As the tensions between US and China escalated sharply during the third quarter, the global mergers and acquisitions market, as well as the US activity, plunged to reflect the higher risk and greater uncertainty about the potential dealmaking. Deal making in the US fell 40% from last year to $289 billion in the third quarter. Nevertheless, there were some very notable M&A in the Healthcare, Financial Services and TMT industries. Consumer Noncyclical, Financial and Communications sectors drove the majority of the deal volume, but the greatest number of deals were in the Technology, Financial, and Consumer Noncyclical sectors.
U.S – China trade war fears
While the debt financing conditions are favourable and many companies can still access cheap capital, the concerns about the trading war between China and the United States and the economic slowdown have had a significant effect on investors’ confidence. Global M&A plunged 16% Y-o-Y, the lowest quarterly volume since 2016, as companies became more risk averse. Risk-aversion and uncertainty are two factors that will be driving the M&A volume in the next quarters as well. While many shareholders want the management teams to take advantage of the cheap capital, there is a mismatch in valuation between buyers and sellers that is often hard to bridge and result in many deals not reaching the finish line.
TMT tops the table
Changing media landscape and rapidly growing competition requires many companies to pursue defensive moves to stay competitive and be better positioned among larger companies. While Q1 saw no megadeal activity, several deals in Q2 highlighted the shift to a personalized entertainment & media environment, where consumers want greater control of how and when they consume content and experience media. This trend has continued in Q3 as the largest TMT deal between Viacom and CBS has finally been announced in August. An acquisition represents a defensive move to better compete against the other TV networks: ABC and NBC and disruptive entrants: Disney, Apple TV. The merger was also made to better meet the consumers’ need and allow them to control how they want to experience and consume media.
Energy sector maintains momentum
Despite the challenging environment, corporate consolidation and foreign buyers are the factors that maintain the driving activity. While Q3 didn’t have any deals larger than $6bn, there were 4 transactions greater than $1.5bn and 5 deals between $500M and $1 bn. The current E&P market is seeing a broad geographic diversity and a variety of deal types, including joint ventures and royalties. A major deal in Q3 was an acquisition of BP’s Alaska business by Hilcorp, which represents a geographic diversity into the area that has not often been at the forefront of deals. A $3.2 bn acquisition of Carrizo Oil & Gas by the Callon Petroleum represent the buyers’ intent to find companies that match up on asset fit and could be acquired at a low premium. Moving into Q4, though, public companies will try to keep track of their Capex while maintaining moderate production growth, which could translate in a little appetite for making new acquisitions and lower M&A volumes.
Mylan N.V. Acquires Upjohn medicine business
- Industry: Pharmacy Services
- Date Announced: 07/29/19
- Deal Size: 32,684.77M
- Consideration: Stock
- Target Financial Advisors: Goldman Sachs, Guggenheim Capital
- Buyer Financial Advisors: Centerview Partners LLC, PJT Partners Inc
On July 29, 2019, Mylan N.V. and Pfizer Inc. announced that a definitive agreement to combine Mylan with Upjohn, Pfizer’s off-patent drug business focused on legacy drugs from its core prescription-drug operations. The merger is expected to close in the mid-2020 and will be accompanied by the retirement of the Mylan CEO Heather Bresch, who took the helm in 2012 and faced intense political pressure over the high price of EpiPen products.
Under terms of the all-stock agreement, each Mylan share would be converted into one share of the new company. Pfizer shareholders would own 57 percent of the combined new company, and Mylan shareholders would own the rest. The combined company’s Board of Directors will be comprised of 13 remembers, consisting of CEO (Michael Goettler – Upjohn’s Group President) and Executive Chairman (Robert J. Coury – Mylan’s current Chairman), as well as 8 directors from Mylan and 3 from Pfizer.
The combined company is expected to have pro forma 2020 revenue of $19 to $20 bn and pro forma adjusted EBITDA is expected to be in the range of $7.5 to $8 bn, including the phased synergies of approximately $1 billion annually to be realized by 2023. Once the deal closes, the new company will have about $24.5 billion of total debt outstanding and an intent to achieve a ratio of debt to adjusted EBITDA of 2.5x by the end of 2021. The combined company will return the capital to shareholders via the dividends payments and share repurchases. The company plans to initiate a dividend of approximately 25% of free cash flow beginning the first full quarter after close and a share repurchase program once the company achieves its debt to adjusted EBITDA target.
The transaction is beneficial for both Mylan and Pfizer. Pfizer is raising $12 billion in debt that the new company will carry, and keeping the cash. It allows Pfizer to strengthen its balance sheet and focus on the higher-margin innovative business, while Mylan can benefit from the scale of the combined company that will help the new business to push back on pricing and broaden the product and geographic reach. A new leadership team that will replace a highly criticized Mylan’s CEO Heather Bresch, will be able to make the strategic changes and restore the investor’s confidence.
