FT : US dealmaking hits $243bn monthly record

US dealmaking hits $243bn monthly record

A Time Warner Cable logo outside the company's offices in Columbus, Ohio,©Bloomberg
US dealmaking hit an all-time monthly record in May, surpassing the previous highs seen during the peak of the dotcom bubble and the zenith of the debt boom that led to the 2008 financial crisis.
The overall value of deals in US-bound mergers and acquisitions activity amounted to $243bn in May compared to $226bn during the same month in 2007 and $213bn in January 2000, the previous biggest and second biggest months respectively, according to Dealogic data.

The data underline how frenzied US dealmaking has become as cheap debt and bullish boardrooms fuel an M&A boom of a size not seen since just before the last two equity market crashes.
The main drivers were mega-transactions such as Charter’s three-way $90bn acquisition of cable companies Time Warner Cable and Bright House and Avago’s $37bn deal to acquire Broadcom, the largest tech deal since the dotcom boom.
Bankers and lawyers said that they expected 2015 to be a record year with chief executives under pressure to expand their businesses and deals constituting the fastest and easiest way to achieve that growth.
Chris Ventresca, global co-head of M&A at JPMorgan, said equity markets were rewarding deal-driven expansion at a time when organic growth remained subdued. However, prices have been rising sharply as the acquisition spree has accelerated.
“As premiums for deals go up, companies will come under increasing scrutiny and will have to defend the synergies and rationale of deals,” he said.
The M&A boom has come amid a borrowing binge by US companies, as treasurers lock in cheap, longer-term funding ahead of an expected interest rate rise by the Federal Reserve. Economists believe the US central bank will start tightening monetary policy in September, a move likely to rattle markets that have become accustomed to low interest rates.
Average company bond yields have halved since 2007 to about 3 per cent in the US, and there has been over $100bn of corporate bond issuance every month for the past four months — the longest ever streak of issuance above that mark. Bank of America Merrill Lynch predicts that June will become the fifth month in a row.
“Issuers should realise that the window to lock in low long-term yields for any purpose is closing,” Hans Mikkelsen, a senior strategist at BAML, wrote in a recent note.
Acquisitions have been mostly financed by shares, ample cash reserves and bond markets, but some of the pre-financial crisis debt structures have also staged a comeback.
Global issuance of collateralised loan obligations — or CLOs, bundles of loans made to poorly-rated companies that are sold off in slices to investors — almost doubled last year to $99.3bn, according to Dealogic. Although below the heydays of 2006-07, the market’s renaissance has helped lubricate the resurgent M&A boom.
The Fed’s plans to increase interest rates could dent the plans of corporate dealmakers, however, and hurt some of the riskier companies laden with buyout debt. Standard & Poor’s predicted that its gauge of defaults for lowly-rated companies will rise from 1.8 per cent in March this year to 2.8 per cent by March 2016.
Nonetheless, most analysts and money managers expect the frenzy to continue, given the pent-up demand for fixed income investments, even when monetary policy tightens. “Short-term rates should rise, but long-term yields are likely to be more anchored over the next one to two years,” said Russ Koesterich, chief investment strategist at BlackRock.

(ZeroHedge) "By Almost Every Measure Stocks Are Overvalued" Warns Goldman After Slamming Corporate Buybacks

Over the weekend, we first reported that none other than Nobel prize winner Robert Shiller said that in his opinion, unlike 1929, this time everything - stocks, bonds and housing - was overvalued.
Curiously, none other than Goldman's chief equity strategist, David Kostin echoed this sentiment when in his latest weekly note to clients he said that "by almost any measure, US equity valuations look expensive. The typical stock in the S&P 500 trades at 18.1x forward earnings, ranking at the 98th percentile of historical valuation since 1976. For the overall index, the aggregate forward P/E multiple equals 17.2x, a rise of 63% since September 2011, compared with the median expansion of 48% during 9 previous P/E expansion cycles. Financial metrics such as EV/EBITDA, EV/Sales, and P/B also suggest that US stocks have stretched valuations. With tightening on the horizon, the P/E expansion phase of the current bull market is behind us."
Don't tell that to the SNB, the BOJ or any of the other central banks once again buying Emini futures hands over fist with freshly printed money and a complete disregard to cost basis or downside and losses.
Of course, for Goldman to say all of this, it means either the bank is already full to the gills with ES puts, or is just hoping to buy up the S&P to 3000 and above. Here is what else Kostin says on record valuation:
US equity valuations are also historically extended when adjusted for the extremely low interest rate environment. For example, during the past 40 years when the real interest rate (10-year Treasury less core CPI) was between 0% and 1%, the S&P 500 forward P/E multiple averaged 11.2x, well below the current level. Moreover, since 1921 (94 years) when real interest rates have been 0%-1%, the trailing P/E multiple has averaged 13.5x, which is 27% below the current trailing S&P 500 index multiple of 19x.

