Chicago Business article from the 10/03/2016 on GIS & MDLZ and Nestle Rumor


{http://www.chicagobusiness.com/article/20160310/NEWS07/160319978/3gs-next-meal-general-mills-or-mondelez
From: LCHEKROUN@makor-cm.com At: Mar 29 2016 16:43:07
To: LAURENT CHEKROUN (MAKOR SECURITIES LO)
Subject: Fwd:(Chicago Business article from the 10/03/2016 on GIS & MDLZ and Nestle Rumor

3G's next meal: General Mills or Mondelez?

 

Photo by Bloomberg

(Bloomberg Gadfly) — As Brazilian billionaire Jorge Paulo Lemann scouts for 3G Capital's next big acquisition, one can envision Bill Ackman gesturing, "Pssst, over here."

It's no secret that Ackman's hedge fund Pershing Square Capital Management has had a rough year, between its long position in Valeant Pharmaceuticals (the stock lost almost 70 percent over the past 12 months) and bet against Herbalife (the stock rose almost 70 percent). However, Pershing Square also owns a sizable stake in Oreo cookie maker Mondelez—one of two food companies considered to be in 3G Capital's sights—and he'd probably love to see it get acquired at a nice premium.

But the other possible 3G target is General Mills. And unfortunately for Ackman, General Mills looks like the better option.

3G Capital's modus operandi is centered on slashing costs, which it's done at Burger King and most recently, Kraft Heinz. Before Lemann and his team came along, H.J. Heinz had an operating margin of around 14 percent and Kraft Foods' was about 10 percent. 3G (in a deal partially bankrolled by Warren Buffett) acquired the ketchup company in 2013, and then merged it with Kraft last year, creating a food giant now valued at $93 billion.

Analysts' projections imply the combined entity's operating margin could top 25 percent this year and approach 30 percent in 2017. That, incidentally, is about when 3G might be expected to strike again, based on its recent buying patterns.

On paper, both Mondelez and General Mills have the type of room for improvement that 3G looks for in its targets, arguably more so Mondelez. If you exclude the gains from selling its coffee business last year, Mondelez's operating margin was about half that of General Mill's.

A lower margin would argue for more scope to reduce expenses, 3G's specialty. However, Mondelez is already doing this on its own. The $66 billion company says it's focused on transforming into a "lean executional machine" through so-called zero-based budgeting, a meticulous approach in which the budget for a period starts from scratch and each cost must be justified.

Mondelez is also upgrading its manufacturing lines to make them more efficient and getting rid of underperforming products. 3G's next transaction may not come until next year, so by that point, there may not be enough left to wring out from Mondelez in order for a deal to be worth it.

General Mills, too, is looking for ways to save money, using what it calls "holistic margin management." The $36 billion company has also closed about 20 percent of its North American manufacturing plants, an initiative being expanded to its international facilities, and it's exiting some disappointing businesses. But 3G may choose General Mills over Mondelez because its food simply fits better with Kraft Heinz's portfolio.

A lot of Kraft Heinz's products are based around meals. There's Kraft salad dressings, Stove Top stuffing, A1 steak sauce and Heinz condiments and gravy, to name a few. General Mills has Betty Crocker, Pillsbury and Progresso—plate-or-bowl items, if you will. But Mondelez, which split from Kraft in 2012, mainly makes snacks, such as Ritz crackers and Chips Ahoy cookies, as well as the Cadbury chocolates business Kraft bought in 2010.

General Mills' large U.S. presence—relative to Mondelez's very global revenue base—could also make it a cleaner target along the lines of Kraft Heinz. And it would cost a heck of a lot less for the very indebted suitor.

General Mills is about half the size of Mondelez, but both generate about $2 billion or more of annual free cash flow.Should 3G pursue a deal for General Mills, that could drum up old talk of whether Nestle should bid, too.

