors 

Morgan Stanley advised Samsonite on the acquisition, while Goldman Sachs Group advised Tumi.

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Mondelez International; market cap as of 11/03/2016: $66.46bn

Introduction

Lavazza, the leading company in the Italian coffee market, has agreed to buy the French brand Carte Noire for €700m in order to pursue its international expansion. This deal is a result of the EU regulators’ decision according to which the previous owner of Carte Noire – Mondelez International – was forced to sell its brand for antitrust reasons.

After the completion of this merger Lavazza will become the leader in the French coffee market.

About Luigi Lavazza S.p.A.

Luigi Lavazza S.p.A. is an historical Italian coffee producer which focusses on two line of business:

• Roasting and packaging ground coffee, creating capsules and other coffee products.
• Producing coffee machines.

Lavazza can be considered a vertically integrated company as it owns production plants in Italy, Brazil and India as well as several distribution channels for its products.

In terms of geographical presence, Lavazza is the leader of the Italian coffee retail market where it holds 44.9% of the market share. The brand is also well-known internationally. It operates in 90 countries worldwide from which it derives over 55% (€1.4bn in 2015) of its total revenues.

In the last years Lavazza has been investing many resources in order to further grow in foreign markets. In particular, the company identifies Germany, France and the UK as the principal markets in which it wants to grow.

Lavazza invested more than €1bn in the last 12 months. During 2015, it acquired Merrild, a leader coffee producer in the Nordics. Furthermore, the Italian company also decided to purchase the distribution network of their coffee in Australia, a market in which it already has an important market share

The company is targeting 70% of revenues coming from foreign countries within few years, and the goal seems not to be out of reach. Indeed, in 2015 Lavazza experienced a huge sales growth in key countries such as US, Germany and UK with a +20%, +11% and +19% YoY growth respectively. Moreover during the last five years the group achieved a CAGR of 5% even though the industry was not performing very well.

About Carte Noire

Carte Noire is the leader in the French retail market and it sells ground coffee, capsules and expresso beans.

The company is owned by Mondelez International, the American food industry firm famous for its Oreo, Mikado and Milka brands. Carte Noire is the brand under which Mondelez commercializes its coffee products in France, and the success of this brand is largely due to their Nespresso compatibles capsules.

While Lavazza is completely family-owned, like the majority of medium sized Italian firms, Carte Noire is part of a listed multinational company and is now being spun off as a consequence of a previous merger between the coffee businesses of Mondelez International and D.E Master Blenders. Indeed, the merger would have led to the creation of a company controlling 60% of the French coffee market thus heavily influencing the level of competition.

Deal Structure

Lavazza S.p.A. agreed to pay €700m to acquire Carte Noir in an all cash deal. Of the total amount paid, €400m will be funded by Lavazza through bank financing while the remaining €300m will be paid using existing cash reserves. A pool of banks composed by Intesa San Paolo, Bnl-BNP Paribas, Radobank and Unicredit have acreated a club deal in order to finance the transaction.

Deal Rationale

Lavazza S.p.A. is well positioned in the market and it is trying to diversify its presence in the world in order to become a major player in the industry.

Lavazza CEO Antonio Baravalle stated that Carte Noire will well complement Lavazza’s French division as the former is showing higher positioning in the retail coffee sector, while the latter is performing better in the “away-from-home” market in France.

The deal will create a group with combined revenues of €1.7bn and further expected sales growth to €2bn by 2020. By acquiring Carte Noire, which currently has a 20% market share in France, Lavazza will further strengthen its position in the French market, ultimately holding over 50% of the market share. As a consequence, the Italian coffee company is expected to generate about a fifth of its total revenues in France this year.

Finally, a fundamental part in the deal will be played by Carte Noire’s main plant based in Laverune, which is also on the list for sale to Lavazza. The plant will play a key role for increasing the production of the combined company. As a result, Lavazza is planning further investments in Laverune, expanding the facility and increasing the total number of employees in France to 500.

Markets Reactions

Markets are taking into consideration the opportunity of a partial IPO for Lavazza that will unlock many opportunities in terms of investments and consequently growth opportunities for the group. However, the CEO Antonio Baravalle said that the company is not considering an IPO at the moment since shareholders want to keep their independence.

