(The Economist) A zeal for deals


A zeal for deals
Corporate takeovers are booming once again
MIX processed cheese and ketchup and you get revolting gloop. Put two manufacturers that make them (Kraft and Heinz) together and you get a much more efficient company. Or at least that is the theory behind one of the year’s biggest mergers.
Chief executives are dusting off their chequebooks once more. Figures from Dealogic show that global takeover activity in the first quarter reached $889 billion, up 21% from the same period in 2014. It was the strongest first quarter since the financial crisis.
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Academic evidence on the benefits of takeovers to the firms doing the acquiring is distinctly mixed, although much of it dates from the 1980s. That never stops chief executives from believing that their proposed deal will be different: like second marriages, mergers are a triumph of hope over experience.
Fashion plays its part. As the chart shows, takeover booms tend to be associated with periods when stockmarkets are doing well, such as the late 1990s or 2006-07. Executives can use their highly valued shares as currency. In the tech sector, the likes of Google and Facebook can scatter their shares like confetti. Equity-based deals are less risky for the predator, which does not have to saddle its balance-sheet with debts that might prove a dangerous burden in the next recession. But today’s very low level of interest rates also makes life easy for private-equity bidders, which rely mainly on debt.
During a merger boom, executives will be besieged by fee-hungry investment bankers eager to suggest plausible deals; the newspapers will be full of speculation about the next bid. A boom can thus create a “get rich or die trying” mentality. Managers reason that, if they are not a predator, they will turn into prey.
Even more cynical explanations are available. Running a bigger company can justify bigger salaries for executives. A study* in the Journal of Banking and Finance last year found that, in cases where the chief executive of the target company was retained after a merger, the acquirer paid a smaller premium to the initial share price than in other takeovers. That suggests executives are trading away shareholder value in return for personal benefits.
There is no sign, in the current boom, of the rise of the kind of acquisition-hungry conglomerates that marked the late 20th century: the likes of ITT, Hanson or Tyco. Indeed, GE, the longest-lasting conglomerate, is shrinking by lopping off its financial arm. Nor are we seeing the kind of cross-industry deal that usually denotes the top of the market, most famously in the case of the AOL-Time Warner merger of 2000. When investors start hearing the word “synergies”, they should head for the exit.
This merger boom seems to be focused more on consolidation within various industries, as with the Heinz/Kraft deal or Nokia’s offer for a rival telecom-equipment maker, Alcatel-Lucent. Such deals have a better chance of succeeding than most: the enlarged company can benefit from economies of scale. But they can also be a sign of an industry that is struggling to create growth: mergers are a way of boosting earnings per share by cutting costs. There were lots of oil mergers in the late 1990s, when the price of crude was low. Now the price has slumped again and Royal Dutch Shell has agreed to buy BG, another oil and gas producer, for £47 billion ($69 billion).
Indeed, companies seem rather pessimistic about their chances of achieving organic growth, as illustrated by their willingness to return cash to shareholders rather than to invest in new factories and equipment. According to S&P Dow Jones Indices, American companies spent $553 billion buying back their shares last year, and $903 billion if dividends are included. The combined figure may top $1 trillion this year. Meanwhile American domestic investment is well below pre-crisis levels as a share of GDP and profits fell last year according to the national accounts.
This cycle can become self-perpetuating, at least for a while. Companies buy back their shares to prop up prices and fend off takeovers. At the same time, the lack of business investment or organic growth makes it more necessary for firms to merge in order to cut costs and boost earnings per share. The game only stops when the stockmarket declines. But it is hard to envisage a crash when yields on cash and government bonds remain so low, even negative in some cases. Expect the takeover fever to continue.
* “Do target CEOs trade premiums for personal benefits?” by Buhui Qiu, Svetoslav Trapkov and Fadi Yakoub, January 2014

FT: Draghi warns of ‘uncharted waters’ if Greece crisis deteriorate


Draghi warns of ‘uncharted waters’ if Greece crisis deteriorate


Mario Draghi said the euro area was better equipped than it had been in the past to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.
The European Central Bank president called for the resumption of detailed discussions aimed at resolving the country’s debt woes and urged the Greek authorities to bring forward proposals that ensured fairness, growth, fiscal stability, financial stability.

