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Q2 2020 US M&A Roundup

In Q2 2020, global M&A activity fell to levels that rivaled the aftermath of the great financial crisis hitting just $439 billion. On a YoY basis, American M&A activity took the biggest hit with aggregate deal value totalling only $258 billion. This was a decline of 69% from Q2 2019 when many megadeals were announced including United Technologies’ acquisition of Raytheon Co, AbbVie’s acquisition of Allergan, and Occidental’s acquisition of Anadarko Petroleum. This major decline was not unexpected though as the American economy was impacted most by the pandemic in the months of April and May with unemployment rates of 14.7% and 13.3% respectively. Most states did not reopen until after mid-May and businesses experienced severe income reductions in Q2 that brought many to the point of insolvency as corporate defaults shot up. Buyers were busy focusing their resources on bolstering liquidity and cutting costs while sellers did not want to sell for steeply reduced valuations. Altogether, these headwinds prevented most M&A activity from taking place in the second quarter.

However, with the incredible post-pandemic market rally boosting share prices and many believing that the economy has already weathered the worst of the pandemic, activity notably picked up at the very end of the quarter. The biggest deals in Q2 were all announced in June and a number of notable all-stock deals occurred during the first week of Q3 including Uber’s acquisition of Postmates, KKR’s acquisition of Global Atlantic, and Sunrun’s acquisition of Vivint. With the economy moving in an upwards direction and the Federal Reserve promising to support the functioning of markets, it is likely that M&A activity will continue to improve throughout Q3.

M&A Drivers

Consolidation in the Food Delivery Industry

Despite the pandemic giving a boost to food delivery revenues, profitability still remains a distant reality for major food delivery companies operating in the US including DoorDash, Uber Eats, and Grubhub. Despite having only three major players, food delivery is a highly competitive market with companies constantly undercutting each other and offering discounts to both restaurants and diners in order to win market share. Consolidation to reduce the number of competitors in the space has long been speculated as the only path to profitability currently available. It seems that food delivery executives have finally conceded to this reality as the boost in business brought on by Covid-19 did nothing but move margins into deeper negative territory. Uber was in talks to purchase Grubhub first before Just Eat swooped in and struck an agreement to acquire the company. Unsatisfied with the outcome, Uber followed up by acquiring Postmates, a far smaller competitor with strong regional presences. With the American food delivery landscape left relatively unchanged by these acquisitions, there may be further activity in the future should it be permitted by US antitrust laws.

Notable Deals

Just Eat (AMS: TKWY, LSE: JET) Acquires Grubhub (NYSE: GRUB)

  • Industry: Food Delivery
  • Date Announced: 06/10/2020
  • Deal Size: 7,300M
  • Consideration: Stock
  • Target Financial Advisors: Evercore, Centerview Partners
  • Buyer Financial Advisors: Bank of America, Goldman Sachs

On June 10th, Just Eat announced that it would be pursuing an acquisition of Grubhub. Just Eat intends to strengthen its North American presence and move into the U.S market with this acquisition and increase the scale of its global operations to improve operating efficiency. Under the terms of the acquisition, current shareholders of Grubhub will receive American Depository Receipts (ADRs) worth 0.6710 of a Just Eat common share. Based on the closing prices of Just Eat at €98.60 and Grubhub at $57.92 on June 9th, this implied a fully diluted equity value of $7.3 billion and a premium of approximately 30% for Grubhub. Current Grubhub shareholders are expected to own ADRs, which are shares of foreign companies that trade on American exchanges, representing 30% of the combined business.

Under the terms of the acquisition, Matt Maloney, current CEO of Grubhub, will join the combined company’s management board and lead its North American operations. The company will have its shares listed across three stock exchanges in three different countries including Euronext Amsterdam, London Stock Exchange, and an American exchange. According to 2019 financials, the combined company would have processed 593 million orders, achieved $15.3bn in Gross Merchandise Value (GMV) representing $3.0bn in revenue, and earned an adjusted EBITDA of $447m. The group would be the largest food delivery business outside of China and have the greatest international reach. Despite reporting positive adjusted EBITDA figures, both companies have reported losses on a GAAP basis. Just Eat has indicated that the acquisition is part of its plan to prioritize growth over profits, so investors are expecting the combined company to expand both revenues and net losses.

This acquisition was perceived negatively by investors with Just Eat’s stock falling 13.3% upon its announcement. This is because had just completed a $7.6bn acquisition of Just Eat in April raising the concern that it would not be able to effectively integrate two big acquisitions in such a short time span. Moreover, Grubhub has recently been on a decline with its traditionally higher margin pureplay marketplace business model losing customers to the delivery fleets operated by its competitors. Despite having established its own delivery fleet, Grubhub’s share of the US market has eroded dramatically falling from 31% in January 2020 to 23% in April 2020. Investors saw much more value in Grubhub’s combination with Uber if permitted by US antitrust laws as they are major competitors within the same market. Since Just Eat and Grubhub don’t compete with each other in any major markets, this acquisition barely reduces the stifling competitive pressures faced by both businesses.