Based on their financial results, business plan and the recent acquisitions it is obvious that Lavazza S.p.A. is becoming a more influential player in the industry, with solid balance sheet and a great potential to grow organically by exploiting the Italian know-how while using their highly recognised brand. Even though there may not exist an immediate need for an IPO as Lavazza is currently showing strong growth, in the long run going public may be a sound decision in order to outperform competitors.

Financial Advisors 

JP Morgan acted as the financial advisor for Lavazza, while Rothschild assisted it on the club-deal with the banks for financing the transaction. On the other side, Mondelez International was advised by Lazard.

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Sherwin-Williams, market cap as of 15/04/2016: $27.154bn
Valspar, market cap as of 15/04/2016: $8.469bn

Introduction

Sherwin-Williams, the largest producer of paints in the United States, agreed to buy rival Valspar Corp., for about $9.3 billion, to become the world’s biggest coatings maker. This compelling combination will lead to a significant expansion in Asia-Pacific and EMEA markets and at the same time it will allow Sherwin-Williams to secure a competitive position in the challenging paints industry. The deal will generate $280 million of annual savings, expected to be achieved by 2018, and the implementation of improved technology capabilities in order to accelerate product innovation.

About Sherwin-Williams

The Sherwin-Williams Company was founded by Henry Sherwin and Edward Williams in 1866 and is headquartered in Cleveland, Ohio. As third-largest worldwide firm in the development, manufacturing and sale of paint, coatings and related products, it has an extensive retail presence throughout the Americas, and a growing network in Europe and Asia-Pacific. The company is composed by four reportable segments: Paint Stores Group, which operates for Sherwin-Williams branded products in the U.S., Canada and the Caribbean; Latin America Coatings Group, that sells a wide range of architectural paints and industrial coatings in Latin America; Consumer Group, which manages a highly efficient global supply chain in North America; Global Finishes Group, which manufactures and sells a wide range of protective, marine and automotive finishes. Now the company is focused on strategies that will drive long-term growth in revenues, market share and profitability: broaden the share of the do-it-yourself market and the stores’ density, strengthen the retail availability of products throughout Latin America and differentiate the global product offering. The Company’s financial condition, liquidity and cash flow, in FY 2015, continued to be strong, showing an EBITDA margin of 15.9%. It consolidated net sales generating $11.3bn, with an increase of 1.9% over 2014. Furthermore, net operating cash increased by 34%, to $1.45bn, and allowed to return about $1.3bn to shareholders, through dividend payments and share repurchases.

About Valspar Corporation

The Valspar Corporation, founded in 1806 by Samuel Tuck and listed on the New York Stock Exchange, is headquartered in Minneapolis (MN) and is the 4th largest producer of Coatings and Paints globally. The paints segment includes consumer paints whereas the coatings segment includes four lines (packaging, general industrial, coil and wood coatings). Both distribute products in over 25 countries between North America, Australia/New Zealand, Asia and Europe. The company highlighted a strong performance in China in FY 2015 and reached an EBITDA margin of 16.3%. In June it acquired the performance coatings businesses of Quest Specialty Chemicals, which included automotive refinish and industrial coatings. This strategic acquisition doubled the size of the existing businesses and provided Valspar with another strong platform for future growth. In FY 2015 the consolidated net sales were $4.3bn compared to $4.6bn of 2014, with a five year CAGR of 6%, which includes FX effect. The decline was primarily caused by the impact of foreign currency exchange and lower sales in Consumer Paints product line, but it was partially offset by the acquisition of QSC. For the 37th consecutive year, the company consistently increased cash dividends for a total amount of $1.20 per share, with a CAGR of 14% and generated nearly $400 million in cash, this allowed to repurchase 5% of stocks.

Rationale

From a strategic point of view, the companies involved are complementary: the acquisition will allow Sherwin-Williams to diversify its range of products by exploiting Valspar’s resin technology and its portfolio of patents and it will be able to further reinforce its presence in the US market through Valspar’s well-recognized brands. The acquiring company will also leverage the established presence of Valspar in EMEA and Asia-Pacific in order to boost its own international growth. This will allow Sherwin-Williams to increase the current proportion of international revenues from 16% to 24% when the acquisition will be completed. The new conglomerate will now be the first player in terms of global sales ($15.6bn), just ahead of PPG ($14.2bn) and Azko ($11.1bn). In this industry there are still many competitors with similar market shares, it is therefore unlikely that the regulator will stop the deal, however in that case the acquisition price would be revised according to the proportion of divestures required.

