Summer Deals Recap

As summer comes to an end, BSIC presents its top picks of the season’s most interesting deals. We saw several key themes throughout the summer, notably, a wave of megadeals, with 13 deals over €5bn announced this summer compared with only 2 in the same season last year. Worldwide deal activity was bolstered by an active private equity market, which continues its search for attractive investments to deploy its abundant cash and take advantage of the dovish monetary policy measures taken in the US and in Europe over the summer. ECM markets, on the other hand, saw weaker activity due to turbulence in global equities, with, in particular, US-China trade tensions causing AP InBev to cancel its planned listing on the Hong Kong stock exchange, which would have been this year’s largest IPO. Nonetheless, here is a list of the deals that shaped the M&A and ECM landscape over the summer, broken down by sector.

Healthcare

AbbVie to acquire Allergan

This deal fits into a trend that has seen many pharmaceutical companies engage in aggressive, large-scale mega-deals in 2019 to replenish their drug pipelines. AbbVie faces a problem as the 2023 expiration date for its flagship Humira drug is fast-approaching. The solution, at least in the company’s mind, is to fill the future gap in its portfolio by acquiring Allergan, the producer of Botox—but the shareholders disagree, especially at a 45% premium. Indeed, the AbbVie/Allergan deal stands out because of its particularly poor reception by the market, which sent AbbVie shares tumbling down 15% after the announcement of the deal. The rationale for the deal is the $2bn in cost savings and the resulting 20% boost in EPS that would be realized by combining the R&D and overhead costs. These numbers did not impress investors however, as they are used to companies missing their accretion targets, just like Bristol-Myers Squib earlier this year. The AbbVie/Allergan deal demonstrates the difficulty of measuring the integration costs of big pharmaceutical companies and investors’ increasing skepticism about these complex deals.

Pfizer merges its off-patent drug business with Mylan

Deal Value: $32.7bn |Deal Type: Spinoff/Merger Premium: N/A |Date: 29-Jul-2019 | Nationality: US, NL | Subsector: Drug Manufacturing

Also riding the wave of M&A deals in the Healthcare sector this year, Pfizer announced it would merge its off-patent drug business, which includes brands Lipitor and Viagra, with the generics drugmaker Mylan. For both companies, the deal represents a shift in strategy: while Pfizer wants to get leaner and focus its portfolio on innovative drugs and vaccines, Mylan is seeking strategies to unlock shareholder value after seeing its stock price be beaten down 75% by the market over the past 4 years. Indeed, generics producers have taken a hit due to increased pricing pressure over the past years, political controversies around price raises and the opioid crisis. The Pfizer/Mylan deal creates a new, diversified $50bn player, which is made sturdier thanks to the steady cash flows from the Pfizer brands and is positioned to become one of the largest players in the generics space.

Amgen to acquire Otezla assets

The Amgen-Otezla deal comes at the end of a record summer for healthcare M&A, as larger companies like Pfizer and AbbVie fervently pursue blockbuster acquisitions to reduce the effects of a looming patent cliff. Amgen’s acquisition of the psoriasis treatment provider Otezla, while sensible, is primarily a result of Bristol-Myers Squibb’s $90bn acquisition of biotech giant Celgene earlier this year. In order to placate regulators and mitigate antitrust concerns, Celgene and BMS agreed to divest certain assets by year’s end, which in this case included one of their most profitable divisions: Otezla. Amgen and Otezla both boast strong inflammatory category portfolios and is expected to help Amgen boost it’s inflammatory drug sales in international markets, given Otezla’s broader geographic consumer base.

TMT

Viacom to merge with CBS

On August 13, 2019, CBS and Viacom agreed to recombine in an all-stock merger, which will create a multiplatform premium content company set to become one of the leading content producers and providers with a global scale. Formerly a division of CBS, Viacom was spun-off in 1971 amid changing regulatory provisions that prohibited television networks from owning cable TV systems or syndicating their programs in the US. After a merger in 2000 that ultimately failed in 2006 due to internal rivalry between the heads of CBS and MTV Networks, this marks the third attempt at a merger in the last three years. The merger, to which both CBS and Viacom have agreed in August 2019 will create a company with more than $28bn in combined annual revenues, is expected to deliver about $500m in annualized savings through synergies within 12 to 24 months after the transaction is closed. The resulting $47bn entity will be called ViacomCBS and is set to compete in an industry that has been drastically upended by Netflix. This strategic move reflects a trend in which US media and telecoms groups have hurtled towards consolidation in recent years, with the biggest players seeking to defend against streaming giants such as Netflix and Amazon.

