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Quest ™. Pan-European M&A: The return of the LBO FCF yield. 20th November 2012. Quest ™ helpline +44 (0)20 7523 8493 quest@canaccordgenuity.com. Summary. Quest™ LBO screens – First introduced in 2002
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Quest™ Pan-European M&A: The return of the LBO FCF yield 20th November 2012 Quest™ helpline +44 (0)20 7523 8493 quest@canaccordgenuity.com
Summary • Quest™ LBO screens – First introduced in 2002 • LBO Superscreen aims to identify companies which could generate value either off or on-market • Link with M&A Trends to find the likely candidates • Useful valuation metric even if no bids • 2012 Trends and Highlights Story so far: June CITN – 17 ‘Targets’ – Three bids. August CITN 5 more targets (page 2)Sector M&A hot spots – updated – Media, Industrials, Resources warming up. Health Care cooling (page 3)M&A Pan-Euro themes – new slide. The newest theme is the difficulty in finalising proposed deals for various reasons (page 4)Strong cash flows and low debt – global picture, sector breakdown (pages 5/6)Quest LBO FCF yield methodology – LBO yields now also available in Quest screening and Portfolio & Reports (page 7)Sector LBO FCF yields: Tech sector yields have dipped below 10%Technology – Hot sectors but value becoming more difficult to find (page 9)Telecoms – Lots of assets changing hands + attractive yields (page 10) Media – Attractive yields (page 11)Health Care – Cooling? (page 12)Industrials – Warming up? Aerospace. Cyclical Risk vs Attractive LBO yields (UK page 13, Europe ex UK page 14)Support Services – New screen – Consulting Subsector (page 15) General Retail – Consumer discretionary quiet – yields not that attractive (page 16) Page 1
The story so far: June CITN note and presentation • “M&Ayhem: Feeling Hot, Hot, Hot….” CITN 22nd June – noted pick up in M&A in selected sectors Since then we’ve seen more M&A and markets have rallied. So what’s the opportunity now? • Featured Stocks / takeover candidates mainly from Tech, Media, Telco, Industrials:CSR – Value released via major investment from SamsungNCC Group – cyber security – rapidly growing/ consolidating. Ripe for defence group looking for growthSpirent – wireless and positioning testing – fast growing tech area. Big testing companies Agilent, Ixia or JDS Uniphase more likely acquirersITV – Has content/distribution to play tech convergence themeITE – Russia: Risk or opportunity?Aegis – Bought by DentsuEuromoney – 66% owned by DGMT. Buy in?Informa – previous approaches 2006/2008. Private equity consolidator?Virgin Media – Producing cash and rapidly deleveraging: Private equity rumoursFenner – FL Smidth beat Weir for LudowiciBodycote – Sulzer to rebid?IMI – Linked to Honeywell and GE in last 12 monthsChemring – Approach from Carlyle – Preliminary talks – Forecasts under pressure (abandoned)Smiths Group – Rejected PE £2.5bn offer for medical business. Conglomerate discount. CEO admits current structure offers ‘limited strategic rationale’.TomTom – Apple only licenses product – small change to buy.Nokia(LBO yield now only 8% - rising price/falling forecasts)KPN – Carlos Slim stakebuilding in Europe • New stocks (“M&Ayhem: Out of the frying pan… (CITN 24th August)Capgemini (15%) – cloud, data & solutions. Southern Europe exposure limitedVivendi (14.5%) – intention to unlock value. No obvious buyer for Activision. Spin-off? Sell Maroc Telecom (53%, €4bn), GVT, SFR?BSkyB (9.5%) – News Corp break-up? Cobham (14.3%), Qinetiq (14%) – an acceleration of defence consolidation – niche + strong cash flows UK Tech Media Telco Indust. Europe Page 2