Nestle shareholder Gabelli Funds, a unit of Mario Gabelli's Gamco Asset Management, has suggested a Nestle-General Mills mega-merger in the past. Alexia Howard, a Bernstein analyst, explained in a report last week that Nestle is unlikely to be interested in much of General Mills' U.S. business.

But she says that General Mills could potentially sell or spin off those brands as it did with Green Giant, and that perhaps Nestle might be interested in owning outright the cereal joint venture it has with General Mills. (She also leans toward General Mills being the more logical target for 3G.)

It still may be months or even a year before 3G orchestrates its next big acquisition. But what's certain is that the food industry is being completely transformed through deals, and Kraft Heinz was only the beginning.

 

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: LEN +3.2%, EHIC +2%, MKC +1.3%

M&A news: ADMP +25.2% (to acquire privately held US Compounding; expected to close in the second quarter of 2016), YHOO +0.5% (wants a deadline of April 11 for bids, according to WSJ)

Other news: KERX +19.8% (announces positive top-line results from phase 3 study of ferric citrate for the treatment of iron deficiency anemia in adults with non-dialysis dependent chronic kidney disease), CNL +13.2% (receives regulatory clearance for sale of co), OHRP +10.5% (reaches agreement on the Special Protocol Assessment with the FDA on the design of the Phase III trial for drug candidate squalamine lactate ophthalmic solution), GALE +8.5% (clinical trial with Neuvax achieves 70 qualifying disease free survival events), OREX +8% (in sympathy with other biotechs this morning), MNOV +4.7% (cont vol pre-mkt), BLRX +4.2% (announces 'positive' top-line results from BL-8040's Phase 2 clinical trial in relapsed or refractory acute myeloid leukemia), NQ +3.6% (announces proposed $101 mln investment from Chairman Dr. Vincent Wenyong Shi at $5.25/share), TTM +2.6% (still checking), NURO +2.5% (announces that Premera Blue Cross will pilot the Quell Wearable Pain Relief device within their organization), LCI +2.3% (receives FDA approvals for potassium chloride extended-release capsules & temozolomide capsules), GPRO+2.1% (in symp with peer AMBA upgrade), FL +1.7% (to join S&P 500),WYNN +1.7% (positive industry M&A chatter)

Analyst comments: AMBA +5.8% (upgraded to Overweight at Morgan Stanley)

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: ALXA -21.4%, (believes sufficient capital resources until the end of April 2016), CONN -13.7%, SID-8.3%, SNX -8%, ICON -2.9%, CCM -1.9%

M&A news: AFFX -0.9% (Origin withdraws $17.00 per share all-cash offer due to 'unreasonable demands and timeline')

Select metals/mining stocks trading lower: RIO -3.3%, BHP -3.3%, FCX-3%, AA -1.2%

Select oil/gas related names showing early weakness: SDRL -7.4%, RIG-6.1%, CHK -4.3%, WLL -3.5%, PBR -2.4%, RDS.A -1.2%

Other news: GEVO -29.3% (prices $3.5 million public offering of common stock at $0.35/share and warrants), TROV -18.8% (terminates the employment of CEO and CFO for cause; filed a complaint against each for breach of fiduciary duty), BPMX -18.4% (to offer and sell common stock and warrants in an underwritten public offering ), PRKR -17.2% (Parkervision announces that the US Supreme Court has declined its pettition requesting a review of the decision of the US Court of Appeals b/t the co and Qualcomm), PBYI -16.2% ( plans to submit NDA for the approval of neratinib for the treatment of extended adjuvant breast cancer in mid-2016 after meetings with FDA), TERP -15.5% (in symp with SUNE), MDVN -6.2% (Senate and House members send letter to the Department of Health and Human Services and the NIH to step in to lower the cost of a prostate cancer drug Xtandi)

Analyst comments: SWKS -2.5% (downgraded to Neutral from Buy at Citigroup), CMG -2.1% (downgraded to Underperform from Neutral at Wedbush), MU -1.7% (downgraded to Underperform at Needham), BWA-1.5% (downgraded to Neutral from Buy at Citigroup), LNKD -1.6% (downgraded to Equal Weight from Overweight), EBAY -1.5% (downgraded to Underweight at Barclays)

