"2017 in a nutshell: rampant IPOs and deals that don't work out"

I wrote a piece titled...

"2017 in a nutshell: rampant IPOs 

and deals that don't work out"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

Another management team grasps share price defeat from bid approach glory

After writing in late August about the ability of the management of Syngenta to grasp defeat from the jaws of share price victory by turning down the attractive Monsanto bid (link here) it appears that we have another example in an akin agriculture and related space with the news that Potash Corp have withdrawn their bid for K+S.  Or as this article  puts it:

·         Canadian fertilizer producer cites lack of engagement with K+S

·         Probe said to stoke concerns over need for due diligence

Oh dear me.  Suffice to say - just like Syngenta before them - K+S' share price has headed sharply south today:

Yes, a price in the Euro23s is right back near the 2015 YTD lows and over 40% below the high achieved in the halcyon post-bid days in late June/early July.  

I noted in July that Potash Corp would probably have to go hostile to grab hold of K+S and even worked out a notional bid level of Euro45/share 

'But - for control...Potash Corp are going to have to bid Euro45+ for a chance to own K+S.  As the latter's management noted on today's conference call when asked about a more dynamic scenario like a hostile bid: 

'the shareholders have to decide...and we will respect their decision' '

I also observed that:

'All of these are ifs and buts though because any broader tension in the potash (especially) market moves around that division's multiple/valuation materially'

And hasn't the volatility in both financial and agricultural markets done just that and to such an extent that a few weeks ago after global fertiliser peer Mosaic profit warned I observed (link here):

'...from today's perspective K+S shareholders should have bitten the hand off of Potash Corp at Euro41+ a share'

Of course - to be more precise - K+S shareholders should have sold their shares in the market as the company's management were unwilling to work with the bidder - and this risked problems.

Bids have issues especially in volatile markets but this semi-arrogant unwillingness of management teams to engage is doubly problematic.  Sure they have pride at stake but ultimately to refuse point-blank to open the books up to clearly well-financed bidders is ludicrous - and shareholders need to steer clear / sell their shares in such a situation.

As noted in the link in the first paragraph of this piece I replaced the Syngenta shares I had sold on the announcement of bid after the proposed Monsanto deal fell away. I am not a K+S shareholder (and have not been for many years) and the company's (in my opinion) non first tier position does not attract me at prevailing prices.  I have looked at Potash Corp shares before and in a separate article during the week will look at them again given they are still kicking around levels last seen at the nadir of the global financial crisis...

...my major thought however is for shareholders to be very cautious of management teams who do not engage.  There is one aspect to be fighting for the best deal (which should in any case be put to a shareholder vote) it is quite another to not even meet to discuss the bid approach with the potential acquiror.  As both Syngenta and K+S incumbent management will now find out unless they can pull some financial rabbits out of the corporate hat shareholder agitation is highly likely at upcoming quarterly results/AGMs.  

So what to do about Syngenta now that Monsanto have walked?

Syngenta shares have been volatile over the last couple of days following the announcement that Monsanto is not going to proceed with a bid.  And where did the company's shares end up?  Pretty much back to the levels seen in the March-May period before there was even a hint that Monsanto may be interested.

I chatted about top-slicing above the CHF400 level (link here) back in May and enacted this for my pension fund back then.  So should I rebuild the position or not?

Looking a touch further back in my notes I wrote in April (link here) that a fairer value for the Syngenta shares (pre any Monsanto bid talk) was US$70-80 a share...or the equivalent of c. CHF330s-380s which implies that the shares are at least a little cheap.  

Of course no surprises with this given that not only are quite a few shares 'at least a little cheap' at the moment but the credibility of the Syngenta management surely has to be in question today given they turned down a bid which could have been worth deep into the mid CHF400s a share on behalf (and without consulting) Syngenta shareholders.  

Why did they turn the bid down again?  As per Syngenta's press release: 

The 'sufficient clarity' aspects seem slightly strange given that my understanding (via Monsanto's comments) was that the Syngenta management refused to meet with any of Monsanto's representatives where many of these issues could have been progressed or maybe even cleared up (despite noting they 'engaged with Monsanto in good faith'). 

Possibly the most interesting aspect is the second paragraph which notes that the company is 'committed to accelerate shareholder value creation'.  I previously have noted the company's lowly geared balance sheet combined with good pricing power and some strong market positions plus a fairly extensive cost cutting programme. I believe there is good scope to augment the current 3.4% dividend yield for a start. 