Asked about the risks of contagion from a new flare-up in Greece, he said: “we have enough instruments at this point in time . . . which although they have been designed for other purposes would certainly be used at a crisis time if needed.”
The two tools he referred to were the ECB’s so-called outright monetary transactions, which have never been used, and Quantitative Easing, which the ECB launched in January. He added: “we are better equipped than we were in 2012, 2011 and 2010.”
However Mr Draghi added: “Having said that, we are certainly entering into uncharted waters if the crisis were to precipitate, and it is very premature to make any speculation about it.”
The ECB president was speaking following meetings in Washington that have been overshadowed by renewed fears about the risk of a Greek debt default and possible exit from the euro.
US Treasury secretary Jack Lew warned on Friday that a full-blown crisis in Greece would cast a new shadow of uncertainty over the European and global economies, as he put pressure on Athens to come forward urgently with detailed reforms to its economy.
Mr Lew said that while financial exposures to Greece had changed significantly since the turmoil of 2012, it was impossible to know how markets would respond to a default.

There is mounting frustration among Greece’s partners over faltering attempts to sort out its financial woes. Pierre Moscovici, the European commissioner for economic and financial affairs, has set the mid-May meeting of eurozone finance ministers as the decisive moment for Greece to agree a new set of economic reforms or face possible default.
Greece is being urged to speed up technical discussions on a list of reforms it has submitted that, if agreed, would unlock €7.2bn in loans from Greece’s eurozone partners. Without this funding, Greece is likely to run out of money and default either to the IMF in May or June, or to the European Central Bank later in the summer when large numbers of bonds held by the central bank mature.
Expressing confidence in the euro’s continued stability, Mr Draghi said on Saturday it was “pointless” to go short on the single currency — challenging anyone who disagreed to do it.
The ECB president said that “good steps” had been taken but that there was a need for the restoration of policy dialogue so that “specific proposals can be made and quantified and exactly assessed.”
Delegates to the IMF’s spring meetings have expressed deep concern that Greece’s senior ministers are not taking the technical talks seriously and are in no mood to release the money without substantive progress.
Christine Lagarde, head of the International Monetary Fund, earlier this week said her advice was for Athens to take on the “tedious” technical work of designing reforms to the Greek economy and a credible implementation plan rather than hope for a grand political bargain.
Yanis Varoufakis, the Greek finance minister, said this week that Greece was willing to give ground in its negotiations but that “we are going to compromise, compromise, compromise without being compromised”.

Barron's:Telecom Italia Is Still a Good Call


Telecom Italia Is Still a Good Call

Telecom Italia has been a stock market darling in 2015, but some investors may be hanging up too soon. The ordinary shares (ticker: TIT.Italy), which closed Friday at 1.08 euros ($1.16), have dialed up 26% in gains since the start of the year, outperforming a 19% rise in the Stoxx Europe 600 telecom sector. (Telecom Italia’s American depositary receipts (TI) were trading Friday at $11.66, and have climbed 10%.)
It’s hard to blame investors for taking profits, but it isn’t too late to reverse that call, or for latecomers to join in. Telecom Italia’s ordinary shares could ring up another 25% over the next 12 months.
The Rome-based former telecom monopoly trades at 16 times projected 2015 earnings, in line with rivals. On a measure of enterprise value to Ebitda (earnings before interest, tax, depreciation, and amortization) of 5.2, Telecom Italia looks attractive. Fans say it is the best-value large-cap telecom play in Europe.
Telecom Italia provides fixed-line services to 20 million customers in Italy and mobile services to 30 million. It offers IT services and operates Italy’s No. 3 digital terrestrial TV network. It runs TIM Brasil, Brazil’s No. 2 mobile operator, with 75 million customers. Its domestic business has suffered against a backdrop of tough regulations and fierce competition; a string of write-downs erased profits from 2010 through 2013.
However, the environment shows signs of stabilizing. Revenue fell last year, but the rate of decline eased, and the absence of a write-down allowed the company to report a profit. It earned €1.35 billion last year, or seven cents a share, despite an 8% drop in revenue to €21.57 billion. This year is expected to be flat, with net income at €1.37 billion, or seven cents a share, but improvement is forecast for 2016, with net income projected at €1.47 billion, or eight cents a share.


