2011 Mid-Year Mergers & Acquisitions Update [Part1]

 

As expected, corporate merger and acquisition (M&A) activity has increased in the first half of 2011 after making a huge comeback in 2010. Deal making activity continued to rise as the year progressed, with more takeovers being announced in June 2011 than in the previous months of the year. The number of merger deals has increased progressively from a few per month, to one or two a week.  There are now major takeover deals occurring on a daily basis.

 

Corporate Confidence, Low Market Values, Cost Savings, & Search For Growth

Companies have stashed away record amounts of cash, which they have hoarded since the height of the financial crisis (2008-2009) when cash was considered king.  The acquiring companies have been spurred on by record low interest & lending rates, as well as a North American economy which had been considered relatively more stable.  In spite of the current problems in Greece, risk has been perceived to be generally lower than during the financial crisis. This has increased corporate confidence during the first half of the year.

Although stock prices were a lot higher in 2010 than in 2008 or 2009, due to a weak global economy the market value of companies in 2011 have remained relatively low.  This has made corporate takeovers and mergers financially attractive for corporations.  With low valuations, mergers and buyouts make economic sense as well, for companies looking to create cost savings & competitive benefits from synergies. In addition, many businesses are looking to acquisitions for expansion & higher growth, rather than internal organic growth.

 

Most Deals Between $1-$10 Billion In Size, Many Under $1 Billion

M&A activity significantly increased especially for large sized (multi-billion dollar) takeovers as well. During the first half of 2011, the majority of big name deals were between the $1 billion to $10 billion level, with a significant number of deals below $1 billion. We can expect this trend to continue for the rest of the year and into 2012. There were a lot fewer deals above the $10 billion level, and it is also expected that there will be only a small number of deals bigger than $10 billion going forward. Some of the largest takeovers above $10 billion included the following:

4/27/2011 – Johnson & Johnson [JNJ] announced a $21.3 billion (19 billion Swiss francs) cash & stock purchase of Swiss medical device maker Synthes Inc [SYST.VX].
2/16/2011 – Sanofi-Aventis SA [SNY] and Genzyme Corporation [GENZ] announced a $20.1 billion cash takeover agreement.  In addition to the cash payment, each Genzyme shareholder would receive one Contingent Value Right (CVR) payment based on specific drug milestones. The deal ended a long-sought takeover that started in 2010 and became the second largest biotech acquisition in history.
5/19/2011 – Takeda Pharmaceutical Co [4502] agreed to purchase privately held Nycomed of Switzerland for $13.6 billion.
4/4/2011 – Vivendi SA [VIVEF] announced it would buyout Vodafone Group Plc’s [VOD] 44% stake in France’s mobile phone operator SFR, for $11.31 billion (€7.95 bln).
4/1/2011 – Nasdaq OMX Group [NDAQ] and IntercontinentalExchange [ICE] announced a $11.3 billion cash & stock hostile offer for NYSE Euronext [NYX].  On 5/16/2011, the offer was withdrawn following discussions with the Antitrust Division of the US Department of Justice.
6/21/2011 – SAB Miller [LON:SAB] said it would keep talking to Foster’s Group [ASX:FGL] after their $10.1 billion (A$9.5 billion) cash takeover offer was rejected as being too low.

 

M&A Deals Of Differing Types – Units, Assets, Ownership Stakes

Aside from large takeovers of entire companies, many acquisition and merger deals have involved specific business or operational units, as well as individual assets. Companies have also been increasing their percentages in existing joint ventures (JV), increasing or buying out their partner’s entire ownership stake. As consolidation continues, there will be fewer companies that will have the financial strength to pursue entire purchases, as well as fewer companies attractive enough to be complete takeover targets.  We can expect that the majority of deals for the remainder of 2011, and in 2012, will shift from mergers & acquisitions of complete companies, to specific business units, individual assets, and stake increases. Some notable deals and examples of deals that involved specific business/operational units, subsidiaries, assets, and stake increases include the following :