M&A Pan-Euro sector hot spots: blue = new (H2) • UK technology 3 takeovers by North American counterparts in a year: Logica/CGI (19% LBO FCF Yield), Autonomy/HP, Misys/Vista Equity Intel 15% investment in ASML, CSR investment from Samsung. Sector has high Cash flow returns + net cash. Top 30 US tech have potential US$430bn of cash outside US. Enough for top 10 European tech names twice inc. 30% premium. Deal rationale varies. To save on R&D, global customer base, synergies, valuation. Other tech – SAP – cloud acquisitions, Dell cloud acqn. • Telecoms Carlos Slim (America Movil) stakebuilding – offer for 28%KPN (€8 a share) + buying 23% Telekom Austria.Telecom Italia (Egyptian investor Naguib Sawiris interested in taking a large stake).Vodafone – C&W W’wide 12% LBO FCF yield.CWC Break-up – Batelco (Bahrain) approach for Monaco + Islands ($1bn) Private equity interest in VMed, Everything Everywhere, Vivendi looking for buyer of Maroc Tel?, Telenet (Liberty Global) – cable consolidation? US: Deutsche Tel buying MetroPCS. Softbank 70% stake in Sprint Nextel ($20bn) Euro Telecoms: 4G auctions + high capex in next-generation networks (4G auctions). Traditional Revenues under pressure. • Media/Leisure Dentsu buying Aegis £3.2bn, public / private consolidation (Publicis/BBH, WPP/AKQA), Will Hill/GVC for Sporting Bet?Hotels: Nelson Peltz/Stake in Intercontinental Hotels, Accor – Motel 6 chain sold to Blackstone, Vivendi possible break-up. • ResourcesPTT (RD Shell)/Cove, Cairn/ Nautical Petroleum, BP (TNK/ Texas City), North Sea Exploration, Conoco Spin off Philips 66 ($21bn),Chesapeake – selling oil and gas fields/pipelines ($7bn), Shell one of the buyers Glencore/Xstrata, China National Gold/African Barrick Gold • Industrials Elect Equip: Eaton Corp Cooper industries ($12,6bn, 9% LBO FCF yield), Carlyle approach for Chemring (abandoned), EADS/BAE (abandoned), Mistubishi/Vestas, UPS buying TNT express (19% FCF yield – note EU complaint), POSCO interested in Steel Americas (Thyssen) US: Tooling – Bain Capital buying Apex Tool, Spectrum Brands buying Stanley /B&D Home improvement. Icahn/Oshkosh (16% LBO FCF yld) • Health / PharmaLinde buying Lincare $2.7bn. Buffett backed dialysis clinic DaVita/HealthCare Partners, United Health /Amil Participacoes (Brazil) . Fresenius buying Rhoen Klinikum €3.1bn (Cancelled),US Aetna/Coventry Health Care ($5.7bn), Pharma: Watson buying Actavis, Reckitt/Schiff • Support Services Genivar (Canada)/WSP (11%), • Consumer staple Buying Emerging growth: Pfizer Infant Nutrition (Nestle outbid Danone), Brand add-ons Diageo – Brazilian Cachaca maker, AB Inbev / Modello (remaining stake – US DOJ looking), Heineken / Asia Pacific Breweries, AG Barr/Britvic, Mediq pharmacy (PE) • UtilitiesGDF Suez / International Power, China Three Gorges investment in EDP • Financials China for Eu Banks? RBS/DirectLine/Branches, Barclays/ING UK Direct, Leucadia Nat. (“Baby Berkshire”) /Jefferies ($3.6bn).HSBC/Ping AnConsumer discret Quiet. Redrow buy out. PPR to spin off FNAC?, Advent buying Douglas – German Retail ($1.9bn) Areas of high/Increasing activity Areas oflow activity Page 3
M&A Pan-Euro themes • Overseas buyersBric Buying: China Resources: China National Gold/African Barrick Gold, Oil (CNOOC/NEXEN ($15bn), CIC buying 10% stake in LHR. Rescues?: China for European Banks, EDP (Three Gorges). Camargo (Brazil)/Cimpor (Portugal) US Tech buying UK Tech (see sector page – use cash outside US, save on R&D, scale) + (Samsung/CSR) Japanese Dentsu buying Aegis £3.2bn, Mistubishi/Vestas, Softbank/Sprint, Mizkan/Branston Pickle strong balance sheets, slowing Asian growth the motivation?) OthersGenivar (Canada)/WSP (11%), Alimentation Couche-Tard (Canada)/Statoil Fuel/Retail, Hong Kong Ex/LME Walgreen/Alliance Boots, Carlos Slim (America Movil stakebuilding –KPN,Telekom Austria • Consolidation EADS/BAE (abandoned), AG Barr/Britvic, UPS/TNT Express (subject to formal EU complaint), GDF Suez/Int. Power, Eaton/Cooper, (scale) Glencore/Xstrata, Will Hill/Sporting Bet, European Cable (Liberty/Telenet), CNH/Fiat Industrial (Abandoned) • Non-core divest Divestitures account for a record 57% of US M&A by deal value 2012 YTD (Dealogic) 2011 42%, 2005 26%. Oil: Conoco Spinning off Philips 66 ($21bn), Chesapeake – selling oil & gas fields/pipelines ($7bn) to Oil companies, BP (TNK, Texas City) US: Pfizer Infant Nutrition, DuPont performance coating, United Tech Industrial business, Food/Bev: Sara Lee (Hillshire/DE Master Blenders), Kraft (Spin off Mondelez/Cadbury), Fraser & Neave (APB/Food), Carrefour/Columbia Financials: RBS/Direct Line, HSBC/Ping An. Telecoms: CWC Break-up, Vivendi to spin off Maroc?