However, adding new products or entering new markets does not create value for shareholders if the acquisition price is fair. Indeed, the main source of value for this transaction is driven by cost synergies. The annual value of cost savings is estimated to reach approximately $280m when the transaction will be successfully completed. The acquisition is expected to be accretive already in the first year, excluding exceptional costs.

With regard to the offer price, considering an Enterprise Value of $11.3bn, the multiple EV/EBITDA is 15x, which is above 9x which is the average for recent transactions in  the same industry. This might suggest that Sherwin-Williams overpaid for Valspar also taking into account the low-growth of the industry.

Deal Structure

The enterprise value of the transaction is valued at $11.3bn including Valspar’s $2bn debt. Sherwin-Williams agreed to pay $113 in cash per Valspar share, representing a 28% premium to the all-time high closing price. The equity purchase will be financed with a combination of $1bn in cash and $9.3bn of a bridge financing facility fully committed from Citigroup. The new debt financing will include both new bonds as well as low interest term loan.

The deal already anticipated potential regulatory clearance requiring divestitures of assets. Therefore, the agreement took into account the possibility of divestitures of assets for $650m, in this case the transaction price would drop to $105 per share. Sherwin-Williams has the right to call off the deal if required divestitures exceed $1.5bn in 2015 revenues.

The deal has been unanimously approved by both Valspar and Sherwin-Williams Boards of Directors and is subject to the approval of Valspar shareholders and customary closing conditions, including the expiration or termination of the applicable waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act and regulatory approvals in various other jurisdictions. The acquisition is expected to close in Q1 2017.

Market reaction

As you can see from the graph below, the market reacted differently for the companies involved. Valspar’s share price spiked because of the 28% premium that Sherwin-Williams will pay if no major divestures will be required. Since Valspar’s share price is now trading around $107, it seems that the market does not consider sure the positive closing of the transaction.

On the other side Sherwin-Williams’ share price dropped almost 5% on the first day of trading, confirming the initial consideration that the price was a bit high, especially comparing transaction multiples. However, the stock recovered pretty well on the following days, over performing the S&P500 and rebounding above preannouncement levels. This may signal that the market is starting to reevaluate the price paid for the acquisition.

Financial advisors

Citibank and JP Morgan acted as financial advisers to Sherwin-Williams while Goldman Sachs and Bank of America Merrill Lynch are acting as financial advisers to Valspar. Citigroup Global Markets will also provide bridge financing.

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IHS Inc.; market cap as of 15/04/2016: $8.33bn
Markit Ltd.; market cap as of 15/04/2016: $6.16bn

Introduction

On March 21, US-based market data provider IHS announced a merger of equals with London-headquartered financial information provider Markit in a $13bn stock deal. The new company, to be called IHS Markit, will challenge the industry dominance of Bloomberg and Thomson Reuters. After completion of the transaction, former shareholders of IHS will own about 57% of the new company. Investors in Markit will end up with about 43% of the firm. The deal will also give the new company the opportunity to benefit from UK’s lower corporate tax rate.

About IHS

IHS is a Colorado-headquartered financial data provider operating in over 33 countries with c. $2.2bn in yearly revenues as of the end of 2015. Its expertise lies on providing and analyzing energy (Resources Division) and transportation (Transportation Division) data for corporate customers. An additional division of the company is specialized in providing information for technical professionals across the product design, technology, and economic risk industries (CMS Division).   In the past years the company has reorganized itself, now by product segment, and is in a process of divesting non-core assets—such as the Operational Excellence and Risk Management (OE&RM) and the GlobalSpec product offerings—in order to determine and pursue the strategic fit, profitability, and growth potential of all its assets under the new product segment organization. Moreover, IHS raised its EBITDA margin and produced a substantial free cash flow in 2015, which was used in strategic acquisitions. The company was involved in two acquisitions in 2015, first acquiring CARPROOF, a Canada-based vehicle data provider, and then by acquiring Oil Price Information Service (OPIS), a US-based petroleum pricing data provider.

