Tag Archives: mergers and acquisitions

Ackman, Actavis, Allergan and Valeant

November 25, 2014 By in activist investing, mergers and acquisitions, stock market Tags: , , , , , , , , Leave a comment

This is a situation I didn’t pay much attention to while it was going on but which I think has interesting implications for merger and acquisition activity in the future.  It doesn’t seem to me, however, that investors in general understand exactly what went on.

The bare bones:  Bill Ackman, of Pershing Square fame (and J C Penney infamy) bought just under 10% of Allergan, the maker of botox, and urged the company to put itself up for sale.  Ackman then allied himself with serial pharma acquirer Valeant to make a joint hostile (meaning against the wishes of the target) bid for Allergan.  Actavis, a third pharma company, emerged as a “white knight” to rescue Allergan from Valeant’s clutches with a bid that topped Valeant’s offer by about 15%.  Valeant conceded defeat.

 

This is the latest enactment of one of the oldest dramas on Wall Street.  A “black knight” makes a hostile bid for a vulnerable company.  The target firm, realizing that it is now in play, understands that at the end of the day it will most likely be acquired.  The only choice that remains to the target is to choose who the acquirer will be.  Invariably, it determines to join with anyone but the black knight that has caused all this trouble.  That’s why hostile bids fail as often as not.

For this reason, one of the bigger problems in the m&a game is that no one really wants to be the black knight.  Once the villain has appeared, however, there’s usually no trouble in finding someone willing to ride to the rescue.  In most cases there’s at least one potential acquirer hoping against hope that someone else will make the first move.

 

The Ackman innovation: in February, when he and Valeant became co-bidders for Allergan, he agreed to pay Valeant 15% of his Allergan profits if a third-party ended up acquiring Allergan.  This created a win-win situation for Valeant, which would either come away with Allergan or with several hundred million dollars for having played the black knight role.

Issues:

–what was the Allergan price at which Valeant shifted from hoping to acquire the company to wanting to collect a fee from Ackman?;

— did Valeant ever really expect to own Allergan?;

–most important, will this maneuver work again?

I don’t know  …but the answer to question #3 depends a lot, I think, on the answer to #2.

 

the Market Basket supermarket feud

August 12, 2014 By in family owned companies, Industry Analysis, mergers and acquisitions, supermarkets Tags: , , , Leave a comment

I decided to write about my sense of the stock market tomorrow.

Instead, I’m going to write about the struggle for control of the family owned, privately held New England supermarket chain, Market Basket.  That’s both because it says something about the value of supermarkets in the Northeast, and because the fight is typical of what happens in family owned firms in the second or third generation.

The story:  Two branches of the Demoulas family own Market Basket.  One, led by Arthur S. has no involvement in running the business; the other, led by Arthur T., does–or did until a short time ago.

As a result, according to Bloomberg radio, of some past impropriety on the part of the ATs, the ASs have voting control of Market Basket.  Last week the board voted to oust Arthur T. as CEO and replace him with two outsiders who presumably have a mandate to cut costs and prepare the 71-store chain for sale.

Hearing this, warehouse and delivery workers walked off the job, demanding Arthur T’s reinstatement.  Many other workers have staged protests.  Store shelves haven’t been restocked.  The chain is reported by the Boston Globe to be losing $10 million a day.

this is typical family owned company stuff

Many family owned businesses are started by one or two entrepreneurial relatives.  Firms like this tend to have:

–high financial leverage

–lots of family on the payroll

–content to have economic rewards come through salaries/perks for family members rather than paying out dividends

–concerned more about stability than growth.

By the second or third generation, ownership is diffused.  Grandchildren probably don’t want to be in the family business.  Recognizing the value of the stock they hold, they want to cash out.  They come into conflict with other family members, whose lives, heritage and hefty salaries are tied to the business.

New England supermarkets are valuable 

The Globe says Market Basket could be worth $3.5 billion.  There are apparently about a dozen shareholders.  That would imply something like a $100 million payday for even the smallest holders if the firm were sold.  Until recently, the firm had been distributing dividends of about $100 million a year, for about a 3% yield.

I haven’t tried to confirm any of these figures myself.

One important thing about New England, though, is that it’s a mature, heavily developed region.  This has two positive implications for Market Basket:

1.  It’s impossible for Wal-Mart, the ultimate supermarket killer, to get a strong foothold.  It simply can’t assemble parcels to build on or get local planning commission authorization to start construction.

2.  For the same reason, Market Basket’s 71 store locations have immense potential value to a competitor.

A side note:  in my town, the supermarkets are small, dingy and very dated.  Twenty years ago, a major chain purchased a large parcel of land which it thought was zoned for a supermarket, and on which it intended to build a superstore.  The project is still tied up in litigation spurred by “concerned citizens,” funded, I’m told, by the existing markets.

bones of contention with Market Basket

Store employees are reportedly much better paid than typical supermarket workers.  Starting pay is $4 an hour higher than the minimum wage.  Experienced cashiers can earn double the industry average of around $20,000 a year.  Market Basket puts 15% of wages into an employee 401k.  Arthur T. also apparently projects a sincere concern for employees’ welfare.