TELECOM ITALIA ISN’T SITTING STILL. It plans to invest €10 billion in Italy through 2017 in technology, so that it will reach 75% of the population with optic fiber and over 95% with its 4G network. That could bring in another million customers. And Telecom Italia is taking advantage of low interest rates to refinance some of its debt and reduce interest payments. It has a debt load of €26 billion – equivalent to about three times Ebitda – and pays an average interest rate of 5.4%. In January, it issued €1 billion in bonds at 3.3%, an indication of the potential savings on offer.
If Telecom Italia can refinance its bonds maturing over the next five years at that rate, it could save €321 million in interest costs a year by 2019, analysts at Berenberg estimate. That would provide a big injection to profits.
It could benefit from consolidation in Italy. Reports that VimpelCom’s (VIP) Wind and Hutchison Whampoa’s (13.Hong Kong) 3 Italia may combine would be positive for Telecom Italia, but it could become a target. At a €20 billion market value, a suitor would need deep pockets.
Another possibility: sale of TIM Brasil. Telecom Italia CEO Marco Patuano has indicated he is open to talks. At 7.5 EV/Ebitda, Telecom Italia’s 67% stake in TIM Participacoes (TIMP3.Brazil), the holding company that controls TIM Brazil, could be worth €9 billion. Offloading TIM Brasil could push Telecom Italia’s shares to €1.24. Consolidation in Italy, which seems more likely, could drive them to €1.36, 25% above the current price. It pays to stay on the line.

FT : Tesco poised to report annual loss of up to £5bn


Tesco is set to announce an annual loss of as much as £5bn next week — the worst performance in the near-100-year history of Britain’s biggest retailer.
A raft of write-offs and charges in its full-year results will be used to clear the way for chief executive Dave Lewis to attempt a turnround of the supermarket group, said several people familiar with the situation. But they suggested that the resulting loss would be bigger than initial City forecasts.

By announcing a multibillion-pound statutory pre-tax loss next Wednesday, Tesco will mark the end of a tumultuous year, in which it ousted chief executive Philip Clarke, after finding that its half-year profit had been overstated by £263m.
“At a statutory level, its going to be a horror show,” said Clive Black, analyst at Shore Capital. “But, for shareholders, it is about Dave Lewis and the future.” Shore Capital forecast that Tesco’s annual loss would be at least £3bn.
Shares in Tesco closed down 1.8 per cent to 236.70p on Friday. Tesco declined to comment.
Tesco is also close to pressing the button on the sale of Dunnhumby, the data analysis company that runs Tesco’s Clubcard loyalty scheme, which analysts have valued at between £1bn to £2bn.
The retailer will send a sales memorandum to prospective buyers of a majority stake, including WPP, as early as May. People familiar with the transaction said Tesco was now close to resolving issues with Kroger, a US supermarket client of Dunnhumby’s, which had potentially acted as a brake on the business’s growth in North America.
Tesco’s statutory pre-tax loss is expected to be exacerbated by £4bn of property write downs in the wake of plans to close 43 stores and jettison 49 development projects purchased at a much higher rate than their current value.
Wednesday’s numbers will also reflect the cost of the profit overstatement, including £145m for prematurely counting money received from suppliers in prior years, and £300m from cutting thousands of jobs.

China Resources Enterprise, Tesco’s partner in China, also recently wrote down the value of the assets in the joint venture.
Retail executives said Tesco could take the opportunity to clear the decks further, by booking charges for stock that has reduced in value.
Tesco’s loss will dwarf the £1bn charge it took two years ago for ending its failed foray into the US.
Together with a forecast increase in Tesco’s pension deficit to about £4bn, the loss will put further pressure on the group’s balance sheet, and is likely to renew speculation about a rights issue — although Mr Lewis has consistently played down this possibility.
“It is not off the agenda,” said one institutional investor, referring to the possibility of a cash call.
Other people close to the situation said Tesco was likely to wait for the arrival of Matt Davies, recruited from Halfords to be chief executive of Tesco’s UK business, before deciding on any funding requirements. Mr Lewis has said there will be no fire sales of assets.
In December, the supermarket group said that its trading profit — before exceptional items, goodwill amortisation and property profits — would be no more than £1.4bn for the year to the end of February, compared with £3.3bn in the year earlier.

