My M&A Watch List

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I am of the opinion that there are two factors that give sizable value to non-controlling equity positions: dividend yields and good prospects of an M&A deal. That said, I like to look for good companies with either great sustainable dividends or with the characteristics that would attract a potential buyer. Good market positioning, low leverage, and high free cash flow generation are usually very relevant to attract a buyer. Another important feature is being in an industry that is going through a consolidation phase. I will offer two of the companies that currently are in my M&A watch list. They both operate in the materials sector and have great managements.

Crown Holdings (NYSE: CCK), which is 10% up this year, is the world's largest packaging company and the leader in metal packaging technology. With operations in 41 countries the company has an enterprise value of $8.5 billion (net debt is at $3.2 billion and market capitalization is $5.3 billion). With its size, CCK is an ideal target for companies such as Carlyle Group (NASDAQ: CG) or KKR (NYSE: KKR).

The reason can be found in its cash flow generation capabilities: according to analyst estimations the company will be able to generate over $500 million of Free Cash Flow (FCF) in 2013 (a beautiful 10% FCF yield). Of course that FCF yield would be totally sustainable and able to grow. At current prices, CCK trades at 2013 x7.8 EV/EBITDA and x11.2 P/E. Even with its net debt at x2.9 EBITDA and its considerable valuation multiples, I see CCK as an excellent M&A candidate given its unique market position. Besides, CCK offers growth (revenues are expected to grow by 4.5% Year over Year in 2013) within a context of revenue stability (no big jumps) given the market it operates in. Returns On Invested Capital (ROIC) is also great at a stable 22/25% rate. CCK's value deserves its price, and I think there might be many willing to pay for it.

Cytec (NYSE: CYT) shareholders have had a wonderful 2012, with shares up 55%. The company is a global specialty chemicals and materials company focused on developing, manufacturing, and selling value-added products for a broad range of markets. CYT sells its products to sectors ranging from aerospace to the mining industry. With a market capitalization of $3.15 billion the company would not only be a great target for PE shops such as CG or KKR but also for bigger chemical companies such as DuPont (NYSE: DD) - which has a $40 billion market capitalization and lower trading multiples. CYT is a perfect M&A candidate: it generates plenty of cash, offers growth (sales are expected to grow by 17% Year over Year in 2013), low net debt (it will to go back to around $140 million by 2013), and a reasonable 2013 x7.5 EV/EBITDA valuation. If this was not enough, CYT has already started a $650 million buy back program. CYT can be bought, re-levered, and put to work.

As you can see above, both companies share some great characteristics that make them attractive targets. They also both trade in my favorite market capitalization sweet spot: $1 to $8 billion. They are big enough to call bankers and managers attention, but they are not too big for most potential buyers to acquire. Besides, they are growing despite consolidated business lines. Here you may not find cash dividends, but you will find share buybacks and a potential M&A deal premium going forward.


martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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