About Markit

Markit is a London-based financial information provider operating in 13 countries with c. $1.1bn in yearly revenues at the end of 2015. It was formed in 2001 by a group of former credit derivatives traders from TD Securities, and went public on NASDAQ in 2014. Markit aggregates information from major bond dealers and uses it for research, valuation, trading, and reporting. Its main clients are investment and trading clients. The company operates through three divisions: an Information division, which provides pricing, reference data, indices, valuation and trading services; a Processing division, which offers trade processing solutions for OTC derivatives, foreign exchange, and syndicated loans; and a Solutions division, which provides enterprise software platforms, managed services, and custom Web solutions. In 2015 Markit acquired the Halifax House Price Index, Information Mosaic, DealHub and CoreOne Technologies in order to keep the company’s position as leading service provider, although none of these acquisitions were large transactions.

Industry Overview

Outlook for the industry has been optimistic and high growth levels are expected. A driving factor behind the growth is market fragmentation caused by post-2008 financial crisis regulation. These regulations have shifted over-the-counter trading away from banks and onto electronic trading platforms making it harder to value and price things, which is good for data companies.

Moreover, market data vendors are becoming desirable assets given that increasing competition has made exchange-traded products less profitable. A sign of this desirability is the wave of mergers and acquisitions that have taken place in the market data space over the past year. Some of the largest acquisitions include Bloomberg’s purchase of Barclays’ index benchmarking business, Verisk Analytics’ agreement to buy Wood Mackenzie, and McGraw Hill Financial deal for SNL Financial.

Deal Structure

The transaction consists of a merger of equals giving birth to a new entity, headquartered in London, to be named IHS Markit.  IHS shareholders will own approximately 57% and Markit shareholders will own approximately 43% of the combined company on a fully diluted basis. IHS shareholders will receive 3.5566 common shares of IHS Markit for each share of IHS common stock, which based upon the IHS closing price of $110.71 on March 18, implies a per share price of Markit common shares of $31.13. The deal values Markit at roughly $5.5bn (around 11x EBITDA), and the combined company at around $13bn.

Mr. Jerre Stead, CEO of IHS, will be Chairman and CEO until the end of 2017, while Mr. Lance Uggla, founder and CEO of Markit, will be President and board member until the end of 2017, then he will become Chairman and CEO. The board will be composed of 11 members, 6 designated by IHS and 5 by Markit.

The transaction, which has unanimously been approved by both companies’ boards, still requires shareholder approval and is subject to customary closing conditions and regulatory approval. Closing is expected to take place in the second half of 2016.

Deal Rationale

As mentioned in the introduction, the new company is expected to become a key player in the financial market data industry, which has long been dominated by Bloomberg and Thomson Reuters, respectively with market shares of around 32% and 26%. According to the boards of both companies, which have unanimously approved the transaction, IHS Markit “will be a leader in critical information, analytics and solutions, and will have non-overlapping customers and products, a strong financial profile and an excellent management team”. The company is also going to be delivering next-generation information and analytics products to help customers in decision-making, a field that is expected to offer incredible growth opportunities as trading and investing decisions increasingly depend upon machine output. Both CEOs are convinced that the cultural fit between the two companies and the enhanced product innovation resulting from the merger will guarantee high and stable cash flows and a strong return on capital for shareholders, who will be able to cash-in some value through two $1bn share repurchases scheduled for 2017 and 2018.

The merger will create a global information powerhouse with leading positions in energy, transportation, and financial services. The sharing and flow of information within the new organization will improve innovation capabilities, while greater variety in product proposition coupled with a complementary and broader customer base (including more than 75% of Global Fortune 500 companies, governments, large oil & gas and automotive companies on one hand, and investment banks, asset managers, hedge funds on the other) will generate important cross selling opportunities, potentially delivering approximately $100m of additional revenue by 2019. In terms of future product development, management has in mind the creation of a single vast data pool for industry applications and analysis, as well as the creation of new energy indices and of smart beta indices and factors, leveraging on IHS’s industry, economic, and risk data. With respect to cross selling, there are effectively great profit opportunities. In fact, IHS’s primary customers, i.e. aerospace and defense, oil and gas, and automotive companies, will be able to benefit from Markit’s enterprise data management, web services, and tax solutions services (helping corporations comply with tax rules and cross-border payments). On the other hand, Markit’s customers will have access to IHS oil and gas information and research.