 

Valuation looks even more striking in the context of current profit margins—the highest in history. Since 2011, margins for S&P 500 (ex-Financials and Utilities) have hovered around the current 9% level. Information Technology has been the driving force for the overall margin expansion. Profits are highly sensitive to small changes in margins: every 50 basis point shift in S&P 500 margin translates into a roughly $5 per share swing in EPS. Given the current P/E multiple, a $5 shift in EPS would translate into a swing of nearly 90 points to the valuation of the S&P 500.

 

The current P/E expansion cycle has lasted 43 months, the second longest since 1982, but will likely end when interest  rates rise. After each of the three prior “first” Fed hikes, P/E multiples contracted by an average of 8%. In the meantime, we expect the 2% dividend yield to generate the entirety of the total return we forecast the S&P 500 index will deliver during the next 12 months. We expect the market will rise to 2150 around mid-year but fade after Fed liftoff in September and end the year at 2100.
But what is more interesting is that after telling Goldman clients to weeks to put their cash in companies that are most likely to engage in stock buybacks, Kostin now rages at the practice:
Corporations have so far used record profits to return cash to shareholders. S&P 500 firms have spent more than $2 trillion repurchasing shares during the past five years. 

 

However, like investors, managements are often poor market timers. In 2007, companies allocated more than one-third of their cash use to buybacks ($637 billion) just before the S&P 500 plunged by 40% during the following year. Conversely, at the bottom of the market in 2009 firms devoted just 13% of their annual cash spending to repurchases ($146 billion).

 

We forecast buybacks will surge by 18% in 2015 exceeding $600 billion and accounting for nearly 30% of total cash spending. We recognize activist investors often advocate for firms to return excess cash to shareholders via buybacks. Tactically, repurchases may lift share prices in the near term, but in our view it is a questionable use of cash at the current time when the P/E multiple of the market is so high.

 

Although buybacks do not represent an optimal use of cash at the current time, they will be positive for near-term stock performance.... As noted, most firms should do something with their cash other than buyback shares. However, we expect firms will repurchase shares and investors will reward these actions and shares will post near-term outperformance.
As for the long-run, well just ask Keynes.
And while all of the above is well-known, there is one take home from Goldman's note: what Goldman says, or rages at, quickly becomes policy.
As such, don't be surprised if one of the upcoming executive actions by that Supreme Fairness Distributor, president Obama, will be to determine just how much stock buybacks corporations will be allowed to engage in.

>>> FT Fast : Sika shrugs off founding family's St Gobain push

Sika shrugs off founding family's St Gobain push

Sika has shrugged off the latest legal bid by its founding shareholders to push through a SFr2.75bn sale of their stake in the Swiss industrial group to French rival St Gobain.

The family's SWH group asked a court in Zug to overturn key resolutions taken at an April shareholder meeting which the family was not allowed to use its full voting rights in, reports Laura Noonan, investment banking correspondent.

Had the family been allowed to vote, it would have paved the way for the controversial sale of their stake to France's St Gobain.

Sika said on Monday that:

Irrespective of this legal action, which was already announced some time ago, Sika remains convinced that SWH's attempted sale of Sika to Saint-Gobain is legally not viable in this form and makes no entrepreneurial sense.

The sale is controversial because St Gobain wants to take control of Sika by paying an 80 per cent premium for SWH's 16 per cent stake in the company, which also carries 52 per cent of Sika's voting rights.

Other shareholders will not get an offer from St Gobain.

>>> Monsanto must carefully balance cash component for Syngenta bid to safeguar

Deal Reporter 
Monsanto must carefully balance cash component for Syngenta bid to safeguard tax benefits – lawyers
* Risk to tax benefits increases the more Monsanto shareholders hold in merger
* Tax inversion seen as sweetener but not key rationale behind deal
* Exact nature of tax benefits Monsanto could realise unclear

An increase in the cash proportion in Monsanto’s [NYSE:MON] bid for Syngenta AG [VTX:SYNN] would risk negating potential tax benefits resulting from an inversion, according to three tax lawyers.

Monsanto’s original bid of CHF 449 per share, with around 45% in cash, was rejected by Syngenta’s board. Monsanto is expected to submit an improved offer in the near future, as reported.

At the level of cash consideration in the rejected offer, Syngenta’s existing shareholders would end up with about 30% of the new company created by the merger, according to Dealreporter analytics.