>>> US Early premarket gappers

Early premarket gappers
Gapping up: KERX +31%, QTW +14.4%, CNL +13%, OREX +8.1%, NQ+6.3%, AMBA +5.6%, ALDR +2.5%, LEN +2.3%

Gapping down: TROV -41.3%, SUNE -35.7%, GEVO -28.3%, SDRL -7.4%,RIG -6.1%, PBR -4.6%, BHP -3.6%, CHK -3.6%, BBL -3.5%, RIO -3.1%, DB -1.6%, EBAY -1.4%, RDS.A -1.1%, BP -1.1%

FT : Activists face attacks for short-termism

Activists face attacks for short-termism

Prominent US lawmakers including Elizabeth Warren and Bernie Sanders are supporting a new bill that aims to curb activist hedge funds, but it seems that financial markets are already taking the wind out of activists’ sails without them.
While concern about whether activists exacerbate corporate short-termism has now reached Capitol Hill, it has been building for some time among the wider shareholder community.

Activist hedge funds have been on site at an accumulating number of corporate disasters, of which the plunging share price of Valeant Pharmaceuticals is just the latest.
By urging companies to improve their returns to shareholders, these activists are supposed to benefit the wider investor community at the same time as making fat profits for their own funds — but on both counts they have often been found wanting.
“Activism is a credibility game,” says Alper Ince, an investor in hedge funds at fund of funds group Paamco. “You have to have credibility with management and a good reputation. At the end of the day this is also a stock picking strategy, so if your batting average goes down with bad picks then it will become more difficult to convince the market of your view.”
Last week, Valeant, a company effectively built by the activist fund ValueAct, repudiated its entire corporate culture as one where “the tone at the top of the organisation and the performance-based environment . . . may have been contributing factors resulting in the company’s improper revenue recognition”.

It is not the first time that activists have been blamed for pushing companies to enhance short-term shareholder value at the expense of the long term. Between 2012 and 2014, ADT, the alarms business, bought back more than $2bn in stock, partly at the behest of activist fund Corvex; the buybacks were followed by a profit warning that the company blamed on its failure to match rivals’ investment in marketing.
Corvex got $44 per share selling back the bulk of its stake to the company before the profit warning, a share price the company has never seen since.
More recently, LPL Financial, a stockbroking business, went on a debt-funded buyback spree under pressure from Marcato Capital, which is run by Mick McGuire, a protégé of Bill Ackman, only to see its shares crash 40 per cent this year as faltering earnings prompted concerns about its debt load.
The debacles risk robbing activists of one of the things that gives them their edge: their reputation for adding shareholder value.
Activist funds lost 9 per cent, after fees, in the year to February 29, according to HFR, and have returned just 2.8 per cent a year over the past three years, a period when the broader stock market returned an annualised 10.8 per cent. The industry’s biggest stars dimmed: Daniel Loeb’s activist portfolio lost 3 per cent in 2015; Carl Icahn lost 18 per cent; and Mr Ackman suffered a 20 per cent meltdown last year that has only worsened in the opening months of this year.

