Lex Populi is a brand new FT Cash column from Lex, the FT’s every day commentary service on international capital. Lex Populi goals to supply contemporary insights to seasoned non-public buyers whereas demystifying monetary evaluation for newcomers. [email protected]
Mergers and acquisitions generate headlines for corporations, payouts for banks and limelight for executives. However savvy shareholders must be cautious of huge, flashy takeovers. Their contribution to worth creation is extremely questionable. Most seem to destroy long-term shareholder worth.
Take Vodafone’s €190bn (£167bn) deal to purchase the telecom belongings of Germany’s Mannesmann in 2000. The deal stays the costliest takeover on file. Vodafone inventory has since misplaced 70 per cent of its worth.
Or take a look at AB InBev’s deal to purchase SABMiller in 2016 for $70bn. Shares on this planet’s greatest brewer have by no means recovered.
Profitable acquisitions usually tend to be small, low-key affairs. A master of what’s often called the “bolt-on” technique is UK-listed distribution group Bunzl. Since 2004, the group has accomplished 194 acquisitions. This week it confirmed revenues throughout 2022 can be 17 per cent higher than final yr.
Bunzl specialises in distributing working capital objects akin to napkins for eating places or needles for hospitals. It operates the world over and in many alternative sectors.
In a fragmented market, a number of small, family-run companies are ripe for consolidation into Bunzl’s decentralised system. Within the 5 years to 2021, the common measurement of a Bunzl deal has been £40mn. That’s peanuts in contrast with the megamergers Lex often writes about. Nevertheless it has been profitable for Bunzl shareholders.
Revenues from delivering on a regular basis objects has risen roughly in keeping with broader financial progress. Natural annual income progress has averaged 2.4 per cent since 2006. Bolt-ons present a value-added enhance. Development rises sharply to eight.3 per cent yearly as soon as acquisitions are included.
The result’s a wholesome 19 per cent common return on capital invested. That is comfortably forward of the group’s weighted common price of capital of 6-8 per cent. Because of this, Bunzl shares have returned 225 per cent over the previous decade and have comfortably outperformed the FTSE All-Share index. Self-discipline is required to keep up this efficiency.
When offers fail, it is actually because personally bold chief executives pay an excessive amount of. Vodafone took over Mannesmann at a value that was an unbelievable 50 occasions earnings earlier than curiosity, tax, depreciation and amortisation. Today, telecoms shares are fortunate if they’ll break into double-digit ebitda valuation multiples.
One advantage of Bunzl’s “suppose small” technique is that value self-discipline is less complicated when there’s a multiplicity of potential distributors. The corporate, a former maker of cigarette filters which was derided as “Bungle” in unhappier occasions, has usually paid between 6-8 occasions ebitda. It has maintained that all through the cycle.
Bolt-on offers even have the benefit that they are often systematised. The purchaser establishes a routine of shopping for up smaller opponents, integrating them and reducing prices to boost margins.
Many acquirers begin out with this plan however get carried away with the lure of larger and larger offers. Such has been the destiny of many “roll-up” methods, that are much like bolt-on M&A however with a higher tendency to finish in tears.
Take UK software program roll-up Micro Focus. It constructed a sound popularity buying previous software program belongings and taking out prices. That worked well till it bit off greater than it may chew shopping for Hewlett Packard Enterprise’s software program enterprise for $9bn in 2017. Because it struggled to combine the corporate, buyers offered up.
Massive takeovers stay a temptation for firm bosses. Extremely paid bankers promote them adeptly. Government pay offers comprise components that may be boosted with a giant debt-funded takeover. After reaching file heights in 2021, massive ticket M&A has been placed on pause. It should finally return. Shareholder warning is prudent.
PrimeStone chucks a rock
Activist investor PrimeStone appears to agree with Lex on massive offers. It opposes plans by Brenntag, the world’s largest chemical distributor, to purchase its quantity two peer Univar. PrimeStone thinks a bolt-on technique would produce higher returns.
Costly takeovers are sometimes justified on the grounds that they save prices or create income “synergies”, for instance by way of cross-selling. However that will depend on clients staying put. London-based PrimeStone is sceptical they may achieve this if Germany’s Brenntag combines with Univar of the US.
It’s simple to see why a deal appeals to Brenntag management. Provide chain turmoil in the course of the pandemic has boosted earnings. That impact is now fading and shares have been slowly deflating. A significant takeover may carry with it the possibility to chop prices and push up margins.
However PrimeStone, which holds 2 per cent of Brenntag’s shares, thinks this logic is flawed. It believes a deal would as an alternative set off an exodus of consumers spooked by the danger to their provide chains of swapping two suppliers for one. Some may defect to unbiased distributors. The activist says precisely that occurred after Univar acquired rival Nexeo in 2018, erasing some $220mn of natural ebitda over the course of the years following.
PrimeStone, co-founded by ex-Carlyle executives, bases its views partly on the best way chemical compounds are distributed. Bulk and speciality chemical compounds are dealt with in another way. The latter are typically distributed by way of unique contracts. The previous are offered by way of extra of a free-for-all. It’s right here that buyer threat is concentrated.
The activist believes Brenntag ought to break up itself right into a bulk chemical compounds group and a speciality chemical compounds firm. Pure play teams of the latter sort command considerably larger scores; IMCD and Azelis commerce on 22 occasions ahead earnings in opposition to Brenntag’s 9 occasions.
Lex calculates that spinning off speciality chemical compounds would add round one-third to the present group worth of €8.8bn. Over two-fifths of Brenntag’s earnings originate from this division. Development may then circulation from smaller bolt-on acquisitions. Lex sides with tiny PrimeStone in its face-off with mighty Brenntag.