Moreover, a stable and diversified revenue base combined with a strong balance sheet allowing for financial flexibility should be key drivers in terms of new product investment. The large portion of IHS’s subscription based revenue, together with Markit’s fixed and variable recurring revenue, should guarantee stability in future gross proceeds. Durability in revenues on a global scale will also be the result of a more diversified segment and geographic mix. Management is expecting strong future free cash flows ($900m expected for 2015) and has set a target gross leverage of 2.0-3.0x with a high non-investment grade rating.

The new company expects to realize cost synergies of $125 million by the end of 2019. These will be driven by integration of corporate functions, reduction in technology spending resulting from improvement in IT infrastructure, establishment of centers of excellence in cost-competitive locations, and optimization of real estate and other costs. The transaction is expected to be immediately accretive to adjusted diluted EPS, and should result in approximately 20% adjusted diluted EPS growth in 2017.

One last point should be made with respect to the tax consequences of the transaction. In fact, IHS Markit will be incorporated the UK, rather than in the US (though it will keep some key operations in Colorado). While initially this deal might have seemed to be designed for the very purpose of a tax inversion (we have seen a lot of these happen recently, triggering temporary competitive advantages and thus further inversions) it is clear from what has been analyzed in this paragraph that the actual benefits go well beyond that of a lower tax rate, which is expected to be in the 20-25% range. It is indeed true, however, that the benefit is not negligible, especially when it comes to repatriation of foreign profits (which would be charged a 35% tax from US authorities). Moreover, for the sake of clarity, this is not technically a tax inversion, insofar as IHS’s shareholders will end up owning less than 60% of the new company.

Market Reaction

Upon announcement of the deal, on March 21, shares of Markit climbed to $32.26 (rising 9.4%), while those of IHS jumped 6.4% to $117.80. The same day, the two closed at $33.51 and $122.09, respectively. The movement in share prices reflects the good growth prospects from the deal, both in the short run, given the immediate EPS accretion and the share buyback programs scheduled for the next 2 years, and in the long run, considering the opportunities offered by the sector, the operational and cultural fit of the two companies, and the track record of top management.

Financial Advisors

IHS was advised by M. Klein & Co. and Goldman Sachs Group Inc., while Markit was advised by JP Morgan Chase & Co.

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Vivendi S.A. Market Cap; as of 15/05/2016: €25.68bn
Mediaset S.p.A. Market Cap; as of 15/05/2016: €4.59bn

About Vivendi S.A.

Vivendi S.A. is a French conglomerate operating in four main sectors: television and film, music, ticketing and publishing. This media giant manages its businesses through its subsidiaries Canal+ Groupe, Universal Music Group, Vivendi Village and Dailymotion. In addition, it holds an equity stake in affiliates such as Telecom Italia, Telefonica, Gameloft and Ubisoft.

The company started out as Compagnie Générale des Eaux (CGE) in mid-19th century as a water supply firm. Throughout the years it went through the diversification of its activities, and as a result it created Canal+ in 1984. Vivendi was also an important player in the telecommunication industry holding a significant equity stake in SFR, in which it later divested. Nevertheless, it still shows an appetite for the telecommunication industry as it became the owner of 24.90% of Telecom Italia’s shares through recent acquisitions.

In 2016 Vivendi recorded revenues of €10.76bn, mostly coming from Canal+ (€5.51bn) and Universal Music Group (€5.11bn.). It is also one of the companies that composes the Euro Stoxx 50 index.

With the 14.35% stake in Vivendi, Groupe Bolloré is its main shareholder, while the rest of the shareholding structure consists of institutional and retail owners. BlackRock Inc. is the second biggest owner with 5.03% of equity stake.

About Mediaset S.p.A.

Mediaset S.p.A. is a Milan based mass media company founded in 1978 by former Italian Prime Minister Silvio Berlusconi. It started out as a local broadcaster – Telemilano – and it soon renamed itself to Canale 5. Besides this well-known Italian TV channel, Mediaset expanded its business not only in the television industry but also through many other media-related services both in Italy and abroad. As a result, Mediaset currently owns a range of businesses including advertising (Publitalia ’80 and Digitalia ’08), free and pay TV (Canale 5, Italia 1, Retequattro and Mediaset Premium), film production, news and web related services. Besides Italy, Mediaset also entered in the Spanish media industry when it acquired 50.1% of Telecinco’s shares in 2003.

The company is also well known for its pay-tv service – Mediaset Premium – that among other content also holds the sole rights for broadcasting Champion’s league football matches in Italy.

