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Downgrade, Downturn and the Future of M&A |
The week started with the force of S&P’s downgrade of U.S. debt, the implications of which are still rippling throughout the global economy. To examine the impact of the debt crisis, the resulting downgrade and where things stand in the M&A market, the M&A Advisor sought out one of the most seasoned experts on both the U.S. and the global M&A middle market, Marshall Sonenshine. Sonenshine is Chairman and Managing Partner of Sonenshine Partners, as well as a leading dealmaker and middle-market advisor.
What Sonenshine makes clear, as viewers will note in this first-of-many-to-come M&A.T.V. segments, is that the focus on the downgrade is the result of a panoply of problems in the U.S., ranging from public deficits, stagnate GDP, persistent high unemployment and the fragile economy.
To shed clear light on what can be an opaque frenzy of market activity, Sonenshine reminds us that, despite the host of issues, the downgrade is a relatively minor downgrade, not shared—for now—by Moody’s or Fitch.
What Sonenshine advises is that Wall Street’s knee-jerk reaction to regulation should be tempered by a desire to see more intelligent regulation when it comes to financial reform. He notes that the political risks are certainly a big change to the U.S. economic and political climate.
Yet as he notes in this segment, deals are getting done and dealmakers should remember that “M&A is a fussy stuff. M&A is fragile, a lot of stuff goes into making deals happen or not happen. And M&A likes a calm friendly environment in which buyers and sellers can agree on price and buyers can finance deals. And sellers like it when buyers will even compete for deals and drive prices higher. Right now, the environment is anything but friendly…although, you do see opportunistic buying…”
Sonenshine sees vertical M&A opportunities in: energy—as a hedge against inflation, project finance deals—as the U.S.’s needs to shore-up its infrastructure, utilities—as an enduring market—as opposed to discretionary spending, and retail—as strategic plays present specific opportunities.
Across borders, Sonenshine notes the fluctuation in capital flows in manufacturing activity, the foreign exchange markets, and the financial markets. He says that building-to-scale to be competitive is absolutely necessary for dealmakers to have their portfolio companies survive and thrive.
Sonenshine further notes that we are in a U- if not L-shaped recovery with implications for all, including the world’s most advanced dealmakers.
Sonenshine does take heart that the floor was made clear—at least in the equities markets this week. The real question, he says, is: How much of a slowdown are we looking at—based on the lack of conviction?
For dealmakers who do have conviction, the plays are in strategic deals. Sonenshine says that despite markets being fragile and fragmented, and despite the fact that geopolitical risk is running high—as witnessed in London and Greece this week—there is still room for growth.
PE-sponsored driven deals and dealmakers are looking to shore-up operations at best in breed firms. Better, stronger, faster is the way forward. Never before, given the global and financial market place, has competiveness been more at the forefront of M&A deal making. He notes that the leverage lone calendar and the syndication calendar both look good and that CLOs are back in business. Meanwhile, the high yields, IPOs and the capital markets are all in solid shape for what should be continued robust M&A transactions throughout the year and beyond.
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Pipeline Professional
Want to sell in the middle market or are a buyer looking for a good deal? Try reaching out to Brian Ballo, Managing Director, at Corporate Finance Associates. Corporate Finance Associates provides clients with financial advisory services, and access to capital resources, to help companies successfully sell, buy or finance a business. As an international investment banking firm serving middle-market businesses, the firm is a respected advisor to private corporate clients, as well as public companies. Ballo focuses on providing solutions on the sell side of the middle market, with a focus on technology. His sweet spot: delivering innovative financing solutions. Ballo also serves as Corporate Counsel at a firm facilitating international money transfers, as well as at several other technology driven companies. He is a licensed attorney in California and Colorado and an member of ACG.
You can reach him here on our M&A Advisor network.
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Metrics Meter
M&A Profit Potential Surges on Stock Losses
According to Bloomberg News: “Anticipating the completion of U.S. mergers and acquisitions has become a more lucrative investment strategy during the past two weeks as stocks have tumbled.” Bloomberg’s above chart tracks, “the average percentage gap between the share prices of takeover targets and the value of offers for 10 of the largest pending purchases. The differential rose for 6 straight days and more than doubled, to 15%, before falling (on August 9, 2011).” |
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How to Accurately Measure a Downgrade: M&A Deal Activity
Roger's Corner
by Roger Aguinaldo
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“May you live in interesting times” is a Chinese allusion that is considered somewhat of a curse. Well, here we are again, folks. Another reminder that we live in interesting times…And, therefore, another rocky ride, this one brought on by S&P’s downgrade of the U.S. While the futures markets are having a rough time of it, I want to keep things in perspective in terms of M&A, and the middle market in particular.
But let’s have a balanced check-in, if you will, and look at the underpinnings of the wide swings this week—in particular, those that are driving the volatility in the equities markets and the flight to both the U.S. bond market and the corporate bond markets. Aside from S&P’s downgrade, the PIGS continue to plague overall GDP in Europe, and it is true that the U.S. has made a fiasco of the debt process.
