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All Contents © 2017The Kiplinger Washington Editors
By Will Ashworth
| May 24, 2017
Washington might be in disarray, but that hasn’t stopped U.S. business executives from pursuing mergers and acquisitions.
EY Americas surveyed more than 2,300 executives in March and April about their willingness to do M&A deals. Surprisingly, nearly 80% said they’re serious about buying other companies to grow their businesses.
U.S. mergers and acquisitions activity got off to a quick start in 2017, but it has petered off in recent weeks; experts project total M&A activity for the year to hit $1.2 trillion, about 29% less than in 2016.
Perhaps Unilever Plc (UL) rejecting the $143 billion bid made by Kraft Heinz Co. (KHC) in February was foreshadowing things to come.
In order to meet the M&A results from 2016, there will have to be some large deals in the next seven months.
These are the ten mergers and acquisitions investors would love to see that can help get us there..
Prices and data are from the original InvestorPlace story published on May 19, 2017. Click on ticker-symbol links in each slide for current prices
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Buyer: Monster Beverage Corporation (MNST)
Seller: Dr. Pepper Snapple Group Inc. (DPS)
Typically, in any M&A conversation, Monster Beverage is considered the seller, not the buyer.
However, the energy drink maker is financially sound, and its business is good; there’s no reason why it couldn’t pull the trigger on buying Dr. Pepper
Snapple. The only question is whether Monster would want Dr. Pepper Snapple, whose margins are considerably lower.
A deal would also put an end to all the rumors that The Coca-Cola Co. (KO) — Coke owns 16.7% of Monster and is the company’s preferred global distribution partner — was eventually going to buy it.
Of course, Coke paid $2.2 billion to Monster in 2015 as part of its strategic partnership which included Coke transferring its energy drink assets to
Monster while Monster moved its non-energy-drink assets to Coke.
I’m sure the two companies could figure out how to keep their partnership going despite Monster acquiring Dr. Pepper Snapple.
Buyer: Brown-Forman Corporation (BF.B)
Seller: Davide Campari-Milano SpA (DVDCY)
Previously, I suggested that it would be a good move for Brown-Forman to acquire Boston Beer Company Inc. (SAM) because the craft beer maker’s stock is cheap and it could go on a bit of a buying binge in the craft category — and not just beer.
However, its heritage is in spirits, so a better move might be to fill some holes in its lineup by buying Davide Campari-Milano, the Italian liquor company whose biggest brand is Wild Turkey, something Brown-Forman doesn’t need.
What Campari does have that Brown-Forman doesn’t is a strong rum brand in Appleton Estate; Glen Grant, the world’s fifth-best selling Single Malt Scotch Whisky; and Cabo Wabo, Sammy Hagar’s former tequila brand.
Of the three names, Appleton is the key to any acquisition. It would also be interesting to see what it could get for Wild Turkey and some of the other brands owned by Campari.
If Brown-Forman wants to be in the big leagues when it comes to brown spirits, it has got to have a top-notch rum brand. Appleton is that.
Buyer: Hershey Co. (HSY)
Seller: Tootsie Roll Industries, Inc. (TR)
Hershey announced first-quarter earnings April 26 that were better than expected. Analysts called for adjusted EPS of $1.26, but they beat by 3.9% delivering $1.31 per share. Hershey expects its 2017 full-year adjusted earnings per share to be as high as $4.81, implying a 22.6 forward price-to-earnings ratio.
It wasn’t too long ago that Hershey was an M&A target, but now it should turn the tables and go on the offensive.
Tootsie Roll for the longest time was run by husband-and-wife team Melvin and Ellen Gordon. Melvin died in 2015 at 92; Ellen now runs it. She’s 86. That’s not a formula for proper succession planning.
Although Tootsie Roll has some iconic brands including its namesake, Junior Mints (made famous by a Seinfeld episode), Dubble Bubble, DOTS gumdrops and much more, the level of product innovation at the company has slowed in recent years.
Buying Tootsie Roll might not be the big splash investors are hoping for, but in the hands of a more modern company, it’s possible Tootsie Roll could once again be in the minds and stomachs of kids everywhere.
Buyer: Clorox Co. (CLX)
Seller: Church & Dwight Co., Inc. (CHD)
I’m not sure there’s ever such a thing as a merger of equals, but if one does exist, it would be the marriage of Church & Dwight and Clorox.
Clorox brings to the table its namesake brand along with Pine-Sol, Glad, Kingsford Charcoal, Burt’s Bees, Brita and Hidden Valley. Church & Dwight is best known for Arm & Hammer baking soda, cat litter, toothpaste, etc.; Trojan condoms; Oxiclean stain removers and Xtra laundry detergent.
Together as one company, it would have $9.2 billion in annual revenue generating $1.7 billion in operating profits providing grocery stores and its other customers with a much bigger product offering. Not to mention its $1.3 billion in free cash flow would give it lots of future M&A ammunition.
Church & Dwight has long been one of my favorite consumer stocks. Merged with Clorox, it would be a rare case of one plus one equals three.
Buyer: Brunswick Corporation (BC)
Seller: BRP Inc.
Brunswick has some of the finest brand names on the water; BRP is famous for its Ski-Doo and Sea-Doo brand names. Together, these two leisure-related businesses could corner the market on fun.
