Electrolux - a failing GE deal but don't ignore the shares

A little under five months ago writing about the Swedish capital goods company Electrolux I noted:

'I like some of the trends here (pricing positive, happy to keep pricing up at cost volume) but buying here clear hope on US deal not only occurring but also adding value for them.  So a ‘trust management’ call especially with the shares trading at a mid-teens EV/ebit multiple.  

I would prefer wait for the full set of Q2 numbers in a few weeks time and maybe the c. SEK225 level where support where the shares have exhibited some historic resistance/support' 

(my additional emphasis added)

The above became hugely relevant today as the Electrolux/GE deal broke apart as noted on Fast FT here:

Electrolux shares have been spun around in a washing machine this morning after the Swedish appliance maker had its $3.3bn deal for General Electric's appliances business scuppered by the US Department of Justice.

The shares have fallen 14.5 per cent to SKr204.6 this morning. Before today, they had climbed 50 per cent over the last two years.

Electrolux will now have to pay GE a termination fee of $175m.

As I write the shares are off the 14.5% reduction lows...but are still not looking that healthy on a last 24 hour perspective down at a new 52 week low:

Now we all know the rationale for the deal: beefing up the US exposure in the light of general competitive challenges but - in the absence of such a transaction - we go back to the Electrolux business today (or at least as shown by the recent Q3 numbers).  SEK6bn+  of ebit profitability...

...and generally positive trends underpining the business (price-mix, cost savings etc.)...

...implies there may be a price to get interested.  At current multiples a low teens EV/ebit valuation is getting more interesting, especially when combined with a 2.7% dividend yield and generally good cash flow generation (5-6% free cash flow yield). 

The shares have tracked back to where they were before the GE deal was announced which means...they look interesting to me here.  

A useful insight as I pull together my top stocks for 2016 list over the next couple of weeks. 

GE - a quick Alstom deal sanity check

A quick update on General Electric after perusing their presentation on the Alstom power acquisition. I noted at the time of the former's Q3 numbers that:

'Net net I am still a believer in a US$30+ GE share price and will review my holding only at a share price above this level'

And guess where we are now?!

I wrote away from Financial Orbit that I was shifting to a more 'hold' centred position with the share above US$30 and I guess my observation with the Alstom deal metrics is just to make sure it materially does not impact the figures.  

First I note that the 'deal economics' have been impacted by the prolonged nature of the discussions although 'growth opportunities better than original outlook'.  From a surprise improvement the former observation sounds far more influential...

Meanwhile on the critical theoretical value add returns are greater than WACC by 2018 (my emphasis).  Hmm...that does not sound that exciting: 

Still got to see the final consideration worked out.  US$10bn odd is equivalent to c. 3% of GE's market cap.  And the initial boost to EPS?  5c odd a share (after some initial costs).  Well even ignoring the costs on a 'spend to save' medium-term basis, 5c is around 4% of the FY15e Industrial unit EPS.  In short that massively different from the proportional consideration.  

In short an ok acquisition but not mind-blowing.  All other matters being equal adopting a more 'hold' mindset to GE feels correct despite ongoing simplification and capital returns.  I just think the market is sort of there already and the story needs a new / not discounted leg.  

Been a great call however - and I do remain a 'holder' of a clear global leader. 

"Rexam – you ‘can’ believe in deal completion"

I wrote a piece titled "Rexam – you ‘can’ believe in deal completion" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

What to think about Air Liquide's big deal

As I observed back in July:

'I have long regarded Air Liquide as your 'if you need to own an industrial Continental European listed stock then this is the one' name.  Today's numbers did nothing to change my mind.  Solid.

If you were going to pick a level?  Below Euro110 to buy some (more).  Yes, not cheap at teens EV/ebit, 2%/change yield but quality'

Last yesterday the company announced the proposed purchase of its US industrial gases peer Airgas.

Does this change anything?  Having listened to the deal conference call this morning I don't think so. Here are a few thoughts:

You can see the logic in terms of augmenting the market position for the Air Liquide group in the US and reinforcing the global position. 

Does make the company more US centred turnover-wise. 

‘Largest industrial gas market world wide…fastest growing amongst advanced economies’

Ultimately adds 25% to sales, 19% to operating income.  So need to achieve synergies etc. 