/GVT/SFR Inds: Cookson break-upSteel: Thyssen / Steel Americas, Arcelor/stake in Canadian Iron Ore business Consumer: PPR/FNAC • Buying consumerBuying Emerging growth/Brand add onesgrowthPfizer Infant Nutrition (Nestle outbid Danone), Diageo (Brazilian Cachaca, A-B Inbev (Modello Minority), Heineken (Asia Pac Breweries) • Private Equity Carlyle: Chemring (abandoned), DuPont perf. coating, United Tech industrial businesses, Icahn: Oshkosh, Advent: Mediq (pharmacy)(examples) Blackstone: Vivint (US home security). KKR: Renesas Electronics (semi-cond). TPG: Billabong, Buying industrial non-core divestments • Take Private Redrow, Best buy?, Douglas (German) – Family + Private Equity. • Clean up MinoritiesA-B Inbev/Modello – US DOJ looking closely, Heineken (APB), Liberty (Telenet) • Deals difficult to do EADS/BAE, CNH/Fiat Indust, Fresenius/Rhoen Kliiniku, Chemring (all abandoned), Competition authorities – UPS/TNT, AB Inbev/Modello Page 4
M&A: Another way of thinking about value (LBO FCF yields) • Equity investors are not buying but others are starting to take a view • Buyers – Corporates, overseas buyers, pockets of private equity, activists – selected sectors “Valuations in Europe are making a lot of sense to us….. In times of crisis, people become much more short-term focused. [We are taking] a long-term view”Carlos García Moreno, CFO of América Móvil. Re Stakebuilding in KPN, Telekom Austria “We are more willing to pursue acquisitions than we have been for some time. This is driven not just by our strong balance sheet but also by a less frantic atmosphere around M&A – we are able to be more considered.” - a FTSE 100 CFO (Source: FT, October 2012) Global (debt + other)/EBITDAR Corporate sector debt is low Global free cash flow yield And cash flows are cheap to buy! 5.1% - Down from 5.4% in July 10 October Free cash after interest, tax and net capex but before acquisitions and dividends Page 5
Hot spots are often characterised by strong cash flows, low debt The Finance Director’s dilemma: • What to do with the cash? Increase investment – Capex or M&A (just in time capex) Remain cautious – Hoard/run ungeared balance sheet Return to shareholders – Increased dividends / buybacks • M&A route tempting, especially where organic growth is under pressure 10 October Global (debt+other)/EBITDAR Global CFROC +12m August 2012 Page 6
Value tools: Quest™ LBO FCF yields & screen High level screening metric of the type favoured by private equity – identifies pre-tax cash flow yield on EV. Assesses cash flow available to prospective purchasers, after meeting its operating and capex needs but before financing costs or tax May be compared with required rates of return to see if company initially meets its funding cost Uses historic and consensus forecasts of EBITDA, capex and working capital needs to estimate ‘normalised’ cash flow Good track record when there is a pick-up in M&A activity (first introduced by Quest™ in 2002 - Newsletter #11) Plenty of high (Double digit) yields DIY private equity toolkit – LBO superscreen - Identify companies which could generate significant value either off or on-market LBO FCF yield calculation • LBO spreadsheet data updated weekly • LBO FCF Now also available in the main Quest website in screening and portfolio and reports. Page 7
Pan-Euro sector LBO FCF yields inc pension 31 October June = 10% June = 10% June = 11% Page 8