I should say, however, that I am not discounting the mess and unrest in Europe, nor am I saying we will never get our house in order here in the U.S., but what I am saying is that as long as there are people, there will be markets. And as long as there are markets, we need to keep our heads clear. First, this week amid the gyrations, France held onto its AAA rating and the U.S. Fed said that rates will stay low. Those are two solids that, regardless of equity swings, are reflective of the fact that the sky is not falling.
More importantly, the big bright spot in all of this, in our view, is that the M&A activity—the real bellwether of growth around the globe—continues to both demonstrate and uphold market activity across verticals. And if one looks at M&A activity in the big picture, in the last quarter—as accessible in a great report by our colleagues at Merrill DataSite—the risks of another downgrade are not as high as some might predict.
According to Merrill’s DataSite metrics:
“Looking at overall private equity exits globally, dealmaking defied the wider slowdown in the global M&A market, rising by 33.3% and 17.4% to 362 divestments collectively worth US$88.8bn. Buyout activity, on the other hand, experienced a marginal fall even as the combined value of private equity acquisitions was up by around a third over year-earlier levels. Still, for an asset class that was hard hit by the financial crisis, the private equity deal trends from the second quarter are comparatively buoyant when viewed against numbers for the overall global M&A market.”
To further help us keep things in perspective this week, we also reached out to Hiter Harris, co-founder of Harris Williams & Co. For nearly twenty years, the firm has focused on serving the middle market with best-in-class advisory services, making Harris Williams & Co. one of the premier middle market advisory firms. Here’s what Hiter had to say about this past week’s turn of events:
Will the downgrade by S&P impact M&A dealmaking going forward? Why or why not?
H.H.: The downgrade should really have little or no effect on the M&A market. First, treasuries have never been a viable funding alternative for investors in the M&A world – it is a low yielding security, and private equity and corporate investors would rather invest in growing companies or in their own businesses as those opportunities arise. Also, we should keep in mind that S&P is only one rating agency, and rating agencies in general are viewed to have greatly diminished intellectual integrity in judging big events – think the A rating for Lehman before bankruptcy – think the AAA ratings for certain mortgage securities before they lost most of their value. Most importantly, the M&A market revolves around other constituencies that have a lot of capital right now. Corporations have cash ready to spend on acquisitions; in fact, the companies in the S&P 500 have more cash available than ever in history. They have cut costs, are running lean, and are ready to take advantage of opportunities. Private equity groups have a tremendous amount of capital to invest before their fund deadlines, and the leveraged lending market is active with capital available. Treasuries and many other securities are not preferred alternatives.
Having said all of this, we will keep a watchful eye on how events unfold. We are well aware that sentiment can sometimes drive action. We also know that we live in a “law of unintended circumstances” environment. Could this negative sentiment lead to recessionary tendencies or events that we cannot predict today? Probably not, but we will watch intently. With the size of our firm, Harris Williams is active on over 50 M&A transactions at any given time, so we are constantly monitoring and communicating any effect – thus far we have no reason for concern.
Do you expect valuations to change as a result of the current comments by the FOMC?
H.H.: No, I really don’t. Prices in the M&A market really are not driven by FOMC rates. Spreads in the leverage lending market is the driver of interest rates applicable to M&A transactions, and that market is stable at this point. Slower overall growth prospects in the economy could affect M&A prices, but again, thus far, U.S. companies are growing at a very nice clip. They are lean and efficient and seeing nice earnings growth. Keep in mind that U.S. corporations and private equity groups are a very resourceful group. They know how to thrive in different environments and adapt very quickly. Corporations have also become more global and diverse. I would not bet against the best minds in U.S. business!
If other rating agencies follow suit, how might this impact the dealmaking climate?
H.H.: Other rating agencies may or may not follow, and S&P may or may not spread their lower ratings to other securities or municipal debt. But these things should have no further affect on the M&A market. As described above, the drivers of the M&A market are just different. What we will continue to monitor is a preponderance of bad news that affects the sentiment or confidence of economic growth. Sometimes a lower tide can lower all boats, but right now we are in a protected harbor full of activity.
Thanks, Hiter for your balanced perspective! And thanks to all the dealmakers out there who work daily to uphold the true value of the markets even in interesting times. |
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CELEBRATING 10 YEARS
The M&A Advisor was founded in 1998 to offer insight and intelligence on middle-market activities. In 2002, the first M&A Advisor Awards were presented to the year’s top professionals in M&A, financing and turnarounds.
Since that time, The M&A Advisor Awards have become synonymous with excellence in dealmaking. Each year we recognize the leading transactions by innovative firms and individuals whose acumen is exemplary.
