M&A

  • 28 Nov
    CVS/Aetna deal just got approved – does that make the stock a buy?

    CVS/Aetna deal just got approved – does that make the stock a buy?

    One of the biggest news items of the day yesterday came when CVS Health Corporation (CVS) announced they had received final regulatory approval for their proposed merger with Aetna Inc. (AET). Announced at the end of 2017, this is an intriguing deal, and not just for the massive $77 billion price CVS is paying for the deal that is expected close this week. Combining one of the largest pharmacy companies with another big player in the heath care provider industry offers the promise of a major shift in the way healthcare is offered and delivered in the United States; it certainly seems to put the combined company firmly at the forefront of a change that could leave the rest of both industries scrambling to catch up.

    Earlier this year, pharmacy and healthcare stocks tumbled amid rumors that Amazon (AMZN) was investigating the potential of entering the business as well. That may still happen, and if it does, that should certainly amplify an already highly competitive industry landscape, but a lot of industry reports seem to indicate those fears may be overblown because of the regulatory challenges AMZN would have to hurdle just to make an initial move into the industry. Even if they do, this merger seems like a proactive, forward-looking move by both CVS and AET to set the standard AMZN and every other company is going to have to measure up to.



    CVS is a stock that has performed pretty well this year – especially when you compare it to the performance of the broad market indices. It’s up almost 10% year-to-date, and nearly 13% in the last month alone. It’s fair to say that the biggest piece of that surge has come from enthusiasm about this pending merger; it’s been widely praised by analysts and industry insiders since it was announced. I’ve also seen a lot of analysts labeling the stock as a terrific value, based primarily on forward-looking estimates of what the combined company should be able to do. Some of that makes sense, I suppose; the real problem, of course is that forward-looking estimates are just that, and nothing more. The truth is that integrating two companies is a challenging task – and that is even when the two companies operate within the same market space as usually happens when a merger happens. Merging two companies in related, but completely separate industries is another matter altogether, and so a smooth integration and transition is certainly not a given.

    There is a lot of promise for the future, to be sure, and the fact is that this is a mega-merger between two large cap stocks that are unquestioned leaders in their respective fields. Each company has significant fundamental strengths they bring to the table, and as a combined company, they offer some interesting potential opportunities, such as the expansion of CVS’ existing MinuteClinics to include AET’s clinical capabilities. Those “concept clinics” are expected to start rolling in early 2019, which means investors generally should have almost immediate feedback to work with in trying to analyze the likely success of the merger. What I want to do with today’s post is to consider what folding AET into CVS’s business structure is going to mean from a fundamental point of view, and from there to try to determine if the resulting company is likely to offer a compelling value to work with.



    Fundamental and Value Profile

    CVS Health Corporation, together with its subsidiaries, is an integrated pharmacy healthcare company. The Company provides pharmacy care for the senior community through Omnicare, Inc. (Omnicare) and Omnicare’s long-term care (LTC) operations, which include distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings. It operates through three segments: Pharmacy Services, Retail/LTC and Corporate. The Pharmacy Services Segment provides a range of pharmacy benefit management (PBM) solutions to its clients. As of December 31, 2016, the Retail/LTC Segment included 9,709 retail locations (of which 7,980 were its stores that operated a pharmacy and 1,674 were its pharmacies located within Target Corporation (Target) stores), its online retail pharmacy Websites, CVS.com, Navarro.com and Onofre.com.br, 38 onsite pharmacy stores, its long-term care pharmacy operations and its retail healthcare clinics. CVS has a market cap of $81 billion. Aetna Inc. is a diversified healthcare benefits company. The Company operates through three segments: Health Care, Group Insurance and Large Case Pensions. It offers a range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, medical management capabilities, Medicaid healthcare management services, Medicare Advantage and Medicare Supplement plans, workers’ compensation administrative services and health information technology (HIT) products and services. The Health Care segment consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis and an employer-funded basis, and emerging businesses products and services. The Group Insurance segment includes group life insurance and group disability products. Its products are offered on an Insured basis. AET has a market cap of about $69.4 billion