1/13/2011 – U.S. retailer, Target [TGT] made a deal to acquire the leasehold interests of 220 Zellers discount retail locations from privately owned Hudson’s Bay Co for $1.8 billion.
2/28/2011 – Private equity firm Blackstone Group LP [BX] struck a deal to buy about 600 U.S. strip malls and other properties from Australia’s Centro Property Group [ASX:CNP]  for approximately $9.4 billion.
4/4/2011 – Kohlberg Kravis Roberts & Co. (KKR & Co.) [KKR] agreed to purchase the hard capsule unit, Capsugel, from Pfizer Inc. [PFE] for approximately $2.38 billion.
4/5/2011 – Diamond Foods Inc. [DMND] made a deal to buy Procter & Gamble Company’s [PG] Pringles chips business for $1.5 billion.
6/7/2011 – Comcast Corporation’s [CMCSA] NBC Universal agreed to purchase Blackstone Group LP’s [BX] 50% stake in Universal Studios Florida for $1 billion, to take complete ownership.
6/8/2011 – AXA Private Equity, a division of insurance giant AXA SA [AXAHY] agreed to buy a $1.7 billion portfolio of private-equity assets from Citigroup [C].
6/13/2011 – Alimentation Couche-Tard Inc. [ANCUF/TSE:ATD.B] struck a deal for the acquisition of up to 322 retail sites in southern California from Exxon Mobil Corporation [XOM] for an undisclosed amount.
6/20/2011 – PNC Financial Services [PNC] agreed to buy the U.S. retail banking operations of Royal Bank of Canada (RBC) [RY/TSE:RY] for $3.45 billion, and $165 million worth of credit card portfolios.
6/20/2011 – Inter Pipeline Fund [IPL.UN] agreed to buy 4 petroleum storage terminals in Denmark from a unit of state-owned DONG Energy for approximately $510.5 million.

 

Deal making activity has noticeably risen in the commodities industry, specifically in mining. Purchases of land packages, mines, individual projects, and increases in ownership have climbed, as miners look to replenish reserves with new supply. Exploration of new unproven areas may become costly, if they do not yield good results.  With equity prices low, the acquisition of other miners (usually smaller) that already have some results and good potential, look to be much more economical and likely better bets. Acquisitions of miners already in production are also attractive. As costs rise and fewer mines replace existing ones, we can expect activity in this sector to increase into 2012. Some of the more notable deals include :

1/12/2011 – U.S. miner Cliffs Natural Resources Inc. [CLF] made a deal to purchase Consolidated Thompson Iron Mines Ltd. [TSE:CLM] for $4.9 billion, in the biggest iron-ore deal in Canadian history.
4/4/2011 – New Gold Inc.[NGD/TSE:NGD] struck a deal to acquire Richfield Ventures Corp. [TSE:RVC] and its Blackwater gold project for about $550 million worth of shares, at a 31% premium its day closing price.
4/25/2011 – Barrick Gold Corp. [ABX/TSE:ABX] entered into an agreement with Equinox Minerals Ltd. [ASX:EQN/TSE:EQN] for a C$7.3 billion takeover offer.
5/19/2011 – Osisko Mining Corp [OSK] acquired a 9.2% stake in gold miner Threegold Resources [CVE:THG], through the purchase of shares on the open market.
6/14/2011 – Rob McEwen, Chairman, CEO, and largest shareholder of both US Gold Corporation [UXG/TSE:UXG] and Minera Andes Inc. [MAI] proposed an all stock merger of the two companies to create a high growth, low-cost, mid-tier silver producer focused in the Americas.  The total value of the exchange would be $626.25 million.
6/15/2011 – Belgium based Nyrstar NV [EBR:NYR], the world’s largest zinc producer, announced it would buy Breakwater Resources Ltd. [BWR] for $619 million, as part of a strategy to buy more mines to increase self-sufficiency.
6/21/2011 – Rio Tinto [RIO] gave notice to Ivanhoe Mines [IVN/TSE:IVN] that it will raise its ownership stake from 42% to 46.5% after exercising outstanding warrants at a cost of $502 million.  Rio Tinto can increase its ownership to 49% on or before 18 January 2012 by the exercise of its subscription right to acquire shares from Ivanhoe, and the right to acquire additional Ivanhoe securities from Ivanhoe and Robert Friedland.