London Stock Exchange Acquires Refinitiv Holdings Ltd
- Industry: Commercial Services
- Date Announced: 08/01/19
- Deal Size: 27,000.00M
- Consideration: Stock
- Target Financial Advisors: Canson Capital Partners, Evercore Partners, Jefferies
- Buyer Financial Advisors: Barclays, Goldman Sachs, Morgan Stanley, Robey Warshaw LLP
On August 1, 2019, the announcement was made that the London Stock Exchange will acquire Refinitiv, a prominent provider of financial data, in an all-stock transaction for a total enterprise value of approximately $27 billion. The Transaction brings two highly complementary businesses to create a leading global financial markets infrastructure provider with a leading data and analytics business and significant capital markets capabilities across multiple asset classes.
Under the terms of the Transaction, Refinitiv Shareholders will be holding an approximate 37 percent economic interest in London Stock Exchange Group and less than 30 percent of the total voting rights. The Blackstone group would become the biggest shareholder in the London exchange, with the right to name two non-executive directors, and one non-executive director will be a representative of Thomson Reuters, another significant shareholder. David Craig will join LSEG’s Executive Committee and continue as Chief Executive Officer of Refinitiv. The Combined Business will be chaired by Don Robert, LSEG’s Chairman, and led by David Schwimmer as Chief Executive Officer, with David Warren as Chief Financial Officer.
Together, the London exchange and Refinitiv collected about £6 bn ($7.3 bn) in sales last year, which would make the Combined Business the largest listed global financial market infrastructure by revenue last year. The Combined Company expects to deliver a revenue compound annual growth rate of 5 to 7 per cent over the first three years following the completion of a Transaction. Revenue synergy benefits are expected to be in excess of £225 million by the end of year five, and the annual run-rate cost synergies are expected to be in excess of £350 million. Combined adjusted EBITDA margin is expected to be around 50 percent in the medium term, and the expected adjusted earnings per share in the third year following the completion should be accretive of over 30 percent.
A merger would significantly expand LSE’s information services business, which NYSE and Nasdaq have been building as a more stable source of cash flow than its primary transaction-reliant businesses. It will also allow being better positioned in all key geographies and will offer significant benefits to its customers: future data and technology-enabled innovation and growth opportunities.
CBS Corp Acquires Viacom Inc
- Industry: Multimedia
- Date Announced: 08/13/2019
- Deal Size: 20,456.10M
- Consideration: Stock
- Target Financial Advisors: Evercore Partners Inc, LionTree Advisors LLC, Morgan Stanley
- Buyer Financial Advisors: Centerview Partners LLC, Goldman Sachs, JP Morgan, Lazard Ltd, Moelis & Co
On August 13, 2019, CBS Corp. (NYSE: CBS) and Viacom (Nasdaq: VIA), two of the world’s leading entertainment companies, announced that they have entered into a definitive agreement to combine in an all-stock merger, creating a combined company with more than $28 billion in revenue. As the entertainment industry is changing rapidly and the rise of digital streaming services like Netflix, Amazon, Disney is prevailing in the industry, the merger between CBS and Viacom will allow the combined company to establish a world-class, multiplatform media organization that is well-positioned for a competition and is ready for growth in a rapidly transforming industry.
Under the terms of the deal, the combined company will be named ViacomCBS Inc. Bob Bakish, President and CEO of Viacom, will become the President and the CEO of the combined company. Joe Ianniello, President and Acting CEO of CBS will become Chairman and CEO of CBS and will oversee all CBS-branded assets. Christina Spade will act as EVP and a CFP; and Christa D’Alimonte as EVP, General Counsel and Secretary. The Board of Directors will consist of 13 members: six independent members from CBS, four independent members from Viacom, the President and CEO of ViacomCBS and two National Amusements designees. CBS Corp shareholders will hold 61% of the combined company, and Viacom Inc shareholders will hold the remaining.
For the LTM before the acquisition, Viacom Inc generated $12,890M in Sales and $2,950M in EBITDA. The deal’s LTM EV/Revenue multiple is, therefore, 1.6x and EV/EBITDA – 6.9x. The transaction will be EPS accretive, and companies estimate $500 million in annualized run-rate synergies within 12 to 24 months. The deal will also increase the financial scale for significant and sustained investment in programming and innovation and allow them to pursue new acquisitions. ViacomCBS is committed to maintaining an investment-grade credit rating and modest dividend payment.
Together, ViacomCBS will control around $11 billion in advertising revenue, will reach more than 4.3 billion cumulative TV subscribers and will have more bargaining power during the negotiation with cable and satellite partners, who may be reluctant to drop Viacom and CBS. The combined company will also be one of the largest content spenders with more than $13 billion spent in the last 12 months. The merger will also enable the combined company to accelerate the growth of its direct-to-consumer strategy and create a leading producer and licensor of premium content to third-party platforms globally. However, while this is a very notable and significant merger, the newly merged company will still be small in comparison with its competitors – Disney, Netflix, Comcast.