The reaction has been swift. For the first time since the financial crisis, investors pulled money out of activist funds in the fourth quarter of 2015, a net $1.5bn, about 1 per cent of their total assets, and there is an expectation that this year’s first-quarter figure could be even worse.
Anthony Scaramucci, founder of the fund of hedge funds company SkyBridge Capital, reduced his company’s investments with several high-profile funds late last year when it became clear that profits were no longer rolling in, despite an apparently benign environment for activism.
“The activists over the past 24 months have had only tailwinds,” Mr Scaramucci said. “There has been tons of cash on S&P 500 balance sheets, near-zero interest rates and all the positive rules in the Dodd-Frank act that improved minority shareholder rights and allowed activists to exert more power over companies. They had these huge tailwinds and yet they did not do well.”
The so-called Brokaw Bill introduced on Capitol Hill earlier this month is designed to add some headwinds. It is named after the little Wisconsin town where locals blame the closure of a paper mill by Wausau Paper on pressure from activist fund Starboard Value.
“We cannot allow our economy to be hijacked by a small group of investors who seek only to enrich themselves at the expense of workers, taxpayers and communities,” said Tammy Baldwin, the Democratic representative who has co-authored the proposed legislation.
The bill aims to make life harder for activist hedge funds by forcing them to disclose their stakebuilding and derivatives positions more quickly — within two days of hitting a 5 per cent stake, rather than the current 10 days — and limiting their ability to work with other funds.
For the time being, the bill has received little traction beyond the core group of liberals who signed up earlier this month, but that might not matter. The skies are getting darker for activists regardless.
“This is an unforgiving industry,” says Paamco’s Mr Ince. “Making mistakes can lead to massive outflows.”

>>> Israel M&A activity on track for record end to Q1, driven by interest in cyb

MergerMarket

Israel M&A activity on track for record end to Q1, driven by interest in cybersecurity and from Asia - Analysis
Tech remains most attractive area
Activity in traditional sectors continues to mature
Domestic tech M&A increasing
Israel is poised for a record-breaking end to the first quarter with the remainder of the year also looking strong as interest in cybersecurity and from Asia continues to grow, dealmakers told Mergermarket.

Following a record 103 deals valued at USD 7.789bn in 2015, 1Q16 to date has had 18 deals valued at USD 3.437bn, making it the largest Q1 by value on record and putting it on track to surpass 4Q10 which had USD 3.7bn on 21 deals to become the fourth largest quarter by value on record, according to Mergermarket data.

Activity continues as companies look to sell, sources said. Regulatory demands, such as the Business Concentration Law (BCL), among other requirements, remain a key driver, they said. BCL requires companies over a certain size to choose between their financial and non-financial holdings within the next few years.

A slow IPO market may also cause companies to look at alternatives, such as a stake sales, the dealmakers said.

Tech and healthcare remain the strongest sectors, while activity in traditional sectors continues to mature, Roy David, Managing Director of Ridgeback Capital Partners, said. He pointed to consumer, retail, and financial services, specifically insurance and banking, as examples of active M&A sectors.

A government panel set up to increase competition in the banking industry will likely force Israel's largest banks - Bank Leumi [TLV:LUMI] and Bank HaPoalim [TLV:POLI] - to sell their credit card divisions, Leumicard and Isracard, respectively, in the next few years, as reported. The two companies - the largest credit card companies in Israel - are expected to attract foreign private equity and financial institutions, David said. The companies could be sold for NIS 2bn to NIS 3.5bn (USD 514m-USD 900m), as reported.

Large companies in other sectors that have unique products or technology are also attracting the interest of foreign buyers, Itay Makov, Head of Investment Banking at Citi Israel, said.

The largest cross-border deal in 2016 could end up being the sale of Keter Plastics, a local investment banker said. It has attracted PE bidders including TPG, Apollo, Carlyle, Apax, Onex, Bain, and KKR, and could be sold for between USD 1.5bn-USD 2bn, as reported.

Two of the largest cross-border deals so far this year have been the sale of a 36.3% stake in Israeli food company Osem [TLV:OSEM] to Nestle [VTX:NESN] for USD 836.7m and China-based NanJing Xinjiekou Department Store Co's acquisition of home healthcare provider Natali Seculife for USD 294.49m, according to Mergermarket data.

Overall, the majority of deals lie between USD 75m to USD 150m, Rick Mann, Partner at Israeli law firm GKH, said.

Technology

Fintech, internet, and especially cybersecurity are among the most attractive areas in tech, the dealmakers said.

Cybersecurity M&A is being driven by increasing consolidation of public and large private companies trying to offer a full solution and to grow margins, an investor said. Most deals in Israel are early stage companies without sales, Mann said.