Employees assume, doubtlessly correctly, that Arthur T.’s ouster spells the end of above-average salary and benefits.  This for two reasons:

–Arthur S’s family understands that a dollar of wages to an employee is money that would otherwise be dividended to shareholders, meaning it’s money that comes directly out of their pockets.  If we assume that the average employee earns $4 an hour more than the industry median and that the 25,000 workers average 20 hours a week, then the  total “excess salary” paid by Market Basket yearly is $107 million.  My suspicion is that this is too low.  Still, a ballpark figure is that dividends to shareholders could double if wages and benefits are chopped back.

–Presumably, a trade buyer would pay less for a company if it had to take the reputational black eye of reducing staff and cutting compensation.  Market Basket could sell to a financial buyer, a private equity firm that would do the pruning.  In my view the equity owners have decided to maximize their personal payout by doing this unsavory task themselves.

To my mind, this is all par for the course for family owned businesses.  What is truly remarkable in this case, though, is how much publicity the ouster of Arthur T. has gotten.  The way employee sentiment has been galvanized is also noteworthy, although workers have a very clear–and large–economic interest in defending the status quo.

Company warehouse workers and truck drivers are playing a key role in the dispute, since their job action is the reason stores can’t restock.  Some press reports have even suggested that Arthur T., who is apparently one of a number of potential buyers of Market Basket, somehow helped them along in making their decision to walk off the job.  I have no idea whether this is correct, or whether it’s part of a movement to deny AT sainthood.

 

 

 

takeover defense: getting bigger and uglier

February 18, 2014 By in mergers and acquisitions, Recent Market Action, stock market Tags: , , , , , , , , , Leave a comment

MW vs. JOSB

Men’s Wearhouse (MW)–yes, W-e-a-r–and Jos. A Bank (JOSB) , two publicly traded men’s clothing companies, are involved in a takeover struggle.

the companies

MW is larger, in terms of yearly profits, number of stores and market capitalization.

JOSB has just over half as many stores.  By most important measures–return on capital, return on equity, earnings growth, cash flow growth–it is the superior company.

action so far

JOSB got the ball rolling by making an unsolicited bid for MW last October.  MW reportedly thought about trying to buy shoe company Allen Edmonds (the stratefy of making itself bigger and less attractive) but opted to go on the offensive and bid for JOSB instead.  MW did so in November, and upped the offer last month.

This maneuver, although not exactly rocket science, apparently caught JOSB by surprise.  Its response…

Last week, JOSB announced that it intends to buy Eddie Bauer from Golden State Capital.  According to the New York Times, GGC purchased EB in a bankruptcy auction for $286 million in 2009 (EB’s second bankruptcy in a decade).

The price?  …$825 million in stock and cash.  In a separate move, JOSB also intends to repurchase in the open market the same number of shares issued to GGC .

When the dust clears,

JOSB will own EB and have the same number of shares outstanding.  But it will also have $340 million less in cash and $589 million in new debt.  If the JOSB presentation materials talk about any borrowings EB may be bringing with it, I can’t find where, so the actual amount of debt on its balance sheet may be higher.  JOSB is projecting interest expense of $40 million for 2014.

what’s going on?

JOSB says the Eddie Bauer purchase will boost the combined company’s earnings by 40% in 2014 and another 50% in 2015.  Wow!

But if that’s true, why did JOSB ever pass over EB and bid for MW first?  According to JOSB’s investment banker, Financo (in a Bloomberg Surveillance interview), it presented Eddie Bauer to JOSB as an acquisition candidate in early 2012!  Moreover, Financo touts EB as a superior acquisition choice to MW.

I have a more cynical view of the situation.  I should be clear, though, that while I’ve studied this industry extensively in other countries, I don’t know much about the ins and outs of either JOSB or MW.  Rightly or wrongly, I’ve regarded men’s clothing as too highly cyclical to be worth the trouble.

Anyway, in this case, I see two sources of added value to the acquirer:

–the positive effect of ending situations where an MW store and a JOSB store compete head-to-head, lowering income for both.  Store openings for all brands under the acquirer’s umbrella can be coordinated to avoid this in the future.

–the merged company doesn’t need two CEOs, or CFOs or virtually any other head office employee.  The same for regional supervisory people.   The budget for advertising and other marketing probably can be a smaller percentage of revenues, as well.  This is the main synergy I see in any acquisition of this type–the management of the acquiree all become redundant and lose their jobs.

The net result–intended or not–of buying Eddie Bauer would be to make JOSB $1.2 billion more expensive for MW.  It’s questionable to me whether “diversification” into the technical or casual apparel EB offers is something MW–or JOSB, for that matter–should want.  I find it hard to believe, despite JOSB’s projections of fabulous earnings gains, that making itself bigger and uglier isn’t the purpose of the Eddie Bauer bid.

Note, also, that there’s nothing in the EB acquisition that requires JOSB to tender for $300 million of its own shares at $65 each.  The only thing the tender does is to erase a huge chunk of cash from JOSB’s balance sheet–making it unavailable for a potential acquirer to use to pay for its bid.

After all, doing so is a standard tactic of takeover defense.