 

M&A Activity Involving Private Equity Firms and Pension Plans

Private equity firms, hedge funds, government pension plans, and other state owned government investment arms, have been very active within the first half of 2011.  M&A deals involving them have risen considerably, due to low equity valuations which have made takeover targets more attractive.  In addition the financial crisis and economic downturn has also left many businesses financially weakened.  This had made friendly buyouts beneficial to the survival and long term success of some companies, while leaving others vulnerable to being acquired.  It is expected that deals involving these groups will increase further for the remainder of the year and into 2012. During the first half of the year, many organizations were involved in multiple deals, as well as being both buyers & sellers. Notable organizations included:

Blackstone Group LP [BX] – private equity:
• Real estate deal involving Centro Property Group (mentioned in previous section above).
• Universal Studios Florida deal with NBC Universal (mentioned in previous section above).

Kohlberg Kravis Roberts & Co. (KKR & Co.) [KKR] – private equity:
• Acquisition of Academy Sports and Outdoors, a Texas based outdoors & sporting goods retail chain of 131 stores, with $2.7 billion in revenue last year. Financial terms were not disclosed.
• Sale of the oil & gas interests & operations (Eagle Ford Shale assets) of Hilcorp Resources Holdings LP, to Marathon Oil Corp. [MRO] for $3.5 billion.
• Purchase of Pfizer Inc’s Capsugel unit (mentioned in previous section).
• A proposed $1.6 billion joint purchase offer for Yageo Corp, with its founder.  The deal was rejected by Taiwan’s financial regulator on 6/23/2011 due to concerns over the amount of debt that was going to be taken on to complete the deal.

The Canada Pension Plan Investment Board (CPPIB) – the investment arm of Canada’s public pension plan:
• A proposed $3.6 billion takeover of the TMX Group [TMX] for a combination of cash and equity consideration, as part of the Maple Group Acquisition Corporation. On 5/20/2011 the TMX Group’s board of directors said it rejected the offer.  On 6/13/2011 Maple Group filed for a C$3.7 billion hostile bid for TMX.  The Maple Group is a consortium which also includes the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Toronto Dominion Bank, Alberta Investment Management Corp (pension fund), Caisse de depot et placement du Quebec (pension), Fonds de solidarite des travailleurs du Quebec (FTQ) (pension), and Ontario Teachers’ Pension Plan Board (pension), Desjardins Financial Group, GMP Capital Inc, Dundee Capital Markets, and Manulife Financial.
• The purchase of a 50% stake in the Northland Shopping Centre,in south-eastern Australia for $469 million.
• A joint acquisition with Allianz Capital Partners GmbH and the Abu Dhabi Investment Authority, for a 24.1% stake in the Gassled Joint Venture from Statoil ASA.
• A 50% acquisition of shares in Hong Kong Interlink, an industrial facility under development, for $285 million.

AXA Private Equity – private equity division of insurance giant AXA SA [AXAHY]:
• Purchase of a $1.7 billion private-equity assets portfolio from Citigroup (mentioned in previous section).
• A $3 billion joint offer with Caisse de depot et placement and Clayton, Dubilier & Rice for French engineering group Spie from French private equity group PAI Partners.

Clayton, Dubilier & Rice – private equity:
• Acquired healthcare & physician services company Emergency Medical Services Corp for $3 billion.
• Joint offer with Caisse de depot et placement for Spie from AXA Private Equity (mentioned above).

The Caisse de depot et placement – Canada’s largest pension fund manager:
• Joint offer with Clayton, Dubilier & Rice for Spie from AXA Private Equity (mentioned above).
• Part of the Maple Group Acquisition Corporation in the takeover battle for TMX Group (mentioned above).

Japan’s Innovation Network Corp – an investment fund set up by the government and the private sector:
• Purchased a 40% interest in Swiss meter maker Landis+Gyr for $711.4 million.  Toshiba Corp is expected to buy a 60% stake in Landis+Gyr, and Innovation Network Corp intends to sell its Landis+Gyr shares to firms such as Toyota Motor Corp and Panasonic Corp.