Inevitably there is going to be little news until the company's Q3 results but at this point I think risk-reward is good for the simple reason that surely something is going to come out of this approach even if it is a revolt against the current Syngenta management by shareholders.  I like the underlying agriculture and related themes behind the shares and am happy to re-augment my position to put it back to how it was before the Monsanto approach earlier this year.  

So embrace the volatility and buy.  

Potash Corp: look at the target more than the acquirer

Potash Corp's numbers today of course was about more than just their own business.  As I detailed here a few weeks ago the company's bid for the German sector peer K+S inevitably raised some questions.  They talked about 'diversification' as a rationale for the deal there plus the advantages of infrastructure and distribution for the build-out of the Legacy K+S asset and that their Euro41/share offer is fair and full.  I would disagree as I talked about at the above link.  They will have to go hostile and possibly bid up.

Unsurprisingly management preferred to keep the main focus of the call on the Potash Corp business.  Here there was both good and bad news.

The better news is that China remains 'strong' and they believe there will be a record year of imports.  However note that sequentially 2014-2015 only China and India are expected to see better shipments...but even this was couched a little bit with some acknowledgement of macroeconomic uncertainty.

Reflecting this and some general negative commodity impacts (including US/Brazil weakening demand, greater competitive supply environment) they tweaked down the top of their FY15 earnings range.  The last time I wrote specifically about the company (link here) I talked about a sub US$30 a share level as being of interest from a value perspective.  During the last month we have slipped back below this level (and as noted in the 10 year long chart below back down to levels not seen since the dark days of 2009)...

...but my fears re the next stage of the K+S bid keeps me a little cautious despite the current 5%+ dividend yield.  

My instinct more at prevailing is to look for opportunities to buy K+S below the Euro35/share level in the potash space per se...

McGraw-Hill - good quarter, expensive deal: what price to buy the shares?

I was right to dub the McGraw-Hill Financial stock a 'worth thinking about' moniker in my last formal write-up on the stock in April last year (link here) with the share cruising up from US$75 then to around US$100 today:

Today's quarterly numbers from McGraw-Hill were perfectly solid with strong margin progression across all their key operational units...

...and very strong cash flow ex regulatory and settlement payments (the latter which reduce uncertainty - see previous link for more colour on this aspect of the company's profile).  

However uppermost in the corporate reporting today was the announcement of a significant acquisition by the company of SNL for c. US$2.22bn...

...a business which looks quite complementary with the core McGraw-Hill Financial businesses especially due to the high inherent renewal level: 

What I did note, however, is that the run-rate annualised synergies (in four years time!) are only just over 3% of the total consideration and that on a GAAP basis accretion only comes in 2018.  

To me this indicates a pretty firm underlying price despite some of the benefits noted above. 

Even though some of the consideration is being met via higher domestic US debt (as some of the net cash pile of the company is held overseas) I would still inherently rate McGraw-Hill as an inherent growth business with a good balance sheet - or a c. x14 EV/ebit multiple profile.  Applying this puts the first interesting level for the stock at about US$90 taking into account the deal and some residual regulatory pressures/issues.  That feels like the first level to buy some shares...and I am not surprised to see the stock off 4-5% today on the announcement of good Q2 numbers but a complementary/a bit expensive deal.  

"If Monsanto wants Syngenta it is going have to bid higher"

My latest post as a Yahoo Finance Contributor titled 'If Monsanto wants Syngenta it is going have to bid higher' can be found here.

Potash Corp are going to have to go hostile if they want K+S

Continuing the agricultural sector attempted M&A (which kicked off with Monsanto's approach to Syngenta - as most recently discussed on Financial Orbit here) was the approach last month by Potash Corp listed in the US/Canada to buy Germany's K+S.  Earlier today K+S formally rejected Potash Corp's Euro41 a share approach noting on a conference call that:

• 'Strongly believe proposal should be rejected...'
• 'their bid is opportunistic'
• 'not convinced has a sustained approach in continued our potash and salt activities' 
• 'does not reflect fundamental value'
• 'not in best interest of stakeholders' 
• 'the K+S business should be valued from a sum-of-the-parts perspective'
• completely disregards value of the Legacy project (a K+S expansion project in Canada) which they observe has a book value of Euro11 with a DCF Euro21 and an operational/financial profile of the site being commissioned from summer '16, being cash flow positive in FY17 and generating positive ebit from FY18 onwards

I thought however in the conference call Q&A the real nub of the Potash Corp approach came to light with the observation following an analyst comment that a prospective 'fair summary' would be that following a takeover there would be the potential closing of K+S' German mines to expand production in Canada. 