Potential buyers in the space include major security vendors such as Microsoft [NASDAQ: MSFT], CA [NASDAQ: CA], IBM [NYSE: IBM], and Google [NASDAQ: GOOG], the investor said. Israeli security vendors such as Check Point [NASDAQ: CHKP], Imperva [NYSE: IMPV], and CyberArk [NASDAQ: CYBR], and PE firms, such as Insight Ventures, have also been active, Dan Yachin, a research director at IDC, said.

Other trends driving cybersecurity M&A include cloud security and mobile/BYOD security, Yachin said. Included in cloud security are cloud security gateways, cloud identify and access management, cloud encryption and other solutions that enable to protect and maintain control over users, data and workloads in cloud environments, he added.

There is also a growing need for IoT security, which will drive security M&A activity, he said.

Other established Israeli security vendors include Varonis [NASDAQ:VRNS] and Forescout, he said. Notable start-ups include Cybereason, LightCyber, Skybox, Cato Networks, Skycure, Indegy, Tufin, and CyberObserver.

Local and global buyers

Foreign buyers continue to come from the US, followed by Europe, and then Asia, Makov said. Local PE funds are also very active in making acquisitions, a second investment banker said. For example, Tene Capital acquired a 51% stake in Peanuts & Cotton Marketing Limited for an estimated USD 32m in January.

Chinese companies are looking for targets, including in healthcare, that have an existing sales force and strong brand and can act as a gateway to target markets such as the US and Europe, Manor Zemer, Head of Asia Practice at Clal Finance Underwriting in Israel, said. They are also looking for large scale M&A opportunities.

Examples of Chinese companies looking in Israel include Huawei, Baidu [NASDAQ:BIDU], Alibaba [NYSE:BABA], Fosun, Ping An Insurance [SHA:601318], and SunPower Group, the second investment banker said.

Investors from Singapore are also interested in Israel, Zemer said, explaining that they are looking for military tech that used for civilian applications, including robotics, drones, and aviation.

Emerging and potential trends

"M&A last year was fueled by low interest rates and strong economics. The first two months of 2016 has seen a bit of a slow down in the markets on the back of 2015 which could drive boards and CEOs to be more cautious given market volatilities," Makov said.

An increase in domestic deals is expected to continue in tech and between local PE funds as the market matures, such as ironSource’s acquisition of SuperSonic Ads and the acquisition in 2015 of a 50% share for NIS 100m in Marina Mushrooms by Sky Fund from Kedma Capital, David said.

Activity between Japan and Israel is accelerating, Kenichi Hartman, an IP lawyer and blogger on Japanese-Israeli business activity, noted. Japanese companies see how aggressive Korea and China are in growing their economies and want to take more action. While activity with Israel is still mainly partnerships and small seed investments, one notable exception was the acquisition of Altair Semiconductor for USD 212m by Sony Corporation [NYSE:SNE] in January.

Digital Garage (DG) Incubation, SBI Group [TYO:8473], and Mitsui [TYO:8031] are among Japanese investors interested in Israel, as reported.

(TAG) Starwood Hotels/Marriot: Nobody's ready to tap out yet

Starwood Hotels/Marriot: Nobody's ready to tap out yet
TAG notes the increase in the bid to $82.75 from $79.53 (both of which exclude Vistana) from Anbang does not seem out of reach for MAR, while they believe the Anbang consortium could have the advantage in terms of leverage tolerance. While MAR shares moved positively on the Anbang bid, they hesitate to become too bullish on MAR ahead of a potential counter offer from the co. They consider the possibility realistic that MAR could bid higher as the strategic rationale for the deal is generally sound, although it becomes increasingly difficult to own the stock in the near term should it choose that course. The read-across remains increasingly positive for HLT and H, which are owners of assets and are trading at 10.3X and 8.7X 2016E EV/EBITDA, respectively, which is considerably lower than the levels of HOT's prospective deal. In particular, they believe HLT shares should benefit more from the lift in hotel valuations given that it is in the process of establishing a REIT for its asset ownership in 2016.