Financing looks like a bank loan etc. now and ultimately tapping the fixed income/equity markets. 

Believe will be accretive in year one.  Metrics not terrible even pre-synergies.  Certainly full but cannot fault general logic.   

From the Q&A –

2-5% first year accretion but depends on precise outcomes (cost of financing etc.)

‘very early…above the WACC for the group’

Airgas headwinds in the last year ‘the same as other firms’ – industrial slowdown etc.

Regulators on geographic profile – believe have planned for this drawing on historic precedent.  Noted gas cylinder business very local in orientation. 

Cash generation – said ran numbers on this deal carefully to ensure can invest in business, pay dividends and pay down debt

Overall – not surprised to see the shares down 5%+ given likelihood of an equity issue but you cannot really fault the industrial logic.  Very high quality but I have noted above a Euro120 pretty full today.  Always looking to buy this one below Euro110, that remains the case. 

The 'take-under' of Starwood by Marriott

Another day, another takeover this time a US$12bn odd approach by Marriott to Starwood to create a hotel/hospitality behemoth.  Actually scrub that, maybe it was a 'take-under' as noted here.

Over the years I have seen plenty of acquiring companies suffer a falling share price following the announcement of a deal for various reasons.  But a company being acquired - well that is more unusual.

As the above linked Zero Hedge piece noted:

'Marriott will buy Starwood in a deal where shareholders will receive 0.92 Marriott Class A shares and $2 in cash for each Starwood share, the companies said on Monday. This works out to $72.08 per share for Starwood, a discount of about 4 percent to the stock's Friday close. In other words, an aggressive take under for a company that was trading as high as $86/share, suggesting the purchase price is about 16% below the 52 week highs'.

A discount to the stock's Friday close.  Hmm.  Not the greatest bid level...and a slight fall in the Marriott share price today hardly helps...nevertheless a 6% fall in the shares is a pretty sad indictment of the deal...

A few observations from the deal conference call...

Starwood management – ‘we investigating a full range of possibilities…including buying other companies’ (nod to London-listed International Hotels Group approach?)

‘combining with Marriott – better equipped to derive long-term value for shareholders’.  Noting Starwood shareholders get a premium paid for their shares (rather than paying a premium to buy another company etc.)

‘we wanted stock’ – Starwood management

‘consideration much higher than US$72 a share’…Starwood shareholders will own 37% of the combined company

‘greatest longer-term return for Starwood shareholders’

I think we get the drift as to why they perceived the deal as the best they could do.  Interesting there were also some noises about the underlying market place not being super easy e.g.: 

Can feel noises re ‘less robust marketplace’

And what do Marriott get/see from this aside from an acquisition of a peer near a 52 week low?

‘wide distribution of different brands across price points is critical’

‘the future for luxury is very strong…believe have industry leading brands’

EPS accretive in second full year

‘Sheraton…truly global brand’. 

Using cash would have been cheaper but via shares allows Starwood shareholders to participate…and ‘don’t change the risk profile of the company’

The integration philosophy of ‘choose the best from each company’ sounds pragmatic and sensible (although I bet it inevitably includes more from the Marriott side than the Starwood one) and following some more detailed numbers/combination plan disclosure I will take a proper look at the combined entity.  However the overriding image on the day of the deal announcement has been the plunging Starwood share price.  

A 'take-under' indeed and the sort of concept which is apparent at the end of a bull run in an M&A market?  What was that chart again that I ran in a Financial Orbit Speaks a couple of weeks ago?

Hmm...

What Altria shareholders should be thinking about the potential bid for SABMiller

Last week I observed after the 'Back to school' Barclays conference presentation by Altria that:

'I remain an Altria holder especially as I believe it should be helped by any current 'navel-gazing' at Reynolds/Lorillard as they bed down their merger'

All Altria holders should get a bump today because its 28% ownership in the global brewer SABMiller is worth just a little more than this time yesterday thanks to a potential bid approach by AB-InBev (link here).

So how do the numbers potentially change?

Way back in October 2013 I wrote a posting which appraised tobacco and beer segment worth which you can read here.

If we update the numbers for today the current c. US$8.5bn of ebit is covering US$115bn of EV putting the company on a firm sounding mid x13s EV/ebit multiple.

