Tesla (TSLA) is bidding for SolarCity (SCTY)

The offer is an all-stock deal, with TSLA willing to exchange 0.122 – 0.131 of its shares for each outstanding share of SCTY.  The exact figure will depend on a closer examination of SCTY’s books.  The proposal was announced after yesterday’s close.

My thoughts:

–in today’s pre-market trading, SCTY shares are up by about 14% and TSLA’s stock is down by around 12%.  This has little to do with the merits of the deal.  It’s all about arbitrage.  To the degree the market regards the acquisition as a done deal, it ceases to look at SCTY as an independent entity.  SCTY becomes instead equivalent to a deferred issue of TSLA stock.  Because the bid is at a premium to the pre-offer price of SCTY, SCTY is a relatively cheap way to own TSLA.  So arbitrageurs sell short the “expensive” form of Tesla, i.e. TSLA, and use the money they receive to buy the “cheap” form of Tesla, i.e., SCTY.  So SCTY goes up and TSLA goes down.

–my guess is that there’s no other bidder.  Elon Musk, who owns 20%- of TSLA also owns 20%+ of SCTY.  As is often the case with family-owned empires, one firm ( TSLA) is the heart of the enterprise.  Other companies are arrayed as satellites around the central hub.  Those tend to be more highly specialized, sometimes riskier–and invariably dependent on the main core for essential goods/services.  In this case, the Gigafactory being built by TSLA is going to the be the source of the batteries that SCTY will be distributing to customers.  Who else needs one of these?

–price is the main motive, I think.  SCTY is less than a tenth of the market cap of TSLA, so acquisition won’t make a radical difference in the latter’s fundamentals.  In most cases I’ve seen, the hub-satellite relation persists for decades, with third-party shareholders content with their stepchild status as an adequate tradeoff for the satellite’s narrower focus and faster earnings growth in specific circumstances.

–arguably, this is a good chance for adventurous to buy TSLA shares toward the lower end of its recent trading range.  I’m going to sit on my hands for a while, though, to try to gauge how severe selling pressure on TSLA may turn out to be.


Apple (AAPL) and Time Warner (TWX)

I read in the Financial Times recently that late last year AAPL approached TWX with the idea of buying it.  This follows on the heels of an announcement that AAPL has invested $1 billion in a local rival to Uber in China.

What ties the two moves together is that both are substantial deviations from the production of tech hardware, which is AAPL’s professed core business.  The Didi Chuxing move is a drop in the bucket, however.  The price tag for TWX would amount to perhaps 20% of AAPL’s market cap of $527 billion.  That would be a transformative acquisition.

What does this activity mean?

APPL generated about $40 billion in cash flow during the first six months of fiscal 2016 (its fiscal year ends in September).  All but $5 billion of that amount went, as usual, into the company’s holdings of cash and marketable securities, which now tops $230 billion. That’s almost a quarter of a trillion dollars, and represents almost half of AAPL’s market capitalization.

Sales of the iPhone are beginning to slow.  The worldwide market for smartphones is saturated, for all but the cheapest models.  So all vendors, including AAPL, are increasingly reliant on replacement demand.  This means smartphones, by far the largest part of AAPL’s business, won’t in the future show anything like the spectacular growth of the past.

This is not exactly news.  AAPL shares are down by 25% over the past year, while the S&P 500 is roughly unchanged.

To remain a growth stock, AAPL has to reinvent itself.  It has already done this twice, with the iPod and the iPhone.  This time, however, management appears to be conceding that there’s no obvious, internally developed way for it to move forward. A related issue: as currently configured, AAPL has no way to reinvest the enormous amount of cash on its balance sheet.

AAPL has apparently concluded that it needs to buy something, or somethings, that will significantly change its character.  The TWX news signals it is prepared to act (who leaked the story, about a half year after the approach?  Why now?).

The possibility of one or more large acquisitions adds a risk element not previously present with AAPL.  On the other hand, the idea that, ex acquisitions, the company will slowly begin to resemble a certificate of deposit isn’t exactly appealing, either to outside investors or to employees holding stock options.  And the sharp drop in the shares over the past 12 months must already discount something, as does a PE of around 10.

What to do?

As for me, I don’t own AAPL shares now and haven’t owned them for a long time.  If I did, I’d probably be intensifying my search for new names, with the intention of using my holding as a source of funds.






LVMH’s acquisition of Bulgari

The LVMH bid

About a week ago, LVMH announced a successful bid for control of the publicly traded Italian jewelry manufacturer and retailer, Bulgari.  Bulgari’s offerings, many of which reflect the founding family’s Greek heritage, mostly range in price from $2,000-$10,000.

The terms:

LVMH will issue shares of its stock in exchange for the 51% of Bulgari controlled by the Bulgari family.  It is offering €12.25 in cash for the 49% held by third parties.

what’s in this for Bulgari?

1.  A significant part of Bulgari’s business is high-end watches, the most extremely cyclical category in the fine jewelry business.  Watch sales are especially difficult to monitor, since wholesalers play such a large role in their distribution.  As a result, economic downturns have tended to be white-knuckle events for the company–and its stock.  Being part of a larger, more stable conglomerate will mean less wear and tear on management’s stomach linings.

2.  The Bulgari family gets two seats on the LVMH board, so it retains a management presence in luxury goods.

3.  Younger-generation family members who don’t want to be involved in the business and would rather have their inheritance right now and in cash will be able to sell without endangering the Bulgari family’s control position.

4.  Francesco Trapani, a Bulgari nephew and the current Bulgari CEO, will become head of the LVMH watches and jewelry business, an organization twice the size of Bulgari.

…and for LVMH?

1.  The larger fine jewelry business means LVMH will be in a stronger competitive position versus other luxury goods conglomerates like Richemont.

2.  The willingness of an entrepreneurial luxury goods family like Bulgari to join the LVMH fold contrasts sharply with the frosty reception of the Hermès management when it learned LVMH had acquired a large ownership position.  The Bulgaris, fellow entrepreneurs, may be able to smooth ruffled feathers in a way that Bernard Arnault has been unable to.

3.  The Bulgaris will likely also be instrumental in convincing other European luxury goods families to follow their lead.

What’s next?

Wall Street rumors have TIF (I own it) as the next target of LVMH and Mr. Trapani.

I don’t agree.  The main attraction of TIF would be the fit between its business and Bulgari’s.  TIF is a dominant factor in “statement” jewelry costing $25,000-$50,000 or more.  The company is unique in its ability to–at the same time–be a leader in the market for jewelry and other gifts that retail for $500 and below, without diluting its brand image (i.e., alienating the very big spenders).   I don’t know why, but TIF has never been very good in the middle; Bulgari would fill the doughnut hole in Tiffany’s offerings.  That’s the positive side.

On the other hand,  Europeans don’t regard TIF as a legitimate luxury brand.  That’s partly because it’s an American company, partly because of its lower-end business.

What is Mr. Arnault’s game plan?  I think it’s to collect up as many small, inefficiently run European family luxury goods businesses as he can over the next few years.  He’ll doubtless be able to use the brand names he acquirers more effectively than their current owners.  And he’ll enjoy manufacturing, distribution and marketing synergies.

His main selling points will be two:  the positive experience of the Bulgari family, and the ego appeal of joining a very exclusive club.  Were he do anything so déclassé as acquiring an American “quasi-luxury” company like TIF, a lot of the positive effect of the Bulgari merger on potential European luxury acquisition candidates would be lost.  Yes, TIF is doing a land office business in Europe currently.  But that’s because the affluent there are trading down.

TIF may eventually be on the Arnault to-do list, but I think he’s gunning for smaller, local game first.