In 2011, we are celebrating the 10th anniversary of The M&A Advisor Awards. With the following five awards programs, we continue the tradition of honoring the accomplishments and the contributions of the industry’s leading firms and professionals:
M&A Advisor International M&A Awards
M&A Awards Gala: October 11, 2011 New York, NY
M&A Advisor Awards
Awards Gala: December 13, 2011 New York, NY
M&A Distressed Turnaround Awards Gala
Awards Gala: March 7, 2012 Palm Beach, FL
M&A Advisor Financing Awards Gala
Awards Gala: May 2012 Chicago, IL
M&A Advisor 40 Under 40 Awards
Awards Gala: 2012 Los Angeles, CA
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| Deals of the Week |
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Branching Out: HSBC Sells |
In a sign of the times, HSBC agreed to sell 195 branches in upstate New York to First Niagara the Buffalo-based bank in a cash deal for $1B. The sale price is 6.67% of the $15B of deposits that will be transferred when the deal closes next year. The deal is subject to approval by U.S. regulators. The divestitures are part of a pruning of the bank’s global ambition, as it seeks to scale back in markets that are sub-scale or producing inadequate returns. The deal marks another strategic acquisition for First Niagara, which last year merged with Connecticut-based NewAlliance Bancshares in a $1.5B deal. First Niagara currently has approximately $30B in assets and $18B in deposits, in upstate New York, Pennsylvania, Connecticut and Massachusetts. The bank has been acquisitive, closing more than nine large bank and branch-network deals in the 10 years before the merger with New Alliance. |
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Playing Russian Retail: TPG Takes Control Lenta for $1.1B |
This week, U.S. private equity firm TPG, Russia's VTB Capital and the EBRD signed a $1.1B deal to buy 44% of the St Petersburg-based retailer Lenta from its parent August Meyer. The company was valued at $2.6B. Lenta, had been touted as a possible takeover target by Wal-Mart or Carrefour. Meanwhile, the company has been the subject of a long-running shareholder dispute between the TPG/VTB alliance and Meyer. |
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That’s Real Dough:
Ralcorp to Buy Sara Lee’s Dough Business for $545M |
Ralcorp Holdings Inc., the maker of Raisin Bran cereals, announced this week that the Company will buy Sara Lee Corp’s North American refrigerated-dough unit for $545M, in a move to bolster the Company’s private-label brands with pizza and toaster pastries. Ralcorp is expanding its private-label food brands, after declining a $4.9B bid from ConAgra Foods, while Sara Lee, the U.S. food maker plans to divest itself in the market. Sara Lee reported its refrigerated-dough unit had sales of approximately $300M in fiscal year ended July 2010. The purchase of the unit, which also makes specialty biscuits and crescent rolls, is anticipated to generate savings of $6M to $8M annually, after the third year, excluding one-time costs, Ralcorp said. The deal is also anticipated to boost total earnings per share for the Company by 30 cents in its first year, excluding one-time expenses. The companies expect the deal to be completed by the end of 2011. |
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High Flying Swap: Malaysian Airline System and Rival AirAsia |
Malaysian Airline System and rival AirAsia announced earlier in the week that the two companies will swap shares in a partnership that some analysts say will eliminate overlaps and boost the bottom-line for both companies. The two companies entered into the deal at approximately $364M. The two airlines’ major shareholders, Khazanah Nasional Berhad and Tune Air Berhad, said the RM 2B (£404M) deal will dramatically change the once bitter rivalry between the two into a cooperative venture. Under the terms of the deal, Khazanah will acquire a stake in Air Asia amounting to 10% of the company from Tune Air, which is a private joint venture held by Datuk Kamarudin Meranun and Air Asia’s chief executive Tony Fernandes. The deal may also involve Khazanah to acquire 10% in Air Asia X, the company’s budget long-haul subsidiary, the latter, however, would occur at a later date. Meanwhile, Tune Air will be issued a 20% stake in MAS, the country’s national airline. Under the current structure, the deal will still leave each airline running separately, as both companies work to avoid layoffs. |
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Deal on Display: Ingersoll Rand PLC Sells 60% Stake |
Ingersoll Rand PLC announced the company plans to sell a 60% stake in its Hussmann stationary refrigerated display case business to private equity firm Clayton Dubilier & Rice for roughly $370M. The cooling systems maker said it would use the cash from the deal to rev up its $2B share repurchase program which began on June 8, and expects to buy 28M to 32M shares by the end of 2011. Hussmann provides supermarkets and food retailers with display cases, refrigeration systems and beverage coolers. The company was sold to Ingersoll in 2000 for $1.55B in an all cash deal. As of last year, the business recorded sales of approximately $800M. Analysts have rated Hussmann as underperforming and have praised the company for disposing of assets bought for inflated prices by previous managers. Some have called the Hussmann sale a positive catalyst for Ingersoll stock, which is down nearly 40% from its 52-week high in May. Ingersoll Rand said the Company’s Q3 results from continuing operations will include a charge to reflect the terms of the Hussmann agreement. Excluding the charge, it stuck to its 2011 full-year earnings from continuing operations forecast of $2.90 to $3.10 a share. Under the current terms, Clayton Dubilier & Rice would pay Ingersoll a $30M fee if the deal is to be canceled, according to a regulatory filing. The deal is expected to close by the end of Q3 this year. J.P. Morgan Securities LLC acted as financial adviser to Ingersoll Rand. |
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