Although the overall number of transactions moderated in the second quarter, there was an uptick in the mega deals. Deal volume reached $839.2bn, up 27.4% and 11.5% from the first quarter of 2019 and the second quarter of 2018 respectively. Consumer Noncyclical, Industrial and Energy sectors drove the majority of the deal volume, but the greatest number of deals were in the Financial, Consumer Noncyclical and Technology sectors.
Rise in Mega Deals continues
US strong M&A performance could be attributed to a continued rise in mega deals that took place in the past three months. These included the $90bn merger between United Technologies and the US defence contractor Raytheon, and the US drugmaker AbbVie’s acquisition of Botox maker, Allergan, for $83bn. The geopolitical tensions that impacted investors’ confidence were partly offset by the unparalleled access to capital that made significant acquisitions possible. Mid-sized companies are also looking to pursue the M&A as they feel more comfortable with the economic conditions, according to the Morgan Stanley Head of M&A Americas.
Hospitality & Leisure consolidation activity
The Hospitality & Leisure sector, driven by the Casino & Gaming and Entertainment, represented 45% of total M&A value in the Consumer Cyclical industry. M&A activity has been stimulated by inbound deals aimed to achieve revenue and cost synergies; add scale through domestic geographic expansion, and consolidation of the market share to strengthen brand positioning and offerings. A merger between the hotel and casino operator Eldorado Resorts, Inc and Caesars Entertainment was one of the largest deals announced in the second quarter. The combined entity will be a prevalent owner and operator of US gaming assets with 60 casinos across 16 states under management.
Energy sector is gaining a momentum
After a weak first quarter, the second quarter deal value totalled $126.4bn driven by the three mega deals worth $80bn, representing 64% of the total quarterly deal value. The majority of Q2 2019 transactions were in the upstream, with Occidental Petroleum’s $55 billion acquisition of Anadarko Petroleum Corporation representing the bulk of Q2 deal value. The other mega deals were in the midstream segment, where private equity funds continue to play a critical role in deal-making due to diverse and risk-adjusted opportunities. Nevertheless, the current price volatility and interest rates remain the key concerns for the M&A activity in the Energy sector.
United Technologies Acquires Raytheon Co
- Industry: Aerospace / Defense
- Date Announced: 06/09/2019
- Deal Size: 90,016.87M
- Consideration: Stock
- Target Financial Advisors: Citigroup Inc.
- Buyer Financial Advisors: Evercore Partners, Goldman Sachs, Morgan Stanley
On June 9, 2019, the announcement was made that United Technologies Corp. and Raytheon Co have entered into an agreement to combine in an all-stock merger of equals. The merger is expected to close in the first half of 2020 after United Technologies completes the separation of its OTIS elevator and Carrier air-conditioner businesses, which were announced earlier this year. The combined company, valued at more than $100bn after planned spinoffs, would be the world’s second-largest aerospace-and-defence company by sales behind Boeing Co., with annual consolidated revenue of about $74 bn this year.
Under the terms of the deal, Raytheon stockholders will receive 2.3348 shares in the combined company for each Raytheon share. United Technologies holders will own approximately 57 per cent, and Raytheon shareowners will own nearly 43 per cent of the combined company on a fully diluted basis. Combined company’s Board of Directors will be comprised of 15 members, consisting of 8 directors from United Technologies and 7 from Raytheon. Greg Hayes, the UTC CEO, will serve as CEO of the merged company, while Raytheon CEO Thomas Kennedy will be appointed as an Executive Chairman.
Net debt for the combined company at the time of closing is expected to be approximately $26bn, with $24bn of that coming from United Technologies. There is no change to either Raytheon’s or United Technologies’ financial outlook for 2019. The companies said they expect to return $18 to $20bn to shareholders in the first 36 months after the merger and to see about $1bn in annual cost savings by the fourth year. The deal’s TTM TV/Revenue multiple is 3.27x, TV/EBITDA 17.19x, while the comp median is 1.72x and 14.48x respectively.
The transaction will create a premier systems provider with advanced technologies to address rapidly growing segments within aerospace and defence. The Raytheon deal will expand the product portfolio of UTC from jet missiles and jet engines to other items like cockpit electronics and radars. The proposed deal will also allow UTC to cut their costs as plane makers seek better terms from suppliers and the Pentagon puts more pressure on contractors to cut costs and invest more of their own money in new technologies.