Before the deal with Vivendi was announced Mediaset SpA had a shareholding structure in which 33.59% of the company was in the hands of Fininvest – the financial holding company owned by Silvio Berlusconi. The remaining of the shares was hold by retail and institutional clients (62.7%) as well as the company itself (3.4%).

In 2015 Mediaset reported €3,524.8m in revenues which is 3.23% more than in 2014. The company derives its revenues mostly from Italian operations (72.46%), while the remaining portion comes from its activities in Spain. Pay TV services amounted to 22.44% of total net revenues and it recorded 3.78% YoY growth.

Deal Structure

The deal will consist of a stock swap through which Mediaset will transfer to Vivendi its existing treasury shares corresponding to 3.50% of its shareholding structure. In return Vivendi will hand to the Italian broadcaster 3.50% of their own share capital. The deal comes with a twist, as Vivendi will also gain control of Mediaset’s crown jewel – Mediaset Premium. The deal therefore implies a €735m value for this pay-tv business. However, the Italian media group holds only 89% of Mediaset Premium, since the remaining 11% had been sold to Telefonica SA in January 2015. As part of the deal, Vivendi will also buy Telefonica’s stake and take full ownership of the business.

The deal, after a period of due-diligence, is expected to be finalized on September 30th and it includes a lock-up clause which prohibits Vivendi from buying extra shares of Mediaset in the first year and from reaching a stake bigger than 5% in the second and the third year. Finivest, Berlusconi’s holding company and Mediaset’s largest shareholder, will not have instead any particular limit in buying additional Mediaset’s shares (beside those imposed by the Italian regulation on mandatory takeover bids.) Following the deal, Mediaset’s CEO – Pier Silvio Berlusconi will join Vivendi’s board of directors.

Deal Rationale

The deal wants to design and crystallize a strategic partnership between the two media groups. Together, the group will develop a content production on an international scale, adopting standards and language in line with the global market. The project will be enhanced by distribution through the television networks of the two groups in Italy, France and Spain. In fact, the deal confirms the will of Vivendi to build a strong presence in Southern Europe – a market that shares the same roots and the same cultural imprint. This agreement also represents an important step forward for Vivendi in its desire to become a large international group.

Through its Studiocanal division, Vivendi is already the first film producer in Europe and it has significantly strengthened its presence in the TV production with important investments in many independent production companies in Spain and Great Britain. With the acquisition of Mediaset Premium, Vivendi will expand its presence in the European pay-tv business reaching more than 13 million individual subscribers.

Overall, the partnership with Mediaset and the acquisition of the Premium segment represent crucial points in the plan of Vivendi’s Chairman – Vincent Bollorè – to create a media platform capable to challenge giants like Sky and Netflix in Southern Europe.

The deal could also be seen as part of the personal plan of Mr. Bolloré to gain further influence and power in Italy. Mr. Bolloré is in fact already a very well-known figure in the Italian business community. His group holds an 8% stake in Mediobanca (second biggest shareholders after Unicredit) and a 24.9% stake in Telecom Italia through its control of Vivendi. Now he will add another strategic and iconic asset in his Italian portfolio.

Finally, the deal could represent an aged Silvio Berlusconi’s will to divest and to sell the group he founded and still controls. Rumours say that the French billionaire Bolloré could acquire the entire group in 2019, after the expiration date of the lock-up clause. However, Pier Silvio Berlusconi declared that this deal does not represent by any means an exit of the Berlusconi family from the media business.

Vivendi’s shopping spree

Mediaset is not the sole acquisition of Vivendi since the beginning of 2016. After having disposed of some of its subsidiaries, the company accumulated around €16bn in cash. Out of this amount, 6bn is planned to be returned to shareholders though dividends and share buybacks while 10bn is available for new acquisitions.

In April this year Vivendi announced the acquisition of 15% of Fnac, a French retailer of entertainment and leisure products and consumer electronics which it comes with the price tag of €54 per share. The acquisition which is worth in total €159m will be performed with the funds raised through reserved capital increase. This deal is expected to result in a strategic partnership in live events and ticketing business.