Dispassionately this makes huge sense.  I have talked about Potash Corp a number of times on this website over the last 18 months plus and noted near the end of last year (link here) that 

'the key becomes cost control/having first quartile assets. This is undoubtedly one of Potash Corp's strong points.  Let's not forget this was one reason a few years ago BHP Billiton made a bid for the company so good to see ongoing cost control.  As with any mining company that's hugely important if there is a risk of supply/demand imbalance'

On the conference call K+S talked about their Legacy mine (which is based in Canada) having production costs of C$90+ (pre depreciation and amortisation undoubtedly) which would make it potentially competitive with the Potash Corp output.  Now given K+S muted versus history returns at the moment despite selling their potash output at over Euro300/t allows you to fairly easily back out that the German plants are higher cost. 

So you can see where the battle lines are being drawn.  It seems pretty obvious to me that Potash Corp are going to have to appeal directly to the shareholders if they want to buy K+S.  

Therefore, what is a reasonable price for K+S?

Well the company is the number one salt company in the world and even though the clearly weather influenced de-icing business is material, this is a sensible business with a solid demand profile.  Certainly Euro500m of ebit at a x10 multiple for a Euro5bn valuation is not madness.  

Then we have the potash division - with its German historic focus and Canadian potential.  As I observed at the above link, Potash Corp the industry leader is valued at around x14 forward EV/ebit. Even though there is a 'control premium' to acquire the Legacy asset I think if you pay more than x10 ebit for the K+S potash assets you are overpaying given the aforementioned higher cost nature of the German assets (not to mention the global supply/demand tension that still exists - after all who could forget this).  So for me the value of the division is around Euro7bn.  

Of course there is Euro1.6bn worth of debt which given the Legacy build-out costs I believe will push overall company net debt to Euro3bn+ over the next year.

So adding these numbers together I get c. Euro9bn.  And the current market cap of K+S?  A little over Euro7bn...so you could justify a Euro45+ price.

All of these are ifs and buts though because any broader tension in the potash (especially) market moves around that division's multiple/valuation materially. 

But - for control - I think the above is fair.  So to my mind Potash Corp are going to have to bid Euro45+ for a chance to own K+S.  As the latter's management noted on today's conference call when asked about a more dynamic scenario like a hostile bid: 

'the shareholders have to decide...and we will respect their decision'

So what do you do?  A bit like my above linked Syngenta-Monsanto analysis you have to scenario attribute.  A 50% chance of Euro45 and an equivalent chance of a return to Euro30 gives a blended price of Euro37.5...or basically today's share price.  Therefore to me ceteris paribus below Euro35 looks an interesting price to be getting involved with K+S on a semi-speculative nature.

"Telecity’s epic last year ends with a takeover: another reason to think thematically"

I wrote a piece titled "Telecity’s epic last year ends with a takeover: another reason to think thematically" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"Shell’s late Easter present for BG shareholders"

I wrote a piece titled "Shell’s late Easter present for BG shareholders" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"FedEx-TNT Express: a clever deal or empire building?"

My latest post as a Yahoo Finance Contributor titled "FedEx-TNT Express: a clever deal or empire building?" can be found here.

"Dow Chemical: another piece of impressive deal making"

My latest post as a Yahoo Finance Contributor titled "Dow Chemical: another piece of impressive deal making" can be found here.

Telecity's deal with Interxion is worth a look

The last time I wrote directly on Financial Orbit about the data centre operator Telecity was thirteen months ago (link here) although since then I have written indirectly on the stock a number of times (see for example here) most recently when news of a potential link-up with its American listed peer Interxion was mooted a month or so ago. Today's more definitive agreement adds to my confidence with the stock.  Here are some conference call notes I put together: 

Continuing management certainly optimistic:

‘company in a unique position’

‘transformational opportunity to drive growth…biggest European data centre footprint’

Deal terms unchanged from a month or so ago.  Interesting to see at the current share prices Interxion shareholders will receive Telecity shares worth the equivalent of US$32.6 (or c. 8.7% above the current Interxion share price).  

Combination makes good sense on paper…

…and in a geographical map (‘overlap in the larger markets’):

‘Flash’ combination (pre synergies).  For context if the split is 55% Telecity, 45% Interxion then the value of ‘the combined group’ is c. £3.4bn.  Statically x14s EV/ebitda but this should come down relatively quickly.  Assuming synergies as below plus some growth into the x12s by the end of FY16e is definitely possible. 

Synergy phasing well worth noting, essentially a third in the first full year, all by 2018.  Note the third box where areas such as debt and tax optimisation will be considered. 

