m&a


Buying MOS for a potential takeover: read full story here

Even if no takeover, spinoffs are a very underappreciated buying opportunity, add to that MOS is in the Ag. space, [just look at POT] and we have potentially a very attractive swing trade.

M&A. Hardly known for their market timing insights, never-the-less, M&A can definitely propel the stockmarket higher, so worth considering the implications.

•M&A transactions are most likely to be “horizontal” consolidation deals, expected to be the dominant deal type by 68 percent of surveyed companies. Typically, these are expected to be smaller, lower-risk acquisitions than the transformational deals previously anticipated for and to some extent executed in 2009. This indicates that there is a degree of caution in the market and that the effects of the financial and economic crisis are still being felt.

•Restructuring deals are also expected to rise steeply, with nearly one out of three companies planning to strengthen its strategic and financial positions by divesting businesses. These disposals will be essential not only for cleaning up corporate portfolios but also for generating proceeds to help fund new acquisitions as the M&A market picks up. In fact, 75 percent of companies believe that investors, banks, and other creditors will exert greater pressure to go down the deal-based restructuring route in the coming 12 months. Moreover, one-third of companies believe that even distressed divestitures could make valuable targets

Horizontal and consolidation deals are not the KKR buyout premium frenzy type of deals that drive markets higher. They smack more of survival than empire building expansion. Certainly also, debt, is far cheaper than equity currently, for the most part.

Restructuring – speaks for itself really. There are many companies that are taking the current window of opportunity to refinance before the tsunami of Treasury paper overwhelms the markets.

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Business “X” is the business that looks likely to be my first completed LBO. I worked very late into last night putting the closing touches to the deal, which will start it’s closing today. I doubt that we will achieve a “close” before Christmas once the solicitors get hold of it, urgency doesn’t enter their lexicon.

There was a problem identified within Gross Margins, that was once adjusted, not a huge concern, it brought our offer down [which was accepted] and saved us some $36,000.

Accounts Payable also indicated the contraction within credit being extended to business, more and more cash settlement at the time of sale is being asked [demanded]

The business like many smaller businesses is overly reliant upon Bank credit lines to fund Working Capital, however, this has been showing improvement. This area however is the primary source of risk, and will need to be controlled tightly.

Depreciation was stepped up in anticipation of the sale. As this was noted in the analysis, again, the offer price was adjusted accordingly to the markdown in tangible asset values, saving $22,531

Now we wait for the solicitors to settle.

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A bit of a new venture for me. I have wanted to become involved within the LBO industry for some time, getting established or even started has been a bit of a challenge in New Zealand. Well I have opened my own shop.

This business was one that I rejected as wholly inappropriate, not that I have any ethical or moral objections to whorehouses, simply that the business was not solid enough based on the financial data.

First off, in New Zealand, non-audited financial data is common place, thus if handed un-audited financial data, you really need to have the data audited, at least the last few years.

This business was also a “start-up” another big problem. You need a fairly established business. I would suggest a minimum of 5 years. In New Zealand I’d prefer at least 8 years. Having gone through the books, some problems were apparent immediately.

The Capital Structure had already undergone some fairly serious leverage with some substantial debt being added in the form of a new loan and to Capital Leases that were fluctuating in a rather odd manner.

This leverage had [possibly] contributed to an impressive expansion in EBIT and by conventional measures driving an impressive margin. However, when the true profitability was measured, the margin was very low.

One of the reasons for this was found within the Cost of Goods line entry. It would seem that the “girls” were taking a larger proportion of their earnings, thus driving margin compression. One possible reason for this margin compression may well have been the legalisation of prostitution in New Zealand. No longer requiring the “protection” of unsavoury characters, they pressured for higher pay.

Operating expenses have also fallen precipitously in relation to revenues. It may be that some of these costs have been capitalized to again produce a higher EBIT in anticipation of a sale.

Depreciation, a crucial cashflow when considering an LBO, was already being pressured. Accumulated Depreciation had declined while Plant, Property & Equipment had risen. The reason most likely for this was to cause a rise within EBIT for preparation for sale, or, to qualify for the loan [that was taken on in the last set of statements] and/or to increase Interest coverage, which was simply too low at 1.47X to take any more debt.

There was also a suggestion that upkeep via CapEx was insufficient to offset the reduced Depreciation, thus again looking to pump up the EBIT line entry.

Lastly, there are no discretionary cashflows that are [normally] hidden by which management can allocate to whatever purpose is deemed the best use for said cashflows. Thus no hidden value, and no additional cashflow to support an LBO.

All-in-all a definite pass.

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All those Banks with slowly improving Balance Sheets, inflationary environment, cheap[er] valuations, threats of potential bankruptcies for the weak, consolidation an attractive option, all these and more could drive a new M&A boom.

From The Economist;

Mergers and acquisitions could boom again next year

LIKE every other business activity nowadays (except bankruptcy-advisory work) merging and acquiring companies (M&A) is in a deep slump. Last week BHP Billiton, a mining giant, withdrew from its planned hostile acquisition of Rio Tinto. This is part of a trend of corporate grooms abandoning their would-be wives at the altar. According to Thomson Reuters, that takes the total value of cancelled mergers so far in this quarter to $322 billion, a two-year high and almost as much as the value of completed mergers in this quarter ($362 billion).

Another study, by UBS, found that one-third of the deals announced in America this year have been terminated before consummation. And the number of proposals is down overall this year. Worldwide, the value of mergers and acquisitions completed so far in 2008 is $2.8 trillion, down by 27% from the same time last year.

Shares in Rio Tinto plunged by 37% after BHP withdrew its offer, which suggests it was a wise decision to pay whatever break-up fees it will incur. The general plunge in share prices will cause many bidders to rethink offers that seemed reasonably priced only a few months ago.

Although BHP had secured the necessary debt—a luxury available to few would-be bidders now—it was concerned that taking it on would worry its investors, especially given the uncertainty about when credit markets will be liquid enough to allow existing debt to be refinanced. Moreover, to please antitrust regulators, BHP would have had to sell off various bits of the combined business, and in the current climate it had no confidence that it would be able to find buyers (at least not at anything resembling a decent price). Since calling off the acquisition, the price of insuring BHP against default has fallen sharply.

There is now speculation that two other multi-billion dollar deals will be called off. The acquisition of BCE, a Canadian telecoms giant, by private-equity firms seems in extreme peril, following “preliminary” comments by its auditors that the amount of debt the buyers intended to impose on the firm would render it insolvent. Roche, a big drugs firm, insists it will complete its $43.7 billion acquisition of Genentech, but this claim is being met with growing scepticism.

That is now. But what will happen when confidence returns to the financial markets and good deals can get funding? At current share prices, attractive targets abound. Industry troubles will likely make private-equity firms more enthusiastic sellers than buyers, creating a big opportunity for companies to do “strategic” M&A—buying their weaker rivals, cutting costs and so forth. This was much harder when private equity could borrow as much as it wanted and so pay often daft prices.

At the same time, the economic downturn will make weaker firms more willing to accept offers than they were in good times. Jumping into bed with a strong suitor is a more appealing prospect than lonely bankruptcy.

In short, when the M&A business re-opens, which, given the speed of mood changes in financial markets, may be sooner than the current gloomy consensus thinks, it will be a buyer’s market. Do not be surprised if many buyers are those firms that recently called off their proposals, only to find themselves delighted to rekindle an old flame.