Here are some breathless headlines from various news outlets on Thursday night:
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We’ve talked about equity collars before in stock-for-stock M&A transactions. The idea is that the selling shareholders who are worried about downwards movements in the stock price of the acquiror, get an upward adjustment in the exchange ratio if the acquiror’s stock price falls. Such collars are typically symmetrical so if the acquiror’s stock price rises, the exchange ratio is then adjusted downward.
The Coty/P&G Beauty brands combination from last week provides a rare example of a collar on debt. Coty is combining with the P&G businesses in a so-called Reverse Morris Trust. P&G will separate the unit and then combine it with Coty so that P&G shareholders will own 52 per cent of the new Coty. That proportion is crucial. Because P&G shareholders maintain control, the transaction is tax-free at the corporate and shareholder level.
Towers Watson management just may know what they are doing even if the company’s shareholders do not seem to have much confidence in them. Last week Towers agreed to combine with insurance broker Willis Group in a tie-up that created a company with a combined value of $18bn. Its shares fell sharply in response, and have only recovered part of that drop.
Uber is fundraising at a $50bn valuation; Airbnb at $20bn. Are private tech companies getting massively higher valuations than would be justified in public markets? A recent slideshow from a partner at venture capital firm Andreessen Horowitz argues that, no, there is a not a bubble – at least not anything like the last bubble. Join the Lex team and other FT writers from 5pm to 6pm London time as we dissect this argument. We’d love to hear your thoughts too – comments welcome.
Colt Defense, the US gun maker that filed for bankruptcy protection on Monday, had tried to get its bondholders to accept a haircut by showing them just how poorly they would fare should the company have to liquidate. The idea was that bondholders should accept the company’s 45 cents on the dollar offer as a part of a debt restructuring where the company would survive and go forward. Otherwise, bondholders would get nothing in the event that company just held a fire sale for its assets.
Here’s the value of its assets Colt presented:
Just-Eat offered to pay £445m (A$867m) for Australian take-away delivery company Menulog. That’s a whopping 371 times earnings (before interest, taxes, depreciation and amortisation). Using last year’s results as a starting point, what does Menulog need to deliver to make that price reasonable?
Our initial calculations of what Menulog needs to deliver were challenged by some Lex readers… and while Lex is never wrong, we are willing to become more right, if given the opportunity. So the analysis below has been changed since it was initially published (the changes are detailed at the bottom for anyone interested).
So maybe things are starting to get a little overexcited in Hong Kong. We notice two recently listed micro cap companies that have had stratospheric rises.
Firstly Yan Tat Group, a printed circuit board manufacturer with revenues of $86m. In 4 days the market capitalisation had gone from just over $300m to a high on Friday morning of $3.2bn. At that high, the share price was up over 3 times versus Thursday’s close. At pixel time, however, the share price was down over one third from Thursday’s close and falling. That is an intraday swing in market capitalisation of $2.5bn.
Lex has a tricky realtionship with go-go e-retail businesses. Their valuations – that is, the relationship of their stock prices to their profits – imply long-term growth rates inconsistent with the normal competitive pressures in retail. So mostly we make surly comments about them. There is, however, another side of the story. Online retail leadership does seem to persist. So in a recent note about Ocado, the UK grocer, we departed a little from our previous dour tone, and tried to articulate the bull case. Here is our summary:
[sceptics about Ocado's valuation] have failed to accept the core principles of online retail investors. Namely that much more of the market will convert to online; that the leader online, because of economies of scale, will never be overtaken by the also-rans; that margins online will expand beyond those of the traditional competitors; and that the bricks-and-mortar leaders will never become digitally competent. Accept this catechism, and all else follows. It is easy to doubt the four together, but in Ocado’s case, no one of them is obviously wrong, either.
Last week Lex kicked around the possibility that BT would spin off or otherwise separate its network division, Openreach. BT’s competitors, such as TalkTalk and Sky, depend on Openreach’s wires. They suggest that BT is (to exaggerate their view slightly) under-investing in the Openreach network and using the monopoly profits from it to subsidize its other businesses. It’s not very clear to Lex that a spin-off would lead to better service. But whether it would or not, Claire Enders of Enders Analysis has pointed out another little problem with the spin-off idea: that BT’s mountainous pension liabilities make it effectively impossible. She writes:
In any spinoff of Openreach, the government would have to consider whether to keep the pension fund obligations with BT, spin them off with Openreach, or split them between the two. The pension fund trustees might have to approve the plan, or at least set conditions for it. Crucially, the Crown Guarantee would also have to be considered.
Amazon’s free cash flow looks great – from a distance. On close inspection, the ecommerce company’s use of capital lease obligations obscures the vast scale of its capital expenditure, This in turn makes free cash flow look much rosier than it would if the true costs of running the business (such as principal repayments on capital lease obligations) were to be included.
At Lex, we always have a soft spot for those readers who agree with our views. Thursday’s Lex regarding Dan Loeb’s Third Point and Japan’s Fanuc attracted these comments from Jean Medecin, member of the Investment Committee at Carmignac Gestion, an investor in Fanuc. Carmignac have €50bln AuM.
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