2 Huge Deals as M&A Accelerates
RJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In one of the more surprising deals in some time, pork producer Smithfield Foods (NYSE: SFD) sold itself to Chinese meat producer Shuanghui International for $4.7 billion, or $34 per share in cash. The price represents a 31% premium to the previous day’s closing price. While American pork consumption languishes, the Chinese have a healthy appetite for the meat. Shuanghui will be able to take excess pork supply to the U.S. and deliver it to China. Since it should increase demand for pork globally, we could see competitors like Tyson and Hormel benefit from higher prices industry-wide without resorting to slaughtering excess hogs.
Even though it is an all cash deal, U.S. regulators could throw a wrench in the deal. Relations between the two countries are mediocre at best, and we are sure the Committee on Foreign Investment will be extremely cautious in allowing a Chinese company any access to the U.S.’ food supply-chain. Smithfield will look to alleviate these fears by leaving the existing management team and facilities unchanged.
Shuanghui has also agreed to honor all existing labor agreements—a major selling point for several Congressional members. Still, a Chinese company purchasing an American company drums up fears of encroachment and security concerns. Shuanghui has had issues with food safety in the past, as it was found to have purchased hog feed tainted with clenbuterol; a drug often used to increase the muscle/fat ratio in animals (including humans). Thus, we could easily see the Committee on Foreign Investment rejecting this deal.
On the positive side, we doubt the combined entity will have a hard time gaining anti-trust approval. From what we gathered from Anheuser Busch InBev/Modelo, we believe the government is focused on the potential impact on U.S. consumers with little regard for consumers elsewhere. A tie-up between Tyson and Smithfield could materially hurt U.S. consumers, but it is hard to envision a scenario where the Shuanghui/Smithfield merger meaningfully impacts the U.S. consumer. If the deal receives regulatory approval, it could help increase profitability in the pork industry, boosting the fortunes of both Tyson and Hormel.
Valeant Pharmaceuticals (NYSE: VRX) continues its quest to become the largest pharmaceutical company in the world, snatching up eye care giant Bausch & Lomb from private equity firm Warburg Pincus for $8.7 billion. The deal includes $1.5 billion to $2 billion in new Valeant equity, and the rest of the deal will be done with new debt.
For a company with a market capitalization of $27 billion, the deal may seem like a stretch. However, Valeant CEO Mike Pearson is known for his tremendous ability to squeeze every dollar of cost synergies out of a deal. Plus, Valeant exploits its tax loopholes to significantly lower taxes paid on its businesses. When Valeant can acquire a company and reduce its effective tax rates from the mid-30% range to single-digits, it immediately makes deals highly accretive to earnings.
All in, Pearson projects $800 million in cost savings, saying:
“Ultimately, we expect these actions to result in at least $800 million of annual run rate cost synergies between these 2 companies by the end of 2014. As usual, we have not included any cost, revenue or tax synergies in this number. Consistent with our structure, the integration process will be executed in a decentralized manner.”
In fact, CFO Howard Schiller noted that if the deal closed on January 1, it would boost Valeant’s earnings per share 40%. Bausch & Lomb is projected to post about $3.3 billion in revenue and $720 million in adjusted EBITDA, but R&D costs and synergies will significantly enhance the effective price paid by Valeant. Additionally, the firm sees ophthalmic pharmaceuticals as a long-term growth market, so one can imagine that the $3.3 billion will grow over time.
Pearson is compensated only when he achieves results that reward long-term shareholders. His acquisition strategy reminds us of Berkshire in the sense that the company maintains decentralized operations and prevents its corporate overhead costs from spiraling out of control. We admire Pearson’s aggressive capital allocation decisions and long-term vision for the company.
The move comes as Salesforce.com hopes to round out its product offerings, and adding a company largely known for its email marketing platform helps the firm move towards this goal. CEO Marc Benioff, excited about this new acquisition, explained that the landscape is changing, saying on the deal’s conference call:
“There is no doubt our whole industry is changing, and the opportunity to create solutions in sales and service and marketing that are unified, that are mobile, that are social, that are in the cloud, that this combination of these two companies positions us in a way as never before.”
Prior to the deal, Salesforce.com’s marketing platform was known to be relatively weak. While the firm features social media monitoring software Buddy Media, which also fetched several hundreds of millions of dollars, the company lacked an email service, which we believe is critical to any company’s marketing strategy. Unlike social media, where we believe the impact is still largely unquantifiable, e-mail marketing delivers strong data and analytical insights for businesses. In Benioff’s eyes, the deal rounds-out the product lineup and adds value to the firm’s existing offering.
Of course, with any acquisition, price is paramount. The firm paid a premium of about 47% over the prior day’s closing price, and 5.5x consensus FY 2014 sales. Additionally, ExactTarget hasn’t been profitable for several years, and its acquisition will weigh on results. Let’s not forget the company used virtually all of its cash to consummate the deal. Undoubtedly, the deal wasn’t cheap, and we aren’t sure if it will be able to live up to the bold assumptions embedded in the forecast.
Overall, we’re not huge fans of the deal, nor are we at all interested in Salesforce.com’s stock at this time. With ExactTarget off the market, other automated email services like ConstantContact (CTCT) and Responsys (MKTG) could be acquisition targets for other cloud marketing competitors like IBM and SAP.
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RJ Towner owns shares of Valeant. The Motley Fool recommends Salesforce.com. 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!