Furthermore, Vivendi has been building up its stake in Telecom Italia since mid-2015, which now amounts to 24,9% – giving Vivendi four out of 18 board seats. The rationale for this move is unclear to investors, since Telecom Italia has been performing poorly during the last couple of years, and Vivendi has been actively selling off its telecom assets in Northern Africa, France and Brazil. Furthermore, Telecom Italia is a heavily leveraged company with roughly half of the enterprise value in net debt. However, having control over the company, Vivendi can participate in its turnaround and deleveraging process. For instance, the disposal of the mobile phone masts business to Italian infrastructure company already commenced. In addition, the changes were further confirmed with the decision for the Telecom Italia’s CEO – Marco Patuano to step down.

Lastly, Vivendi is actively expanding its stakes in video game businesses. It increased its holdings in Gameloft and Ubisoft to 29.86% and 15.90% respectively, spending a total of €160m. The move triggered their stock prices to surge by 17% and 14% respectively. The rationale for such investment is a vision that video games are a strategic operational fit for Vivendi’s content.

Mr. Bolloré seems to be eager to turn Vivendi into southern European media powerhouse. Though the rationale behind some investments remains unclear, his reputation of a savvy trader keeps investors confident in Vivendi. This is reflected in the fact that the company trades at 14x EV/EBIDTA which is well above the industry average.

Market Reactions

The deal between Vivendi and Mediaset was announced on Friday, April 8, after the closing of the markets. On Monday and in the following days the market reacted positively. In particular, Mediaset gained 2.57% on Monday, 2.62% on Thursday and 4.51% on Wednesday. However, it should be taken into consideration that the deal was strongly expected so the Mediaset share price had already gone up by 5.36% before the announcement.

Financial Advisors

Neither Mediaset S.p.A. nor Vivendi disclosed the financial institutions that advised them on this deal.

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Alaska Air Group Inc., Market cap $10.23bn as of 15-04-16
Virgin America Inc., Market cap $2.45bn as of 15-04-16

About Alaska Air Group Inc.

Alaska Air Group, Inc. is an airline holding company founded in 1985 and based in SeaTac, Washington that mainly serves the Pacific Northwest and Alaska. It currently owns two American carriers, Alaska Airlines and Horizon Air, which combined reach over 112 destinations with more than 1000 daily departures.

Through its two main subsidiaries, Alaska Air Group holds a fleet of 219 aircrafts: Alaska Airlines counts over 150 American Boeings with up to 181 seats, while Horizon’s fleet is for now made up of 52 Canadian built Bombardier Q400 with up to 76 seats. Alaska’s fleet is not only more than 3 times larger than Virgin’s, but also 4 years older on average.

On April 12, 2016 Horizon Air has announced the acquisition of 30 new Embraer E175 jets: the order, which also includes options for 33 additional E175s, is valued at 2.8$bn and has the aim of supporting the opening of new routes.

From an operational point of view, Alaska Air Group recently reported a 9.2% increase compared to March 2015 in both RPM (revenue passenger miles) which is now at 3.2bn and ASM (available seat miles), now at 3.7bn, as well as a 0.1 percentage points increase in passenger load factor now at 86.2%. From a financial point of view the Group has a current EV of $9.58bn, representing a multiple of 6.27x its FY2015 EBITDA.

About Virgin America Inc.

Virgin America Inc. is a California-based low-cost airline company which was launched in August 2007 as a subsidiary of Richard Branson’s Virgin Group. By law, no more than 25% of a US airline can be owned by “foreign interests” and therefore at the moment of the foundation VAI Partners LLC, a pool of institutional investors created to group Virgin America’s stockholders, owned 75% of the company while the remaining 25% was controlled by Virgin Group.

On November 14^th 2014, the company was listed on the NASDAQ stock exchange, raising c. $307mln in the initial public offering.

As of March 2016, Virgin Group Holdings Ltd owns a 15.5% stake in Virgin America, while the hedge fund Cyrus Aviation Holdings is the largest direct shareholder with 23.6%.

Ninth-largest US carrier by passenger traffic, Virgin America is based in San Francisco. Its fleet is made of 60 Airbus A320 aircrafts and currently serves 18 US cities and three Mexican ones. The company generated $1.53bn revenues in FY2015, growing 2.7% compared to FY2014, carrying more than 7 billion passengers with an increase in RPM (revenue passenger miles) of 3.6% with respect to 2014.