(BFW) Starwood Hotels Sum-Of-The-Parts Value $100/Shr, Citi Says

--> Stock Closed @ $81,89.
Starwood Hotels Sum-Of-The-Parts Value $100/Shr, Citi Says
2015-04-17 19:02:12.946 GMT


By Joshua Fineman
(Bloomberg) -- Starwood’s upscale brands Westin, Sheraton
and luxury St. Regis, W likely to be of “profound” interest to
major hotel chains, Citi wrote in note.
* Potential $4b valuation of HOT real estate doesn’t seem
“unreasonable”
* HOT’s time share unit likely interesting to cos. in the
space
* HOT remains buy at Citi, PT to $93, Bloomberg avg. $86
* NOTE: Earlier, Starwood Hotels Is Giving Activists Reason to
Check In: Real M&A
* NOTE: March 26, Starwood May Be Worth $103/Shr in Takeout:
SunTrust
* NOTE: March 26, Starwood Rises After FTC Early
Termination on Senator Investment
* NOTE: March 26, Starwood Rises After FTC Early
Termination on Senator Investment</li></ul>


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(BFW) Dijsselbloem Says Greek Deal Could Come Together in Weeks

BFW 04/17 21:15 Dijsselbloem Says No Need for ‘Game of Chicken’ on Greek Crisis
MORE: Dijsselbloem Says Greek Deal Could Come Together in Weeks
2015-04-17 21:20:15.980 GMT


By Rebecca Christie
(Bloomberg) -- “At least a couple of more weeks are
needed, that is my estimate” for getting a deal on Greece’s
next rescue step, Eurogroup President and Dutch Finance Minister
Jeroen Dijsselbloem says, asked about Greece’s reluctance to
make deal with creditors.
* Says deal won’t be ready by Apr. 24 Eurogroup meeting
* “Too little progress has been made but some progress has
been made so we’ll need more time”


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>>> Mylan downplays report of potential Teva bid; 'fully committed' to stand-alo

Mylan downplays report of potential Teva bid; 'fully committed' to stand-alone strategy, Perrigo proposal

Mylan N.V. (NASDAQ: MYL) is being sized up by Teva Pharmaceutical (NYSE:TEVA), although the Israel-based company has not made a formal acquisition approach as of now, according to a newswire report.

Bloomberg News cited people with knowledge of the situation as saying Teva has approached advisors and potential lenders. It noted that Teva is still debating whether to pursue the deal, and could decide not to make a play.

Mylan Chairman Robert Coury issued a statement today saying the company is fully committed to its stand-alone strategy, including its proposal to acquire Perrigo (NYSE:PRGO), and said "today's speculation has no impact whatsoever on this strategy."

"We have studied the potential combination of Mylan and Teva for some time and we believe it is clear that such a combination is without sound industrial logic or cultural fit," Coury said. "Further, there would be significant overlap in the companies' businesses and we believe that it is unlikely that any such combination could obtain anti-trust regulatory clearances."

The statement included a fiduciary statement indicating that Mylan's board would carefully consider an offer offer to acquire Mylan should it materialize. "We do not intend to comment further on media speculation and will maintain our unwavering focus on executing on our business plan and concluding a successful transaction with Perrigo," the company said.

(Reuters)Exclusive: Anadarko considers selling Mozambique gas assets to Exxon

(Reuters) - Anadarko Petroleum is considering selling its multi-billion dollar stake in Mozambique's giant gas reserves, with Exxon Mobil and Qatar Petroleum [QATPE.UL] both showing interest, banking and industry sources said.

Exxon is seen as the front runner, and it would be its first big acquisition since the oil price collapse. The world's largest oil firm has been expected to follow the example of Royal Dutch Shell, which agreed to buy BG Group for $70 billion last week.

Anadarko, which has opened its data rooms to investors keen to get a more detailed picture of its reserves, could sell up to its full 26.5 percent stake in Mozambique's offshore Area 1 license in the Rovuma Basin, the sources said.