LBO Screens - Technology UK: 3 takeovers by North American counterpart in a year: Logica/CGI (19% LBO FCF Yield), Autonomy/HP, Misys/Vista Equity Partners+ Samsung / CSR. Deal rationale varies. To save on R&D, scale – global customer base, synergies, valuation. Peak margins! CITN Page 9
LBO Screens - Telecoms Telecoms Carlos Slim (America Movil stakebuilding – offer for 28% in KPN (€8 a share), + buying 23% Telekom Austria Vodafone – Cable & Wireless Worldwide 12% LBO FCF yield. Private equity interest (Apax?) in VMed, Everything Everywhere (£8bn UK JV T-Mobile and Orange)Telecom Italia (Egyptian investor Naguib Sawiris interested in taking a large stake). Vivendi Telco assets for sale Deutsche Tel buying MetroPCS. Vivendi looking for buyer of Maroc Tel?, Telenet (Liberty Global) – cable consolidation?CWC Break-up – Batelco (Bahrain) approach for Monaco + Islands US Consolidation Euro Telecoms: 4G auctions + high capex in next- generation networks (4G auctions). Traditional Revenues under pressure. CITN CITN Page 10
LBO Screens – Media – convergence? Media Dentsu agreed bid for Aegis (14%); Liberty buying out remaining 49.6% of Telenet (7%) - cable Public buying private: Publicis / BBH, WPP / AKQA Vivendi break-up? triAngle up CITN Gone Page 11
LBO Screens – Health Care (cooling?) Health Care Linde buying Lincare $2.7bn, Reckitts out bidding Bayer for Schiff Sorin – prospective PE involvement Buffett backed US dialysis clinic DaVita acquiring HealthCare Partners. Aetna buying Coventry health Fresenius buying Rhoen Klinikum €3.1bn. (Post deal Rhoen = 3%) (cancelled) CITN Page 12
LBO Screen Industrials – UK - top yields (warming?) Industrials Aerospace warming but deals hard to do and abandoned(Chemring/BAE) Cyclical Risk vs attractive LBO yields Watch out for ‘Charter’ repeat. Profit warning followed by bid. (Charter metrics…pre bid = 16% LBO FCF, Quest upside, Cheap on EV/sales rel margins) Cookson breaking-up Abandoned Breaking up Abandoned Page 13
LBO Screen Industrials – Europe ex UK - top yields Lots fitting criteria: See Q-files for full list – stocks between €500m and €10bn shown below Page 14
LBO Screens - Support Services (New) Support Services Questions: Whose cash is it anyway? Is the year-end balance sheet representative. Consulting subsector. Genivar (Canada)/WSP (11%), - other UK peers taken out in recent years – Halcrow, Scott Wilson, Davis Langdon Canaccord Note: Transformation and Take-out (20th Sept 2012) – cash generative – developing market growth prospects shifting growth-mix Takeout multiples have been rising (2009/10 6-7x trailing EV/EBITDA, 2011+ >7x). WSP 7.8x. Pension deficits less of a problem for large buyers. Atkins’ strong niche positions. Potential bid target as part of the wider industry consolidation evident in the consulting subsector (esp US players).Hyder’s geographic footprint is skewed away from slower growing developed markets in North America and Europe. Could be attractive to industry leaders which are typically weighted toward these markets. Relatively small mkt cap opens it up to a wider constituency of potential bidders. CITN Page 15
LBO Screen – General Retail Retail Watch out for the year end balance sheet making the debt/cash position look artificially attractive Some speculation on M&S Page 16
LBO screen – Targets summary Page 17
Historic performance of the LBO framework • Average relative performance of October 2009 ‘Tasty Targets’ – +6% with 50% win/loss. There were three successful takeovers and one de-merger (Lundin) • “DIY private equity: The complete toolkit” Newsletter (April 2010). +2% with 50/50% win loss. Tomkins bought by private equity. Wolseley and Travis Perkins were also strong performers. Home Retail weak. • LBO FCF yield — first introduced by Quest™ in 2002 (Newsletter #11) • Successful indicator of previous M&A boom – Reuters, Hanson, Somerfield, Gallaher, BootsSee “LBO FCF yields: Four and O” (CITN, 17th February 2007)… four years of strong performance. e.g., Source: Quest™. *Versus FTSE Euro Index in US$. Page 19