‘worked together over the last four weeks to further refine these synergies’

‘clear commitment to returning cash to shareholders’

The buyback if fully imposed should, as per the conference call, take 3-4 years which at c. 23% of implied market cap suggests a buyback equivalent of 5.5-7% of share capital per year.  Add on some dividend (call it c. 2% yield) and the return of cash to shareholders could be quite attractive. 

Quick reminder on the proposed management structure going forward -

Q&A –

‘Global footprints start with regional excellence…certainly not the end of our ambitions’

‘very comfortable’ with regulatory requirements

‘each of us have developed skills most appropriate to our customer base’

Noted Telecity 100% funded by bank loans whilst Interxion is more focused on corporate debt.  Still more work here to optimally combine these.  ‘You should see more updates in the future’.  Didn’t want to comment beyond ‘clear upside’ on tax rate question

Preliminary discussions started a year ago. 

Synergies – ‘all we have addressed is the short-term’

Capex synergies – ‘pleasantly surprised’ by how much they could do after looking at the two companies 

‘Long-term what we want is a piece of those orders that come from the United States and that we do not get…and it is large’

Concluding thoughts -

I like this deal and think it makes a lot of sense.  The forward multiples are not super cheap but the theme is strong based on growing data requirements and clear barriers to entry re getting involved in the space.  You need to take some element of a leap of faith re the valuation but if you believe they will hit the synergies the valuation will move from the x12s EV/ebitda FY16e to the x10s FY17e and single digit FY18e.  With explicit commitment to buybacks/enhanced dividends (as per the numbers in the text at a high single digit FCF yield) I think this is a buy and that the near 1000p level achieved just post the initial deal announcement in February will ultimately prove to be a new support. 

"Big cap deal smackdown: Glaxo and BT Group"

I wrote a piece titled "Big cap deal smackdown: Glaxo and BT Group" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Asia and charts today - Russia, China, Japan, Greece, the Fed and M&A

Got to start with Russia – rouble kicking around 70-72 versus the US$ currently versus low of 80 yesterday so a bit of relative stability there at the time of writing.  Meanwhile in terms of the impact still lots of interesting spillovers.

From an economic growth perspective the Russian central bank are predicting a….2017 bounceback

 

In terms of overspill onto other countries there are no huge surprises re the relative ranking of European countries most impacted with the exception of Netherlands and the UK having a bigger potential impact than that on Germany (doesn’t include gas supply though).

US exposed names list (at the stock level) kind of interesting too

 

In Asia given events elsewhere, less of overt interest.  China is at a new 4 year high today but the most striking chart there must be this one from Fast FT which notes the premium Shanghai listed shares are trading at versus dual-listed Hong Kong equivalents:

What else?

Japan – In hopes of spurring pay hikes, Japan is leaning toward reducing the tax burden on businesses that increase wages by 3% or more as part of a corporate taxation overhaul next fiscal year.  Actually very sensible…as need to get wages up.  The trouble is fiscal side so poor more tax breaks not ideal!

Surely the biggest story in Japan today however is this one...

Fed later -

Hilsenrath Analysis: Fed Unlikely to React Aggressively to Russia Turmoil (link here)

US corrections above 5%...average of 9% in total

Greece – Samaras apparently 20 votes short for vote #1 later in the day

High yield outflows - 

M&A -

Asia today and charts today - internet economy, China, India, M&A, European bonds, Australia & iron ore

A few charts and related which interested me so far today.

Obligatory Apple relative market cap chart.  Even adjusting for the growth and growth of the internet and related economy does homing in on Singapore seem right?!

(h/t @ianbremmer)

As many tweeters so far today have noted, despite the rise of the internet economy, this was the view many of them were getting at the China World Internet Conference

(h/t @PaulCarsten)

Disinflation continues...and when combined with European malaise this graphic from today's Financial Times is unfortunately not surprising.  Still...a 1.01% yield is not a lot.  

In related news Japan's 2 year bond yield turns negative after an auction today.  The malaise continues and to square the circle of the Japanese economy is going to be difficult snap election/sales tax hike postponement or not...  The yen-dollar rate is down to the 117s (and I believe 120+ is the next step).  

Other falling prices include the iron ore commodity price 

(h/t @gregorymckenna)

The potential impact of this across the Australian mining sector nicely captured by @linzcom

Don't forget how important iron is to the Australian economy:

A few final charts.  Will 2014 beat 2007 for M&A magnitude?

The OECD issued a quite positive report about the Indian economy (link here)

Will India grow faster than China by 2016?

Perhaps such fading momentum is why the really big recent central bank balance sheet expander are...the Chinese?