The last stake sold, 10 pct, went for $2.64 billion in 2013 to India's ONGC, but that was seen as overpriced and oil and gas prices have since fallen sharply, making it hard to value Anadarko's remaining asset.

Anadarko initially planned to build a major liquefied natural gas (LNG) export project in Mozambique fed by Area 1 reserves and targeting Asian markets, but the sale process calls that into question and suggests the task will pass to whoever picks up the stake.

Exxon, which operates a diverse LNG portfolio, is the likely front-runner after Shell dropped out following its planned merger with BG Group, which will give it access to large gas assets in neighboring Tanzania, according to one senior oil banker.

Three other sources said Exxon and Qatar Petroleum had visited Anadarko's data rooms to get a closer look at reserve breakdowns and reservoir geology.

An Exxon Mobil spokesman said: "We never comment on speculation or potential business opportunities."

Anadarko said it does not comment on market speculation, as did Shell. Qatar Petroleum, which is itself consolidating after the plunge in oil prices, did not respond to Reuters requests for comment.

PRIZED ASSETS

Plummeting oil prices may have pushed Anadarko to review one of its most prized assets, one of the sources said. But it is unclear if the Houston-based firm is in any hurry to reach a deal or if it plans to offload its full stake.

"There are variants" as to how much it will sell, said a banker.

It is not the first high-quality asset to go on the block. Last month Total put up part of its stake in the North Sea Laggan-Tormore oil and gas field to shed assets after the steep drop in oil prices.

Oil and global gas prices have roughly halved since June last year, leading energy companies to cut spending and sell assets in order to boost their balance sheets. <LNG/>

"This is a $100 billion development that needs developers with significant cash," one banker said, referring to the full long-term costs of developing the initial liquefaction plant as well as future planned capacity expansions.

"The Mozambique government realizes now that it needs to get a top player because if they get it wrong, the project can be delayed by five years," he added.

Exxon Mobil's success in starting up its remote Papua New Guinea LNG export plant last year ahead of schedule and its subsequent rapid ramp-up may make it a desirable partner for Mozambique, which also lacks much basic infrastructure, sources said.

There are also arguments in favor of QP.

"This could represent a good move for QP, the size and quality of the resource is analogous to Qatar's North Field, there's potential to target multiple markets from east Africa, and since Qatar came late to the LNG opportunity in the U.S. it's a good alternative," the banker said.

Already the world's biggest LNG exporter, Qatar faces rising competition from Australia, which is set to overtake it as the No. 1 producer this decade, and the United States where booming supply has prompted several LNG export schemes.

Government restrictions capping production from Qatar's giant North Field, which feeds the country's LNG production facilities, leave Qatar Petroleum little choice but to expand abroad if it wants to maintain its top position.

>>> Intercontinental Hotels rumoured to be eyed by US predator

Intercontinental Hotels rumoured to be eyed by US predator
Shares in Intercontinental Hotels (IHG), the UK-based leisure group, firmed up yesterday, 17 April, amid rumours of interest from a potential buyer in the USA, The Daily Mail reported. The market report said IHG declined to make any comment on the gossip circulating among City traders.

The Daily Telegraph said chatter suggested a merger between IHG and its Stamford, Connecticut-based competitor Starwood Hotels & Resorts, which is thought to have made an earlier approach in 2014. The latest rumours say Senator, a hedge fund which owns a stake in Starwood, may press the business to do a deal and IHG is regarded as an attractive partner for a merger, the report said.

IHG has a market capitalisation of GBP 6.43bn (USD 9.61bn) on the London Stock Exchange. The company’s shares rose 6p to GBP 27.22 yesterday.

Daily Mail, Daily Telegraph

(BN) Teva Can Preserve $5-a-Share Earnings Goal With Mylan: Real M&A


Teva Can Preserve $5-a-Share Earnings Goal With Mylan: Real M&A
2015-04-17 22:27:20.917 GMT


(For a Real M&A column news alert: {SALT REALMNA <GO>}.)