But...think about the current SABMiller stake value.  Today's 20% bump in the share price increases the value of the Altria stake to just over US$25bn.  As I did back in October 2013 take off a 20% haircut for taxes and the like and this gives a worth of US$20bn.  Deduct this in turn from the Altria EV and you get for the latter a value of c. US$95bn...which in turn puts the 'stub' tobacco-centric business at just over x11.1 EV/ebit.

For a business which gave such a solid update at the conference last week (as noted at the link above) that is absolutely fine.  If you can buy it at less than x10 implied then you should.  That would suggest looking below the US$50 level.

Of course...SABMiller may or may not be bid for.  I do observe that even after today's 20% pop, SABMiller shares have underperformed those of AB-InBev (Belgian euro quote shown here). This has been a long-mooted deal but with disposals it is very do-able.

For my own Altria holding I am sitting tight.  Add below US$50, sell some above US$60 feels about right to me.  

Trades I have undertaken in the last week

With plenty of end of the month analysis to come over the next few days, let's dive straight into the dealing over the last week.

Purchases / adds / buys to cover:

APR Energy - as I titled my results write-up: 'geopolitics, management change, share price volatility = opportunity?'  Link here.

Smith & Wesson - bought back into the gun manufacturer after a sharp decline.  Link here.

Tesco - embraced the volatility...here's why: link here

Sells / take profits / short initiations:

Interpublic - took my profits after a nudge from sector peer FTSE-100 (link here)

FTSE-100 index - disturbed by that high sentiment data I added to my general portfolio protection.  Link here

Vivendi - on a re-review of the sum-of-the-parts, I take my profits (link here)

Content is King again: the bid for Time Warner

It was a few months ago when I last wrote about Time Warner concluding back in February that:

'The share has actually fallen, with the general market malaise, into the low US$60s over the past couple of months.  At prevailing I estimate it trades on x10.5 EV/ebit FY14e. 

 
I can easily see Time Warner shares at US$70+.  I will be looking to add in the low US$60s, following these results, if the opportunity becomes apparent'

And I did add in the low US$60s which makes today's newsflow doubly interesting:

'The media giant 21st Century Fox, the empire run by Rupert Murdoch, made an $80 billion takeover bid (around $86.00) in recent weeks for Time Warner Inc. but was rebuffed, people briefed on the matter said on Wednesday. As WSJ reports, The offer was first made orally in June and then with a formal letter in July. Time Warner rejected the offer curtly, after Chief Executive Jeff Bewkes took the proposal to the board'

In my research pieces on Time Warner I typically concluded that the value was in the content that the company produced and it seems that Mr Murdoch agrees. 

So what is a fair price?  Well I always worked on the principle that a fair value for a sensible content business like Time Warner was around x12 forward EV/ebit or getting on for a US$75 share price.  Add on a couple of EV/ebit points to reflect the potential value of synergies and you get to about the level of Mr Murdoch's apparent bid. 

So it is not a mad bid at all.  In fact it is a sensible first approach level.  Mr Murdoch certainly can go higher given the content empire this is going to create. x16 forward EV/ebit would be a just under US$100 Time Warner share price equivalent level.   

Of course Mr Murdoch may not decide to come back but the content prize to me seems big enough to justify an approach near that magic three digit share price level.  That is why I will only take a few profits today on my Time Warner position. 

'Buying from a forced seller is good news: Imperial Tobacco'

I wrote a piece titled 'Buying from a forced seller is good news: Imperial Tobacco' which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Charts today - US economic observations, volatility, geopolitics, fragility, deals and the best investors in the world (historically)

Charts today starts with a few US-based observations.  I am still trying to understand if Janet Yellen said anything particularly different or interesting yesterday but I was struck by this comment:

'Too many Americans remain unemployed, inflation remains below our longer-run objective'

Mix that in with the recent trend in monthly seasonally adjusted retail sales...

March +1.5%, April +0.6%, May +0.5%, June +0.2%

...and no wonder @Fullcarry can make the interesting observation that:
              

'It takes more than 95 hours of average hourly earnings to buy the SP500. It was higher only during the tech bubble'

 

 

Of course despite all this volatility remains low versus history as nicely captured by GaveKal Capital in this posting.  The most striking chart however is this one...or the asset class that is showing a volatility spike:

 

 

 As I have noted a number of times recently geopolitics is a volatility concern as shown well here...