    • Earnings and Sales Growth: Over the last twelve months, earnings for CVS increased by about 15%, while sales were mostly flat, increasing about 2%. For AET, earnings increased about 20% in the last year. CVS operates with extremely narrow operating margins, as Net Income was only 1.6% of Revenues for the last twelve months and 2.9% in the last quarter. AET has a wider margin profile, with Net Income that was 5.9% over the last year and 6.4% in the most recent quarter.
    • Free Cash Flow: CVS’s free cash flow is healthy, at about $4.3 billion, while AET’s is more modest, and about $550 million. Both companies have good liquidity, with cash and liquids assets for CVS that totaled $41.6 billion in the most recent quarter, and $9.5 billion for AET over the same period.
    • Debt to Equity: CVS has a debt/equity ratio of 1.66. This is higher than I usually prefer to see, but is primarily attributable to the massive increase in debt the company preemptively took on at the beginning of the year when the merger was first announced. Total long-term debt is $60.7 billion for CVS. AET has $7.7 billion in long-term debt, which is almost $2 billion less than their cash. CVS has also laid out an aggressive debt reduction program that they expect to lower the total debt the combined company will be working with to much more conservative levels early in 2020.
    • Dividend: CVS and AET each pay an annual dividend of $2.00 per share. Whether that means that shareholders in the combined company will get to enjoy receiving a $4 annual dividend remains to be seen; my expectation is that the dividend will remain the same on a per-share basis in order to give the combined company more flexibility in managing their debt service.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CVS is $35.97 per share. At CVS’s current price, that translates to a Price/Book ratio of 2.21. The stock’s historical average is 2.48, which offers about a 12% upside from the stock’s current price. There is a more compelling argument to be made for the stock on a Price/Cash Flow basis, since the stock is currently trading more than 35% below that historical average. AET, on the other hand, is overvalued based on both its Price/Book and Price/Cash Flow ratios by anywhere from 5% (slightly overvalued) to 50% (very overvalued). Based strictly off of existing, historical information, I expect the combined company to initially be overvalued.



    Technical Profile

    Here’s a look at CVS’ latest technical chart.

     

    • Current Price Action/Trends and Pivots: CVS followed the broad market quite a bit lower in October, but rallied back above its early October high before dropping back a bit until late last week. The market’s enthusiasm for the merger is giving the stock a nice boost right now. Resistance is right at $80, which is almost where the stock is sitting right now. Immediate support is around $69. A push above $80, to about $82 (or whatever price its recent high translates to once the merger is completed), would mark a continuation of the stock’s upward trend since August, while a drop below $74 would mark a reversal of that trend, with a break below $69 representing an indication a new bearish trend could see an extended run. AET, not shown here, has a completely different technical picture, since the stock has been following a very impressive upward trend since February of 2016 and has more than doubled in price over that period.
    • Near-term Keys: CVS is a stock that by most measurements would be considered undervalued, while AET is overvalued. It seems apparent that CVS is consciously paying a big premium for this deal. The potential to transform the healthcare industry is a compelling draw, and it’s safe to say that both companies believe they can thrive in that effort by doing it together. Does that make the stock a bargain right now? I think a lot of investors are going to be jumping onto the stock with exactly that expectation, so don’t be surprised if you see the combined company experience a pretty nice rally in the short-term, post-merger period. Over the next few months, I’ll be watching the financial results pretty closely, to see if they seem to line up with the story both companies have been presenting for the last year. No matter which way it goes, this is a deal that could mark a big turning point for both industries.


  • 07 Nov
    Big discount + buyout rumors = what for SYMC?

    Big discount + buyout rumors = what for SYMC?

    For most of this year, the tech sector has been one of the most profitable areas of the market to be invested. That’s not all that surprising given that the industry’s performance throughout the market’s extended upward trend since 2009 has been led by this sector. Since the beginning of October, however, this sector has also paced the market to the downside, dropping almost 14% as measured by the SPDR Select Technology ETF (XLK) through October. More →

  • 13 Jun
    FOX: who wins a bidding war?

    FOX: who wins a bidding war?

    One of the biggest stories that had tongues wagging this morning as the stock market opened was a federal ruling late yesterday rejecting an anti-trust appeal by the government to block AT&T’s (T)pending merger with Time Warner Inc. (TWX). Not only did that clear the way for that deal to close sooner than later, it also seemingly could act as a blueprint for a number of other deals going forward. Perhaps the next biggest deal analysts are paying attention to is the Walt Disney Company’s (DIS) proposed acquisition of assets from Twentieth-Century Fox Inc. (FOX). Comcast Corporation (CMCSA) has long been waiting in the background to jump into the fray in competing for those FOX assets, and the AT&T/Time Warner ruling appears to have been one of the last things the company was waiting on to submit their own competing bid.