By Tara Lachapelle
(Bloomberg) -- There’s no better deal for Teva
Pharmaceutical Industries Ltd. right now than Mylan NV.
Teva is evaluating a purchase of $34 billion Mylan in what
would be the biggest pharmaceutical acquisition so far this
year. It comes after months of analysts saying Teva should
consider such an acquisition to help offset the drop in revenue
and profit that’s expected after generic copies of its top
medicine, Copaxone, hit the market. Just Thursday, a team of two
drugmakers said they won U.S. approval to market their generic
version. Mylan is also seeking approval to sell generic
Copaxone.
Teva “should make the aggressive, wise, and value-creating
decision to move on Mylan,” Ken Cacciatore, an analyst at Cowen
Group Inc., wrote in a note before Teva’s deliberations with
Mylan were reported Friday.
With Teva’s other formulation of Copaxone also at risk of
generic competition, the company would have to find ways to
lower costs just to maintain its annual earnings of about $5 a
share while it waits for drugs still in its pipeline to
contribute to profit, Cacciatore says.
Buying Mylan would instead immediately boost profit. For
instance, an all-stock offer valuing Mylan at $90 a share --
about a 30 percent premium -- would deliver annual earnings of
about $5.60 a share next year, according to data compiled by
Bloomberg, using Cacciatore’s estimate for $2 billion of
synergies. If Teva could partially fund the transaction with
cash or debt, the earnings gain would be even larger.

‘Strong Motive’

Teva hasn’t made a formal approach yet, people with
knowledge of the matter said Friday, though Mylan is aware of
the Israeli company’s interest. Mylan, which announced plans
earlier this month to buy Perrigo Co., said in a statement that
it’s committed to the deal and isn’t interested in a sale to
Teva.
Teva’s American depositary receipts rose 2.2 percent
Friday. Mylan surged 4.5 percent to $69.82.
“Financially, there’s a very strong motive to pursue this
kind of acquisition because it would be highly accretive to
earnings,” David Steinberg, an analyst for Jefferies Group,
said in a phone interview following the report. “Strategically,
there are some pluses and some minuses.”

Pros, Cons

On the one hand, a large transaction such as Mylan gives
Teva the chance to diversify away from Copaxone. It would also
provide instant growth in earnings because of the added products
and cost savings, Steinberg said.
The downside: It doesn’t ensure long-term growth and a
higher valuation for Teva the way a purchase of a “higher-
margin, longer-duration proprietary” drug would, he said. Both
Teva and Mylan mainly make generic drugs, which aren’t as
profitable as branded medicines and in some cases have become
commoditized.
Teva shares currently trade for a lower multiple than most
of the company’s peers. The company was valued Friday at about
11 times what it earned before interest, taxes, depreciation and
amortization in the past year. The 20 biggest drugmakers
globally command an average valuation of 21 times Ebitda, and
Mylan’s ratio is 22, according to data compiled by Bloomberg.
Teva’s $3.1 billion acquisition of Auspex Pharmaceuticals
Inc. announced in March is an example of the type of purchase
that can boost value over the long run. Auspex doesn’t have any
revenue yet, but analysts were projecting its experimental
treatments that curb tics and other movement disorders could
generate more than $500 million of sales beginning in 2020, data
compiled by Bloomberg show.

Multiple Deals

Steinberg says Teva could pursue both a large takeover like
Mylan to get the immediate earnings boost and then another
smaller one similar to Auspex to help improve its stock-price
multiple over time.
Now, the question is whether Mylan would consider dropping
its plans to buy Perrigo and sell to Teva instead. If Teva can’t
make a persuasive enough offer, it would have to go hostile --
meaning it would take the bid directly to Mylan’s shareholders.
Hostile deals are rare, and it’s unclear whether Teva is willing
to go that route.
“It boils down to how badly does Teva want the assets, and
how far are they willing to go in terms of price?” Steinberg
said.

For Related News and Information:
Teva Is Said to Explore Mylan Bid to Create Generic-Drug Giant
Teva Set to Resume Deals After Investors Reward Rivals: Real M&A
Mylan Bid for Perrigo May Make Both Drugmakers Targets: Real M&A
Leaderless Teva Beckoning Mylan Merger as Stock Trails: Real M&A
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
Merger calculator: MRGC <GO>

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Elizabeth Wollman