Consumers today are looking for experiences rather than just owning stuff. That’s not to say that we don’t buy things, just that what we are sold evokes an emotional attachment or we aren’t nearly as engaged in the buying process.
“Experience is your product too, it’s not just the physical object. Not to be cliché, but people always remember the way you make them feel,” said Melissa Gonzalez recently, CEO of the Lion’esque Group, a company dedicated to delivering top-notch retail experiences. “At the end of the day, what’s going to get me out of my house or my car to see you in a physical environment, since I can buy from you anywhere.
Nothing will get you out of the house like an excellent boating or snowmobile excursion.
Buyer: Snyder’s-Lance Inc. (LNCE)
Seller: B&G Foods, Inc. (BGS)
Both of these food companies have been busy in the M&A game in recent years; let’s face it, when you’re going up against behemoths like Kraft Heinz, you’ve got to get bigger in order to have any chance of kicking it farther down the grocery store shelves.
At the end of 2015, B&G Foods took it up a notch when it acquired the Green Giant brand from General Mills, Inc. (GIS) for $822 million, its largest acquisition ever. It has become a player in the food business.
In April, Snyder’s-Lance named Brian Driscoll interim CEO of the company after its chief executive officer of 12 years, Carl Lee Jr., retired. Driscoll was the CEO of Diamond Foods when Snyder’s-Lance acquired the maker of Kettle Chips for $1.3 billion back in late 2015.
Bring these two companies together, cut loose the poor performers and make the combined business a bigger, more profitable food company.
Buyer: VF Corp. (VFC)
Seller: Columbia Sportswear Company (COLM)
Both of these companies’ stocks are trading near 52-week lows: Columbia a little over a dollar from its 52-week low of $51.56 and VF Corp. less than $5 from its 52-week low of $48.05.
Needless to say, long-time shareholders probably aren’t very happy at the moment. However, both stocks have had bouts of good performance over the years due to a stable of strong brands.
VF’s CEO says his company wants to make a big acquisition, but the valuations are simply too high.
“We’ve looked at a lot of brands on a monthly basis in the last 2-3 years,” said VF CEO Steve Rendle in April in a Fortune Q&A. What’s prevented us from acting is the valuation of those companies at those times. … It remains our #1 strategic choice around reshaping our portfolio to be able to compete.”
COLM stock seems pretty cheap at the moment. Combine Columbia’s strong outdoor brand with Timberland and North Face, get rid of Lee jeans and presto, you’ve got a very competitive lifestyle apparel company.
Buyer: Berkshire Hathaway Inc. (BRK.A, BRK.B)
Seller: Deere & Company (DE)
Warren Buffett said at the Berkshire Hathaway annual meeting earlier in May that he wants to make a big acquisition, but much like VF, he and partner Charlie Munger have found very few compelling deals.
Munger suggested at the meeting that Berkshire Hathaway could make a deal as large as $150 billion if it used some debt and/or sold some of its equity holdings.
Buffett’s son Howard is a farmer. Nobody would know Deere & Company as well as the future chairman of its board.
Buffett owned DE stock until Q4 2016 when Berkshire Hathaway dumped its entire position. As of the end of September 2016, Berkshire Hathaway had owned $1.8 billion in Deere stock. Perhaps at 24 times earnings, he felt the maker of tractors and combines was priced for perfection.
Deere wouldn’t be a $150 billion deal by any means, but it would be one of his biggest. The fact that he sold out of Deere stock doesn’t leave me very hopeful, but never say never.
Deere is an American icon like the Oracle himself.
Buyer: Six Flags Entertainment Corp. (SIX)
Seller: Cedar Fair, L.P. (FUN)
In fiscal 2016, Six Flags Entertainment and Cedar Fair had combined revenues of $2.6 billion and net profits of $258 million. Walt Disney Co’s (DIS) parks and resorts business had revenue of $17 billion and operating profits of $3.3 billion.
Disney might have some problems at the moment, but this isn’t one of them. It makes more in amusement park profits than Six Flags, and Cedar Fair generate in combined revenue.
Together, the merged company can go on an acquisition binge to bulk up further, allowing it to better compete against Mickey and Minnie. It’s not a new idea, mind you. Back in 2010, the two companies were rumored to be a potential tie-up.
I don’t think much has changed in the seven years since. Bigger, in this case, is probably better.
Buyer: Alibaba Group Holding Ltd (BABA)
Seller: Mercadolibre Inc (MELI)
It’s hard to believe, but I was once anti-Amazon.com, Inc. (AMZN). Not so much because I thought it was a bad company, but rather, I too was put off by its inability to make money, especially in the Latin American market where MercadoLibre is so dominant.
MercadoLibre operates an “asset light” model very much like Alibaba, where it merely acts as the middleman and doesn’t own the inventory.
Jack Ma wants to be a global player; buying MercadoLibre gives it access to many of the world’s leading emerging markets. Sure, it’s not the U.S., but it’s a nice chunk of business to control just the same.
Since I picked MELI stock over AMZN back in 2013, MercadoLibre has delivered a very respectable return of 130.3%. However, it’s peanuts compared to the 270.5% return for Amazon over the same period.
In the hands of someone almost as brilliant as Jeff Bezos, MercadoLibre could shine.
After all, it’s the Alibaba of Latin America.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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