AbbVie Inc Acquires Allergan PLC
- Industry: Healthcare
- Date Announced: 06/25/19
- Deal Size: 83,791.24M
- Consideration: Cash & Stock
- Target Financial Advisors: Evercore Partners Inc, Goldman Sachs, JP Morgan
- Buyer Financial Advisors: PJT Partners Inc
On June 25, 2019, the announcement was made that US drug maker AbbVie will acquire Allergan, the Botox maker, and will pay $120.30 and 0.866 shares for a total consideration of $188.24 per Allergan PLC share. The transaction represents a 45% premium to the closing price of Allergan’s Shares on June 24, 2019 and is expected to close by early 2020. At the announcement, Allergan was valued at $83.8bn, including debt. Together, the companies have projected 2019 revenue of about $48bn, as well as annual pre-tax synergies and other cost reductions of at least $2bn in year three. This transaction is expected to be 10% accretive to adjusted EPS over the first full year following the close of the transaction, with peak accretion of greater than 20%.
Under the terms, AbbVie CEO and Chairman Richard Gonzalez will lead the combined company. Two Allergan directors, including the CEO and Chairman Brent Saunders, will join the combined company’s board after the purchase is completed. After the closing of the Acquisition, AbbVie Shareholders will own approximately 83% of AbbVie on a fully diluted basis, and the Allergan Shareholders will own 17%.
The proposed takeover provides AbbVie with a new growth platform, significantly expanding and diversifying its revenue base with new therapeutic areas, including Allergan’s leading medical aesthetics business. It will also reduce the reliance on Humira, the world’s best-selling treatment for inflammatory diseases, which faced fierce competition from generic versions in the last couple of years. The Acquisition is also said to enhance AbbVie’s long-term R&D funding capacity, allowing for continued investment and sustained focus on innovative science.
Occidental Petroleum Acquires Anadarko Petroleum
- Industry: Energy
- Date Announced: 05/09/2019
- Deal Size: 55,150.57M
- Consideration: Cash & Stock
- Target Financial Advisors: Evercore Partners Inc, Goldman Sachs, Jefferies, JP Morgan
- Buyer Financial Advisors: Bank of America Merrill Lynch, Citigroup Inc
On May 9, 2019, Occidental announced the Acquisition of Anadarko for $59 in cash and 0.2934 shares of Occidental per share of Anadarko, in a transaction valued at $55bn, including the net debt. The transaction is expected to close in the second half of 2019 and will create a $100+ bn global energy leader with a world-class portfolio and 1.3 Million Boe/d of Production. This Acquisition is expected to be accretive to Free Cash Flow Year One and deliver $3.5bn of free cash flow improvements, $2.0bn of annual cost synergies and $1.5bn of annual capital reductions.
Occidental expects to fund the cash portion of the consideration through a combination of cash from its balance sheet and fully committed debt and equity financing. Over the next two years, the management team is also planning to execute a portfolio optimization with $10-15bn of divestitures. $8.8bn divestiture of Anadarko’s assets is expected to close simultaneously after the Occidental’s Acquisition. It should help Occidental maintain a strong balance sheet and reduce the debt burden. According to the company’s report, the transaction will also enhance a smooth transition into a low carbon future and bolster a portfolio with additional cash-generating assets.
Eldorado Resort Acquires Caesars Entertainment
- Industry: Gaming
- Date Announced: 06/24/2019
- Deal Size: 26,699.42
- Consideration: Cash & Stock
- Target Financial Advisors: PJT Partners Inc
- Buyer Financial Advisors: Credit Suisse, Macquarie
On June 24, 2019, the casino operator Eldorado Resorts has announced an acquisition of Caesars Entertainment Corp that will create the largest U.S. gaming company. The agreed total equity value per share is $ 12.75, consisting of $8.40 per share in cash and 0.0899 shares of Eldorado for each Caesars share. This price represents a 28 per cent premium to Caesars’s Friday closing price. The combined company will provide its customers access to approximately 60 domestic casino-reports and gaming facilities across 16 states while allowing the company to realize $500m synergies and boost the cash flow.
Upon completion, the combined company will retain the Caesars name to capitalize on the value of the iconic global brand. However, it would be operated by the Eldorado’s management team – CEO Tom Reeg. Eldorado shareholders will get 51% of the company, while Caesars shareholders will receive 49%. The combined company’s Board of Directors will consist of 11 members, 6 will come from Eldorado’s Board and 5 from Caesars’s.
The deal comes less than two years after Caesars survived Chapter 11 bankruptcy and the fallout of a leveraged buyout in 2008 that left a company with a mountain of debt. The acquisition, on the other hand, will benefit the stakeholders of both companies and would create strategical, financial and operational compelling opportunities for the company.