...and inevitably that leads to fragility.  At first glance this looks as our 'gut feel' should suggest...

 

...but via this interesting write-up here perhaps we should start to realise that just like geopolitics and global economic power matters are getting much more mixed up:

 

'A look back at Ukraine’s 2013 score, for instance, gives no evidence that the country was about to be carved up. In 2010, states like Syria, Libya, Egypt and Tunisia fell into the same bracket as Brazil, Turkey, and Russia. Another way perhaps to avoid its perennial failure at anticipating events is for the index to examine provinces, given the vast amount of sub-variation within countries. That might require a messier map of the world, but at least it would be more accurate (and account for what anthropologists call “alternatively governed” spaces)'

 

To bring it back to volatility this all suggests the scope for much greater variation than we have seen in the last few years.

 

(h/t for highlighting the article to @patriciavalerio)

       

More deals ('best since YTD '07') but did anyone notice how hard both Reynolds American and Lorillard fell yesterday?  (as an aside I will be posting today on the implications for Imperial Tobacco aka the potential winners from the deal). 

(h/t @dealintel)

Finally, if you make this chart...then you have done rather well as an investor!

 

(h/t @harrimanhouse)

 

The week in review - stocks and positions

The week in review - stocks and positions

 

At the end of each week I will briefly list some investment positions that I am - or have been - active in over the last week.  Again, the rationale is to share process and thoughts.  You know the disclaimer to the right.  

Long / added to / closed -
Cisco - post the investor day, structural themes remain in place and balance sheet engineering opportunities (returns to shareholders etc) attractive;
RSA - third warning and CEO resignation provides opportunity to double position.  Discount to a reasonable sum-of-the-parts now material;
Standard Chartered - continuing to add each new £1 down on the share price, this time in the 1290s share price range;
Telecity - following analysis, initiated a starter position;
Tesco - identified the sub 330p share price range as a level for capital appreciation focused add level;
Timken - pair established with SKF after analysis;
Vedanta - formal news of FTSE100 exit and sub £8 share price provided opportunity to add;
Vivendi - share price weakness due to French mobile concerns provided the opportunity to add
 

Short / sold -
FTSE100 index - augmented index short, following some of the trading above, to keep overall position exposures under control;
SKF - pair established with Timken after analysis
 

Unless otherwise mentioned, positions from previous weeks have been maintained.   Please see the other weekly trading summaries for details (under the label 'trades'). 

Vivendi – finally breaking up is the easiest thing to do

Just when you give up hope two deals come along in the same week.  Just last month Vivendi could make this sort of representation at an investor conference about the range of their activities:

After the announcements this week Activision Blizzard and Maroc are likely to soon be no more. 

The EV of Vivendi today is Euro34.5bn. 

The Activision deal will provide Euro6.2bn in cash and an on-going stake worth c. Euro1.5bn+

The Maroc deal is apparently worth Euro4.2bn. 

So the ‘stub’ value of ongoing Vivendi is Euro22.2bn

So what is left?

Take a look at the Q1 earnings breakdown:

 
The likely four continuing divisions (Canal+, Universal, SFR and GVT) had cumulative Q1 13 ebita of Euro665m.  GVT (rural Brazilian broadband) is a growth asset and we – allegedly – had that big offer from Softbank for Universal (US$8bn anyone?!).  SFR has its structural pressures though.  This has sum-of-the-parts written all over it. 

If we use the company’s own guidance (given after the Q1 numbers) –

 

Universal – I still have that alleged Softbank offer in my head.  Let’s go with half the level they allegedly offered.  So that’s Euro4bn.

SFR – it is under pressure.  X4 ebitda provides some suitable conservatism.  So that’s Euro11.6bn

GVT – over the last year allegedly the company has turned down Euro6bn offers.  With 20%+ revenue growth I can see this being justified.  Let’s be conservative and go with Euro6bn

Canal+ - x8 Ebita gives Euro5.5bn approximately

Add this up and you get Euro27.1bn value for the stub.  Another Euro5bn odd on Vivendi’s share price is equal to around a 23% uplift…that’s Euro19.6 a share versus just under Euro16 a share at the Thursday close. 

Vivendi’s management have this opportunity in their grasp.  Will they grab it?  Long-suffering investors will be pleased with the announcements this week, now the company just has to finish off the job.