Friday, June 17, 2011

M&A Activity This Week Indicative of Peak Cycle



Back at the end of April of this year I wrote an article asking where are we in the current economic cycle. I looked at several "real time" indicators such as profitability of cyclical companies and the IPO pipeline, and I thought that there is evidence suggesting that we are at the "peak". The stock market has certainly been unhealthy since then with several recent IPOs burning their investors, and the collapse in commodity and China stocks.

We also had a lull in merger announcements recently (one of the other factors I had looked at), until this week. While by no means a predictive factor, I like keeping an eye on what is happening in the space as it captures several factors at once: management's views of the future, management's view of the value of cash vs. own stock, equity and debt financing conditions, industry consolidation drives, even mood.

So here are a few noteworthy deals, events related to deals or rumors that happened just this past week. While the S&P500 might have been down 6-7 weeks in a row, it does not seem that the M&A cycle has slowed.

-CapitalOne possibly acquiring ING Direct for $9 bn: this is one of the largest deals this year and will make CapitalOne big enough to be TBTF (7th largest by assets) and enjoy the unfair funding advantage that comes with it
-Energy Transfer buying Southern Union for $4bn+/~$8 bn EV: this is a gas pipeline consolidation, everyone knows the US natural gas story
-Allied World/Transatlatic $3bn+ reinsurance deal: I don't have the details/views on this one
-Avis car rental buys back into Europe for $1 bn: high-beta company expansions are peak cycle material
-Graham Packaging going with Reynolds/Rank instead of Silgan: this is after another unsolicited deal on the paper side, with International Paper going after Temple Inland
-BJ's Wholesale Club being acquired by Leonard Green Partners and CVC. BJs had been on the block for a while, and LGP is a PE firm well known for its expertise in retail.
-Wendy's selling Arby's for a paltry sum upfront: while it does not look good on WEN, the fact that there was a buyer (Roark, big investor in restaurants) is a positive sign
-Unusually high profile hostile deal with the Toronto Stock Exchange means that people are braver
-Boyd Gaming making a small Gulf resort purchase: this is a regional destination resort, would be interesting to see the traffic numbers trends there vs. slow/no-recovery markets like LV or AC
-HCA is buying out JV partner in 7 Denver hospitals for $1.45bn: while most financial media attention has been focused on the big pharma decline, it is interesting to see what hospital operators are doing in light of the greatest industry uncertainty in many years
-Dish Network offers $1.4 bn for TerreStar out of Chapter 11
-Air Products buys a semiconductor industry suppliers: this is peak cycle material

Rumors:
-The two Russian fertilizer behemoths Uralkali and Belaruskali are denying talks: when there is smoke and industry consolidation, there's fire
-Blackstone in exclusive talks with Jack Wolfskin: interest in discretionary brands is usually a topping signal (also of note, the Samsonite and Prada IPOs in Hong Kong were not blockbusters)
-GM might be selling Opel again, this time from a position of relative strength
-Glencore denies interest in a large Kazakhstan commodity company

What is the conclusion? We are seeing more of the typical signs of peak-cycle merger activity. There are deals across many sectors. Some of the deals are very substantially sized. Some of the deals are hostile. What we are not seeing is high equity vs. cash usage: part of this might be that there is a lot of cash sitting around earning nothing. While not indicative of where the market will be next week or month, we are seeing that the corporate titans are still optimistic and willing to take on high-risk moves.

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