Salesforce to acquire Tableau

Salesforce, a cloud software king, is known for being highly acquisitive, but the acquisition of data visualization platform Tableau for $15.7bn has been its largest acquisition yet. Tableau’s line of products is complementary to Salesforce’s portfolio and will bolster the company’s market-leading position in information management and analytics for large corporates. In terms of valuation, it was an expensive deal: Salesforce paid a 13.2x EV/LTM Sales multiple for the acquisition. What helped is that Salesforce paid for the acquisition using stock only and its own stock is also expensive, hovering around an EV/LTM Sales of 9x due to its high margins and attractive cash flows. Although the deal breezed through regulators, it may have negative ripple effects for competition in the business intelligence industry. This deal fits within a wider trend of commoditization of BI products, which is making it increasingly hard for small analytics vendors to compete with the likes of Salesforce, Oracle and Microsoft, which are reported to charge monthly subscription fees as low as $5 per user.

Broadcom to acquire Symantec’s enterprise unit

This deal is the latest in Chipmaker Broadcom’s acquisition spree as it attempts to broaden its product offering and move towards software. Executives at Broadcom recently expressed their pessimism regarding the semiconductor market, which struggles with low demand that shows no signs of picking up anytime soon. The Symantec acquisition would be Broadcom’s second mega-deal in two years, coming just after Broadcom purchased software company CA for $18.9bn in 2018. The rationale for purchasing stagnant software companies like Symantec and CA is their cash flows. Indeed, although they offer only marginal growth prospects, they generate a reliable stream of cash flows through license and subscription sales, which can help offset the cyclicality of revenues from semi-conductors. Nevertheless, it is unclear whether the deal will go through as Private Equity firms Advent International and Permira recently offered to buy Symantec for $16bn.

Trainline lists on the London Stock Exchange

The Trainline IPO is the second-largest UK listing so far this year, a deal which has pulled the UK Equity Capital Markets out of the doldrums after seeing record-low IPO activity during the first quarter. Trainline is an online booking platform for train tickets with a lot to show for: the company posted an enviable 19% top-line growth over the past two years and it boasts a 50% market share in its home market. As analysts anticipated, the internet company priced near the top of its range, at 350p per share, demonstrating investors’ appetite for technology companies with high growth potential. Trainline’s lofty valuation, which puts it at around 30x its 2020 EBITDA, places it much ahead of similar peers trading at around 20x EV/2020 EBITDA. The stock price jumped 23% on the first day of trading and it continues to steam ahead, up 36% year-to-date. The company posted strong growth in its H1 results, but it remains to be seen if the company’s business model can survive the threats of Google and other competitors in the long term and fix its currently loss-making operations in continental Europe in order to live up to its high valuation.

FIG

London Stock Exchange to acquire Refinitiv

The London Stock Exchange’s acquisition of data analytics provider Refinitiv is a great illustration of the ongoing phenomenon of commoditization of transaction-based services. Indeed, stock exchanges face pressure on their transaction fees due to the undifferentiated nature of the service and the aggressive price competition amongst stock exchanges. The LSE’s latest acquisition marks a turning point in the company’s strategy: a shift from focusing on maximizing transaction volumes and efficiencies to focusing on data analytics, which drives algorithmic trading activity. The rationale for the deal is strategic but it also based on the $2.8bn of cost savings that the deal is expected to produce. Shareholders enthusiastically backed the deal, sending LSE shares up 7% after the announcement – an unusual feat given that the shares of an acquirer company usually take a dip after the announcement of an M&A deal. This cheerful reaction came even though the deal will almost triple the amount of debt LSE holds on its balance sheet and the threat of regulators is still looming over it. As such, this transaction is a powerful demonstration of investors’ appetite for data analytics and it is telling of the trend for financial services company to acquire technology in an attempt to differentiate their services and increase efficiency. It is uncertain however whether the Refinitiv deal will go through after the Hong Kong Stock Exchange placed a bid to acquire the LSE.

Mastercard to acquire Nets Group’s Real-time payments business

This deal is the largest in Mastercard’s history and is the latest example of a major trend in financial services to acquire payment technology companies. This trend is a reaction to the competition brought by fintech firms, which are disrupting the debit and credit card payment industry by offering alternative payment methods. Facebook’s cryptocurrency Libra and mobile wallets WeChat and Alipay are just a handful of examples of the new competitors challenging debit and credit card giants like Mastercard and Visa. Mastercard’s new acquisition includes Nets’ infrastructure for instant payments as well as its e-billing solutions business and represents an important milestone in the company’s journey to become a one-stop-shop for payments solutions.

Real Estate

Blackstone to acquire GLP’s logistics assets

In the largest real estate deal ever, private equity firm Blackstone agreed to purchase a portfolio of US Warehouses from the Singaporean firm GLP. This deal fits within a context of record deal-making activity in Private Equity, where enormous piles of dry powder and a friendly interest rate environment are fueling the appetite for deals. With this one, Blackstone is betting on the boom of e-commerce, which would lead logistics assets such as warehouses to appreciate in value. A Blackstone executive has described logistics as the firm’s “highest conviction global investment theme”, hence its decisive move to double its US industrial footprint. This belief is grounded in success stories like that of ProLogis, a real estate group invested in logistics assets which have seen its stock price increase over 30% in the past two years. This, along with the quality of the GLP assets and their location near dense cities, has justified the relatively high price Blackstone has paid for the acquisition of around $1000 per square meter.