Under the US tax code, a merged company can redomicile to another jurisdiction if shareholders of the foreign target company, hold at least 20% ownership of the new company. Several US companies have used that rule to relocate to jurisdictions with lower tax rates.

But, in September the US Treasury and Inland Revenue Service issued a notice designed to cut down the benefits of a tax inversion and make it more difficult for US entities to invert by strengthening rules around the former owners of the US company holding less than 80% of the new combined entity.

While the notice – which catches merged entities where the US company holds between a 60%-80% stake in the new company - has not been officially made into regulation, it has had a chilling effect on deals with a tax inversion element.

Abbvie’s [NYSE:ABBV] attempt to take over Shire PLC [LON:SHP] and implement an inversion last year was abandoned after the Treasury and IRS issued their guidance.

Assuming a tax inversion is attempted, the more ownership retained by Monsanto in the new company, the more likely the deal would be to raise the ire of tax authorities, politicians and the media in the US, the three lawyers and a sector banker said.

Monsanto’s market capitalisation is USD 56.2bn, while Syngenta’s market cap is CHF 39.5bn (USD 41.8bn). Assuming a total equity value of USD 97bn based on the combination, Syngenta shareholders would need to keep USD 19.4bn worth of stock, estimated Jason Kaplan, tax partner at Hogan Lovells. The cash structure of the initial bid gives Monsanto the option to invert. Monsanto could raise the cash proportion to 50%, but “that’s about it”, he said.

The proportion of cash that Monsanto can offer and be within the bounds of a tax inversion depends on how much it increases its overall offer. One banker previously estimated Monsanto could up its offer to as much as CHF 580 per share without dilution just based on its own price-to-earnings ratio and the ability to move its tax headquarters to Switzerland.

Effective income tax rates stood at 27.54% for Monsanto on a trailing twelve months basis, according to its latest quarterly report, and 14.41% for Syngenta for 2014.

At CHF 580/share offer price and maintaining a 30% minimum shareholding in the combined entity for Syngenta shareholders, the cash component of the offer could be increased to 58%, reflecting CHF 334.52 cash per share and total cash consideration of USD 33.12bn, according to Dealreporter analytics. The total consideration in this case would amount to USD 57.43bn, with USD 33.12bn in cash and USD 24.31bn in shares.

Even under existing regulations the exact nature of the benefits Monsanto could see out of the restructuring are unclear at this stage, the lawyers said.

It is unlikely an inversion would be a key reason for pursuing the deal as a whole, but would represent a significant sweetener, the lawyers and a second sector banker said. A fourth lawyer said lack of a tax inversion was unlikely to be a deal-breaker in this case.

Much of the benefit would depend upon the levels of intercompany debt between Monsanto’s US operations and the new foreign company, the second lawyer said. “Interest stripping” is used to create an arbitrage between tax deductions on interest paid in the US and tax paid on interest received in Switzerland, he explained.

The future growth plans of Monsanto’s non-US businesses would also benefit from a foreign incorporation because they would not need to repatriate as much cash to the US and could more easily avoid Controlled Foreign Corporation tax rules, the second lawyer said.

Such plans would be sure to draw negative attention because Monsanto is a large, high profile, tax-paying company in the US, but an inversion can be done legally under current regulations and would be respected, the second lawyer said.

“If they’re willing to take the heat then they could definitely do an inversion to maximise the value of the deal,” the second lawyer said. Syngenta shareholders would expect the benefits of an inversion to be factored into any offer made by Monsanto, he added.

They might also look to be compensated for the risk of the deal falling through if an inversion is blocked in some way, said Kaplan. It would be riskier to attempt the tax inversion than not, he said.

It is not clear whether Monsanto’s initial approach for Syngenta was conditional on the success of a tax inversion, but Syngenta cited “significant execution risks, including regulatory and public scrutiny at multiple levels in many countries” in its rejection statement.

The US Treasury and IRS could implement new regulations and Congress could even eventually legislate against tax inversions, which would have a high risk of affecting deals signed but not completed prior to laws being passed, Kaplan and the second lawyer said. But, Congress would not be likely to take such action prior to the next Presidential election in 2016 because the house is too polarised, the second lawyer said.

(FOR) Forbes: Why The Whole Foods Antitrust Case Was Misguided

Forbes: Why The Whole Foods Antitrust Case Was Misguided
2015-06-01 16:47:41.337 GMT

http://www.forbes.com/sites/investor/2015/06/01/why-the-whole-foods-antitrust-case-was-misguided/

PageExcerpt:
Intelligent Investing Intelligent Investing Score it free enterprise 1, government intervention 0 in the grocery industry’s latest twist. Shareholders in companies with upside as acquisition candidates could be the real winners. Background In ...