Waste Management (NYSE: WM) Acquires Advanced Disposal Services (NYSE: ADSW)

  • Industry: Waste Disposal
  • Date Announced: 06/24/2020
  • Deal Size: 4,600M
  • Consideration: Cash
  • Target Financial Advisors: UBS Investment Bank
  • Buyer Financial Advisors: Centerview Partners

Under the terms of the revised deal, Waste Management would acquire Advanced Disposal Services for $30.30 per share in cash along with $1.8 billion in net debt representing an enterprise value of $4.6 billion. The transaction is still subject to regulatory approval and approval by a majority of Advanced Disposal’s common shareholders. So far, the company’s largest shareholder, CPPIB, who holds around 18% of total shares, has already agreed to the revised terms of the acquisition.

Waste Management’s acquisition of Advanced Disposal was first announced on April 15th, 2019 and had to undergo a lengthy process of review from the Department of Justice (DOJ). It was originally planned to be completed in Q1 2020 with Waste Management offering $33.15 per share. However, regulatory delays along with forced asset divestitures lead WM to revise the purchase price downwards to $30.30. Antitrust concerns were a key hurdle to this transaction as waste disposal in the US is a highly concentrated market with a few publicly traded companies accounting for nearly 70% of all revenues. Waste Management has 20% market share as the industry leader and Advanced Disposal also commands a sizable chunk as the fourth largest provider. With many cities and regions only being served by two or three players, a combination between these two companies may create monopolies in many regions where their services currently overlap. In order for the deal to proceed, any assets held by the combined group that would heavily impact market competitiveness as a result of the acquisition had to be divested. As a result, $835 million in assets that generated $345 million in revenue in 2019 are going to be sold to GFL Environmental, a Canadian-based waste disposal company.

Investors are generally accepting of the deal as WM’s share price remained relatively unchanged upon both the announcement of the original deal and the revised deal. The combined company is expected to realise over $100 million in annual cost and capital expenditure synergies through SG&A reductions, network optimization, operating efficiencies, and a reduced cost of capital. By acquiring Advanced Disposal, Waste Management aims to boost its leadership in the North American waste disposal market.

Cannae Holdings and Senator Investment Group’s Proposed Takeover of CoreLogic (NYSE: CLGX)

  • Industry: Data & Analytics
  • Date Announced: 06/26/2020
  • Deal Size: 6,180M
  • Consideration: Cash
  • Target Financial Advisors: Unknown
  • Buyer Financial Advisors: Trasimene Capital Management

On June 26th, diversified holding company Cannae Holdings and hedge fund Senator Investment Group submitted a takeover proposal to acquire CoreLogic. The two groups currently hold approximately 15% of CoreLogic’s outstanding shares and had purchased a high volume of shares directly or through subsidiaries shortly before the announcement was made. The proposal seeks to acquire the remaining 85% of CoreLogic’s shares for $65 per share in cash valuing the company at $7 billion in enterprise value. It represents a 37% premium based on CoreLogic’s unaffected share price on June 15th before shares skyrocketed on speculations of an acquisition.

This appears to be a hostile takeover attempt by activist investors as Cannae and Senator claim that the acquisition proposal “delivers full value to shareholders and is well in excess of what the Company can achieve under its current plans”. CoreLogic’s executives and board have openly rejected the offer and are adopting a poison-pill approach to defend against the takeover attempt. The company raised forecasts for FY 2020 along with providing guidance for 2021 and 2022 which is an extremely unusual move given the business uncertainties surrounding the pandemic and economic recovery. In addition, CoreLogic has also expanded its share buyback program to $1 billion to make its shares more expensive for the investor group to purchase.

Investors expect Cannae and Senator to increase their bid for the company in order to sway shareholders away from management’s new promises. CoreLogic’s stock closed at $67.17 on July 10th, $2.17 above the proposed takeover price.

League Table

Mergers & AcquisitionsGuide to Distressed M&A · Understanding a Merger and Understanding a Merger Model · Introduction to Hostile Takeovers and Unsolicited Bids · Sale and Leaseback Transactions in Investment Banking · Compiling a Buyers List in Investment Banking · Interview With A Mergers & Acquisitions Investment Banker – Part II · Interview with a Mergers & Acquisitions Investment Banker – Part I · Bid Pricing Strategy: Part II · Bid Pricing Strategy: Part I · Deal Protection in Mergers & Acquisitions · Investment Banking Bake-Off or Beauty Contest · Acquisition Finance: Equity Consideration · Acquisition Finance: Bullet Debt · Acquisition Finance: Bank Debt · M&A Process Walkthrough · Types of M&A Sell Side Processes · Investment Banking Teaser · Accretion/Dilution Analysis – Part IV: Synergies and Source of Funds for M&A · Accretion/Dilution Analysis – Part III: Using Debt for Acquisitions · Accretion/Dilution Analysis – Part II: Accretion/Dilution Math and Breakeven Premium · Accretion/Dilution Analysis – Part I: EPS, Earnings Yield and All-Stock Transactions · Purchasing a Company via Cash or Stock ·
Richie is a rising junior at Western University going into the HBA program at Ivey. He is interning at a boutique investment bank this summer and really enjoys the work that he does there. Richie likes to go hiking and follows the UFC in his free time.

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