    A bidding war between DIS and CMSCA could get expensive. When the deal was first announced in December of 2017, it was valued at around $52.4 billion. Without giving away specific numbers or other details, officials at Comcast said that any competing bid for FOX assets would be all cash, and which some analysts suggest could be valued around $60 billion. FOX has set a meeting for July 10 for shareholders to vote on the proposed DIS deal, which differs from the expected Comcast bid not only in value, but also as a mix of cash and DIS shares.



    Who will win? DIS was first to the table, and certainly would seem to have the inside track. The assets they would acquire would fold naturally into multiple existing segments of their business. European sports network Sky, for example gives DIS an way to expand their ESPN sports programming on an international scale they’ve been seeking for some time. The deal also would give them controlling interest in streaming service Hulu, which could simplify the plan they initiated last year to launch their own streaming service to compete with Netflix (NFLX). FOX also controls the rights to Marvel properties like the X-Men franchise, so this acquisition would bring those assets back home.

    Don’t underestimate CMCSA’s potential or desire to buy those assets as well. Comcast is the parent company of NBC, Universal Pictures, Telemundo (Latin American broadcasting, including sports programming), Universal Pictures, and DreamWorks Animation, to name just a few of their business segments. They seem to clearly recognize the need to add even more content and distribution capability, since a deal with FOX could include useful properties like National Geographic, FX Networks and the movie studio. And don’t underestimate the impact of Hulu, since whoever gets control of that service finds a strong foothold versus Netflix and Amazon Prime.

    Looking at a few of the fundamental and value-based elements of DIS and CMCSA could provide some clues about which company could be a stronger position right now. Let’s dive in.



    Fundamental and Value Profile – DIS

    The Walt Disney Company is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The media networks segment includes cable and broadcast television networks, television production and distribution operations, domestic television stations, and radio networks and stations. Under the Parks and Resorts segment, the Company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The studio entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. It also develops and publishes games, primarily for mobile platforms, books, magazines and comic books. The Company distributes merchandise directly through retail, online and wholesale businesses. Its cable networks consist of ESPN, the Disney Channels and Freeform. DIS has a current market cap of $156.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 22%, while sales grew a little over 9%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
    • Free Cash Flow: Free Cash Flow is healthy, at more than $10.6 billion over the past twelve months. Free Cash Flow has been growing steadily, with only occasional, one-quarter dips since 2013.
    • Debt to Equity: the company’s debt to equity ratio is .39, which is a low number. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with healthy cash reserves as well. Total cash and liquid assets are approximately 22% of the company’s total long-term debt. Keep in mind that debt would likely increase if a deal with FOX is completed, but to what extent remains to be seen. The company’s relatively modest debt levels suggests they have room to work with in structuring an attractive cash-and-stock deal, and to engage in a bidding war, as all indications are that DIS will be aggressive in pursuing shareholder’s votes in their favor.
    • Dividend: DIS pays an annual dividend of $1.68 per share, which translates to an annual yield of 1.62% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DIS is $32.35 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.19. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Media industry’s average is 4.6, so DIS’ Price/Book ratio is almost 50% below the industry average and bolsters my argument the stock is being overlooked versus its counterparts right now, despite the buzz surrounding the FOX deal.



    Fundamental and Value Profile – CMCSA

    Comcast Corporation is a media and technology company. The Company has two primary businesses: Comcast Cable and NBCUniversal. Its Comcast Cable business operates in the Cable Communications segment. Its NBCUniversal business operates in four business segments: Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. Its Cable Communications segment consists of the operations of Comcast Cable, which provides video, high-speed Internet and voice services to residential customers under the XFINITY brand. Its Cable Networks segment consists of a portfolio of national cable networks. Its Broadcast Television segment operates the NBC and Telemundo broadcast networks. Its Filmed Entertainment segment primarily produces, acquires, markets and distributes filmed entertainment across the world, and it also develops, produces and licenses live stage plays. Its Theme Parks segment consists primarily of its Universal theme parks in Orlando, Florida and Hollywood, California. CMCSA has a current market cap of $150.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 17%, while sales grew a little over 11%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
    • Free Cash Flow: Free Cash Flow is healthy, at more than $11.4 billion over the past twelve months. Free Cash Flow has declined modestly since the third quarter of last year, but has increased about 25% since September 2016.
    • Debt to Equity: the company’s debt to equity ratio is .90, which is generally manageable. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with adequate cash reserves as well. Total cash and liquid assets are approximately 9.5% of the company’s total long-term debt. Comcast has indicated that any bid for FOX assets would be all cash, and since analysts are predicting that could be as high as $60 billion, the company would certainly have to raise debt to do it. Considering that their total long-term debt right now is more than $63 billion, a successful bid would make CMCSA the most highly leveraged company in the industry.
    • Dividend: CMCSA pays an annual dividend of $.76 per share, which translates to an annual yield of 2.35% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CMCSA is $15.22 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.12. I usually like to see this ratio closer to 1, or even better, below that level, but industry-based averages above 1 aren’t uncommon. CMCSA’s Price/Book ratio is only slightly below the Media industry’s average of 2.2, but it is also below its historical average of 2.7, suggesting the stock is discounted right now by about 21%.