Other notable deals:
• U.K. financier Hugh Osmond’s Horizon Acquisition purchased APR Energy for $855 million.  APR Energy is a power-generation company owned by George Soros and Madeleine Albright (former U.S. secretary of state).
Roark Capital Group purchased a 81.5% ownership position in Arby’s Restaurant Group Inc for approximately $130 million from Wendy’s/Arby’s Group Inc who will retain 18.5% ownership.
Leonard Green & Partners and funds advised by CVC Capital Partners purchased BJ’s Wholesale Club Inc for approximately $2.8 billion (approx 7% premium to June 28 closing price).
The Ontario Municipal Employees Retirement System (OMERS) purchased a 50% stake in MidCity Place in London from an affiliate of U.S. private-equity firm Beacon Capital Partners LLC for an undisclosed amount.

 

Worldwide M&A Activity Increased

In first few months of 2011, much of the deal making activity involved North American companies, but activity increased significantly around the world.  Transactions during the first half of the year involved developed nations such as Canada, U.S., Britain, Japan, Australia, Ireland, France, Germany, Sweden, Switzerland, Belgium, Korea, Singapore, Italy, Spain, Israel, New Zealand, etc.  But as growth slows in developed economies, companies have been trying to increase their global reach.  Businesses have been attempting to expand their footprint in the faster growing emerging markets through acquisitions and joint ventures. Deals involving China, Africa, Russia, Brazil, and India have increased dramatically, while other emerging markets such as Mexico, Malaysia, Mongolia, etc., have seen deals as well.  The trend in mergers & acquisitions involving corporations from emerging market countries is expected to continue, as growth in developed economies is expected to remain relatively stagnant.

Companies from emerging market are not only being acquired, but are also active purchasers. China has been very active especially within the mining industry. Demand for raw materials in the country has increased takeover activity.  In addition to current short term demand, the Chinese are looking to secure future long term supply. Publicly traded companies in China, as well as state owned ones, have been heavily involved in M&A deals this year.  It is expected that deals involving Chinese companies in the mining industry continue at a moderate pace for the remainder of the year.  However, it wouldn’t be unexpected if it decreases slightly, as China deals with slightly slower/lower growth than the first half of the year. A few highlights include:

2/10/2011 – Encana Corp. [ECA/TSE:ECA] agreed to sell half of a British Columbia shale gas project to PetroChina Company Limited [PTR] for C$5.4 billion.  On 6/21/2011, Encana called off what would have been  in the largest Chinese investment in a Canadian energy asset., and said it would seek new partners.
4/4/2011 – State-owned (and listed) Minmetals Resources Ltd. [HKG:1208] of China made $6.3 billion hostile takeover bid for Equinox Minerals Ltd.  The bid was later topped by Barrick Gold Corp. on 4/5/2011 (mentioned in previous section).
5/16/2011 – Gold One International Ltd. [ASX:GDO] accepted a takeover offer from BidCo, a Chinese consortium led by Baiyin Non-Ferrous Group Co. The consortium will invest at least A$150 million to secure a 60% to 75% stake in the African focused gold producer.
5/20/2011 – Chinese state owned Wisco International Resources Development and Investment Ltd., and Minmetals Exploration & Development Ltd [SHA:600058] acquired interests in Century Iron Ore Holdings Inc. Wisco  purchased an approximate 25% interest for $60.9 million.  Minmetals acquired a 5% interest for $12.2 million.  Privately owned Century Iron Ore holds indirect mining interests in Quebec and Labrador.
5/31/2011Mongolia Mining Corp. agreed to buy coking coal miner QGX Coal Ltd. for $464.47 million.

 

The second part of this article will give a brief M&A update and outlook of different industry sectors.

Note: Keep in mind the information in these articles are not meant to be a set of predictions that are set in stone.  It is meant as a discussion of a range of probable scenarios of what we can expect to see happen, based on the information available today.  By knowing the likely possibilities, we can plan for them.  We can also capitalize on potential opportunities, and not be caught off guard by possible negative events.

DISCLOSURE: I own shares of Johnson & Johnson [JNJ], Sanofi-Aventis [SNY], US Gold Corporation [UXG], Minera Andes Inc. [MAI].

Thanks and Happy Investing!  – The Investment Blogger © 2011

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