Consumer

EssilorLuxottica to acquire GrandVision

This deal, which sets to create the world’s largest eyewear maker and retailer, is a textbook example of vertical integration. While EssilorLuxottica already has a large presence in wholesale, it is now set to enter the lower part of its supply chain by taking advantage of Grandivision’s strong presence in European retail. The deal aims to achieve €600m in synergies as well as bolster EssilorLuxottica’s market share in Europe and diffuse the threat of potential competition from GrandVision in its US market. This deal stands out because of its anti-trust implications: market power in the eyewear industry is already highly concentrated and the deal will likely face intense scrutiny from regulators.

Billionaire Patrick Drahi to acquire Sotheby’s

This acquisition marks a change in the Fine Art Auction industry as its two largest players, Sotheby’s and Christie’s, are in the hands of French magnates as of this summer. Indeed, with this deal, Sotheby’s is following into the steps of its archrival Christie’s, which was acquired by the Pinault family in 1998. The deal comes at a time where the art market is thriving in a spectacular rebound after the 2008 financial crisis. The past years have brought record-breaking auctions, including the sale of works by Hockney, Monet, Koons and most famously, the sale of a $450m Leonardo Da Vinci painting. At first glance, the premium paid for the acquisition seems astronomical but the acquisition price of $57 per share is actually in-line with the price the stock was trading at just last summer. Indeed, Sotheby’s has been severely beaten down by the market in the past year, especially after fiery attacks by hedge fund managers Dan Loeb and Mick McGuire. Overall, this deal illustrates the difficulty for companies operating in the world of Fine Art to balance their long-term view with the short-term results that shareholders expect. Drahi, on the other hand, described the acquisition as “an investment for [his] family” and “does not anticipate any change in the company’s strategy”.

Natural Resources

HilCorp to acquire BP’s Alaska Operations

This deal is the latest in a series of divestments by major oil companies in the state of Alaska. BP has faced pressure from shareholders to refocus its portfolio in strategic areas, particularly in shale oil, a sector that is highly coveted for being a relatively low-cost source of oil supply. This pushed BP to sell Prudhoe Bay, the largest and most prolific oil field, as well as the trans-Alaska pipeline. For BP, the divestment of its Alaska assets is a means to pay for the BHP shale assets it acquired in 2018 for $10.5bn. For privately-owned Hilcorp, the deal is a means to reinforce its already dominant position in Alaska, where together with ConocoPhillips, it owns three-quarters of the state’s oil production. The Alaska region’s importance in oil production has declined over the years, falling by about 80% over the past three decades. Despite the region’s potential, it has been entangled in long-winded political battles which have prevented oil and gas development and which are likely to cause more public companies to divest from the region.

Industrials

Raytheon merges with United Technologies Corporation

This all-stock merger of equals is to create a $120bn behemoth which will represent the largest Aerospace and Defense player in the world. The deal is highly unusual because of the apparent lack of synergies between the firms, which show only a 1% overlap in their revenues. Indeed, while United Technologies specializes in Aerospace, with avionics and aero-engines at its core, Raytheon is more geared towards defence missiles, which it produces under its Patriot and Tomahawk brands. The rationale for the deal has come into question, notably by activist investor Bill Ackman. Ackman, whose hedge fund owns a 0.7% stake in UTC, criticized the lack of strategic logic, the “inferior quality” of the Raytheon business and the significant dilution that will hit UTC shareholders. US President Donald Trump also voiced his concerns about the deal, fearing that it would hurt competition in the sector. The companies, on the other hand, argue that the lack of overlap between their activities should avoid regulatory concerns. According to the companies, the main rationale for the deal is the cost savings estimated at $1bn and the diversification of the product mix, which is to reduce the cyclicality of their revenues.

Gaming

Eldorado Resorts merges with Caesars Entertainment

On June 24^th, 2019 casino operator Eldorado resorts agreed to merge with Caesars entertainment in a $17.3bn cash and stock deal, with the hopes of creating the country’s largest casino operator. The deal follows a tumultuous decade for Caesars following its 2008 mega-buyout by Apollo and TPG, as well as its 2015 bankruptcy. On the other hand, the Caesars’ acquisition comes on the heels of a 5 year period of dramatic growth and prosperity for Eldorado. Activists such as Carl Icahn described the deal as a rare merger where the synergies are expected to be “one plus one equals five”, a view that has been reflected in the satisfaction of other shareholders and the companies’ boards.

Published by BSIC on 22 September 201922 September 2019

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