    By Thomas Moore Disney Investiv Daily M&A
  • 27 Jan
    What See’s Candy & WhatsApp Can Teach Us About Creating Shareholder Value

    What See’s Candy & WhatsApp Can Teach Us About Creating Shareholder Value

    • Stock option compensation rewards management if the market does well, business performance is almost irrelevant.
    • BlackRock and Vanguard are becoming more assertive in the implementation of better governance policies. However, it seems it’s only a rhetoric given that they own 9% of corporate America.
    • Two examples show how CEOs can have opposing attitudes toward shareholder value.

    Introduction

    Today, we’ll dig deeper into corporate governance as it’s essential for our long-term investment returns.

    We’ve already discussed how buybacks mostly negatively affect long term shareholder value. But apart from buybacks, there are other interesting, more subtle issues that can help us lower our risks and increase returns.

    We’ll analyze what Larry Fink and William McNabb have to say about corporate governance, and we’ll look at a few examples of how CEOs manage their companies in order to show examples of good and bad practices. More →

  • 15 Dec
    This Could Push The S&P Even Higher

    This Could Push The S&P Even Higher

    • The market looks overvalued but there are three main factors that could push it even higher.
    • A repatriation tax holiday could make $2.1 trillion available for dividends, buybacks, and M&As.
    • Economic growth and inflation could push earnings higher, further inflating stock prices.

    Introduction

    It seems that everyone agrees on the fact that this market is overvalued and borderline irrational. However, there is no correction in sight and the only question to be asked is “how high can this market go?”

    The S&P 500 has jumped 5.4% since Trump won the elections, and is 12.1% higher year-to-date. By adding in the 2% dividend yield, we arrive at an excellent 14% return for 2016. This year’s positive return will make it number eight in a row for the S&P 500 as it has been rewarding investors since 2009. More →

  • 01 Dec
    The Chinese Are On A Buying Binge. Will Your Portfolio Benefit?

    The Chinese Are On A Buying Binge. Will Your Portfolio Benefit?

    • Positive long term outlooks, sharp technologies, interesting metals, and strong brands are what the Chinese are looking for.
    • The boom in Chinese acquisitions isn’t expected to stop as economic growth and development continues.
    • The Syngenta AG acquisition offer was made at a valuation over 30.

    Introduction

    We all know China has been growing rapidly in the last 30 years. What many don’t know is that through this growth, China has become the second largest global economy and is expected to become the largest global economy by 2030. More →

  • 28 Oct
    Is Merger Arbitrage A Good Bet For The AT&T – Time Warner Deal?

    Is Merger Arbitrage A Good Bet For The AT&T – Time Warner Deal?

    • With merger arbitrage, the biggest risk is always that the deal may not go through.
    • The market is currently giving the AT&T – Time Warner deal a 40% chance of success.
    • We’ll share some merger arbitrage insights from Warren Buffett.

    Introduction

    The announcement of the AT&T (NYSE: T) acquisition of Time Warner (NYSE: TWX) in an $85 billion cash and stock deal, was the big topic on the market this week.

    This and other merger and acquisition deals offer the opportunity to make a buck on merger arbitrage. We’ll explain how merger arbitrage is done, what can be gained from it, and what the risks are. More →

  • 10 Aug
    Mergers & Acquisitions – Better To Be Invested On The Target’s Side

    Mergers & Acquisitions – Better To Be Invested On The Target’s Side

    • M&A activity has slowed down in 2016 but may increase as BREXIT, China worries cool off and central banks print money.
    • Price to EBITDA premiums have surpassed 2007 levels.
    • The average premium for targets is 37%, which is a pretty good additional return on your investments.

    Introduction

    A beautiful situation in investing is when a company you own is being taken over at a lofty premium. In this article we are going to discuss the current M&A market, what it means for the market in general, and take a look into the sectors that offer the best consolidation opportunities. More →

    By Sven Carlin Investiv Daily M&A