Furthermore, CASM excluding fuel cost (cost per available seat mile, an important indicator of airline efficiency) is forecast to decline between 1% and 2% in 2016, mainly thanks to high labour productivity and a young single-fleet type which is expected to drive costs down substantially in the long term.

Deal announcement and early reactions

On the 4^th of April, Alaska Air Inc. announced to have reached an agreement to acquire Virgin America Inc. for a total equity value of $2.6bn. The transaction will complete in January 2017 and is still subject to regulatory and stockholders’ approval.

However, the most prominent shareholder of Virgin America – Mr. Richard Branson, the exuberant entrepreneur who founded Virgin Group – has expressed its disappointment on the day of the announcement. He said there was nothing he could do to stop the acquisition mainly because of the restrictions on ownership imposed by the US, and that he hopes that Alaska Air would continue to pursue its mission: providing the best customer experience. The entrepreneur owns indeed a 22% stake in Virgin America, but not a majority voting stake due to his foreign nationality.

Bid war, offer and financing

Before Virgin America agreed the terms of the deal on April 4^th 2016, Alaska Air had had to face a fierce competition against the low cost airline JetBlue Airways, which had engaged in a frenzied bidding war. Virgin America CEO David Cush admitted, however, that JetBlue’s final bid was “fairly close to Alaska’s, not significantly below it”. The main reason behind Virgin America’s choice seemed to be due to Alaska Air’s strong balance sheet: at the end of 4Q 2015, Alaska Air Group was indeed reporting a solid net cash, while JetBlue is a levered player. However, this bid war could extend further and in the case that Virgin America receives a higher offer from another acquirer, the company would be required to provide Alaska Air with four business days to revise its bid.

The acquisition is structured so that the target will be merged with an entity, Alpine Acquisition Corporation, fully owned by Alaska Air and it values Virgin America $57.0 per share, for a total equity value consideration of $2.6bn which will be paid in cash. The price paid represents a 46.5% premium over Virgin America’s closing share price ($39.8) on April 1^st 2016, one day before the transaction announcement, and an 89.6% premium based on the closing share price as of one month prior the announcement ($30.1).

As of 2015 FYE, Alaska Air owned only $73.0m in cash, with the rest of the liquidity consisting of $1.25bn in marketable securities: hence the company will use $600m in balance sheet cash, probably selling some of its more liquid securities, and will raise $2.0bn in new debt. The impact on the debt profile of the merged entity could negatively impact the current credit rating of the acquirer (Moody’s B1 – stable). At the moment Alaska Air has a net cash of $642m and will assume further $1.4bn of leases on Virgin America’s balance sheet. This figures, together with the $2.0bn issuance to finance the transaction, will reverse the net cash into a net debt. However the debt to equity will remain one of the lowest in the industry, close to 58%, way lower American Airlines’ 84%, but also higher than Delta Airlines’ 48% and JetBlue’s 46%.

Post-acquisition takeaways

The deal is expected to be accretive to adjusted EPS from year one after the merger and is supposed to create the premier West Coast airline, with $7.0bn of annual revenues and more than 39m passengers. However, despite the elimination of overheads, the amount of net cost synergies is estimated at $50m with revenue synergies at $175m, bringing annual net income close to $1.3bn.

The main revenue synergies will derive from Virgin America’s footprint in California, since the acquirer sees the acquisition as a significant step into the West Coast and as an opportunity to overtake JetBlue as the fifth major airline in North America.

Currently California has a total population of 39.1m Americans and 185,700 passengers per day: this will contribute to consolidating the group’s position, boasting the largest seat share on the West Coast (22%) and becoming the second largest carrier in San Francisco Airport. Moreover, the company will become the most important player in the low fare premium product carriers, which include Alaska Air, Virgin America, Hawaiian Airlines and JetBlue, in an industry that – with lower fuel prices – was able to achieve a remarkable 24% pre-tax margin in 2015.

Furthermore, in the long term the renovation of the fleet will not be an issue and will give the group an edge over competition: since Virgin and Alaska operate two of the youngest fleets in the landscape. Virgin America’s average fleet age is around 6 years, while Alaska reports 10 years on average, way lower than the 17 years of age showed by Delta but close to the 8 years reported by the low fare premium carrier JetBlue.

Financial Advisors

Evercore Group acted as financial advisor to Virgin America, while Bank of America/Merrill Lynch and UBS investment bank acted as lead financial advisors to Alaska Air.

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