US Firms Buying UK Bargains
06/22/2012 10:30 am EST
Some US firms have decided to put their massive cash hoards to work and buy British firms that are looking especially attractive right now, reports the staff from Motley Fool UK.
The UK’s biggest corporate event this week is the news that giant US pharmacy chain Walgreens (WAG) has bought a 45% stake in British rival Alliance Boots.
On Tuesday, Walgreens announced that it paid $6.7 billion for a 45% stake in Alliance Boots, owner of two of the biggest brands on British high streets: Boots the Chemist and Alliance Pharmacy.
Together, these two companies have a long and illustrious history, as Henry Boot opened his first pharmacy in 1849. Combined, they are the leading health and beauty group in the UK, with over 116,000 employees, 3,330 stores (including 3,200 pharmacies) and operations in 25 countries.
In October 2005, the merger of Boots and Alliance UniChem was announced, with the deal completing in July 2006. The merged group was then itself taken over in a £12.4 billion buyout in April 2007.
Since that date, the group has been owned by Kohlberg Kravis Roberts (KKR), one of the world’s leading private-equity firms, and Alliance Boots’ executive chairman Stefano Pessina, a 71-year-old Monte Carlo-based Italian billionaire and former majority shareholder in Alliance.
Walgreens—America’s biggest pharmacy chain with nearly 8,000 drugstores and sales of $72 billion (£46 billion) last year—paid $4 billion in cash and $2.7 billion in shares for a 45% stake in Alliance Boots. This values the entire equity of the target at $14.9 billion (£9.5 billion).
However, the American Goliath’s ambitions don’t stop there. Within three years, Walgreens may exercise an option to buy the remaining 55% of Alliance Boots for $9.2 billion, made up of $4.9 billion in cash and Walgreens shares worth around $4.6 billion on Tuesday. At such time, Walgreens would also take on Boots’ net debt, which stands at about £7 billion.
Thus, by any standards, this is a big deal. Indeed, adding up all the amounts that Walgreens would need to pay to take full control of its British rival, the US group is looking at a total price tag of $27.2 billion. This is a massive sum, but easily funded from the US drugstore chain’s enormous cash flow.
When Alliance Boots was created, market pundits feared that it was a pricey, top-of-the-market merger that relied too much on debt and leverage. However, given the full price offered by Walgreens, KKR and Pessina look to have made a tasty profit on their investment.
Despite the subsequent credit crunch and global recession, the current owners of Boots could, by 2015, double or triple their original equity investment made in 2007. That’s a fairly decent return, given the global financial turmoil of the past five years.
Then again, shareholders in Walgreens may not be so delighted with this deal. On Monday, before it was announced, Walgreens shares closed at $31.96. Last night, they closed at $29.21, down 8.6% in 48 hours. Hence, the shares KKR and Pessina were given are already worth about a twelfth less than they were prior to the deal being announced. Ouch.
The American Invasion
This is merely the latest in a long line of US takeovers of UK firms stretching back decades. Indeed, there has always been healthy M&A (mergers and acquisitions) activity between our two countries, partly driven by our common language, shared Anglo-Saxon capitalism and broadly similar financial markets.
For example, in August 2011, US computing behemoth Hewlett-Packard (HPQ) launched an $11.7 billion bid to buy UK software firm and FTSE 100 member Autonomy Corporation.
Autonomy shareholders grabbed this cash with glee, thanks to the 2,550p offer price being pitched 64% above the firm’s share price before the deal was announced. However, it remains to be seen how successful HP’s takeover of the Cambridge-based firm will be, after Mike Lynch (Autonomy’s founder) left HP last month.
Furthermore, when US food giant Kraft Foods (KFT) launched a £10.2 billion bid for famous British chocolate company Cadbury in September 2009, it led to a trans-Atlantic war of words. Eventually, Kraft won Cadbury for £11.5 billion in March 2010, but then reneged on promises not to close several British factories.
What’s more, there was more US-UK M&A news this week when the share price of FTSE 250 engineer Invensys (London: ISYS) yesterday soared by almost a third (33%) to close at nearly 270p, up 67p.
Alas, shares in Invensys slumped by a sixth (16%) this morning to 215p, after the firm confirmed that it had "been in highly preliminary discussions with third parties" about possible transactions. However, these discussions—including "a highly preliminary approach" from Emerson Electric (EMR)—are no longer ongoing.
Four UK Targets for US Firms
Following the Boots/Walgreens news, I poked around the FTSE 100 (UKX) to find firms that would be a good fit for cash-rich US rivals. Here are four that I found:
With a market value of £35 billion, AstraZeneca (LSE: AZN)—the UK’s second-largest drug-maker—might be a good fit for US giant Johnson & Johnson (JNJ). Right now, Astra trades on a forward price-to-earnings (P/E) ratio of just 7.4 and a dividend yield of 6.8%, covered 2.1 times. What’s more, this would be a "clean" deal for J&J as—unlike almost every other FTSE 100 firm—Astra has net cash.
As well as being the world’s biggest can-maker for food and drinks, Rexam (London: REX) also supplies plastic packaging to the health-care, pharmaceutical, personal-care,. and household-care markets. When I last reviewed Rexam’s results in February 2011, I gave this "dull" company a big thumbs-up.
With a market value of £3.6 billion, I believe that this FTSE 100 firm would be an ideal meal for Berkshire Hathaway (BRK-B), investing genius Warren Buffett’s conglomerate. Buffett loves market leaders in boring businesses (he’s bought brick, carpet and roofing companies), so I’m certain that Rexam would be an ideal piece to add to Buffett’s jigsaw.
3. BAE Systems
Despite being Britain’s leading defence business, BAE Systems (London: BA) has a market value under £9.5 billion, trades on a forward P/E of just 7.2 times and offers a prospective dividend yield of 7%, covered 2.1 times.
Surely, BAE would be a steal for a giant American defence contractor such as Lockheed Martin (LMT)? On the other hand, the UK government’s "golden share" in BAE—plus the requirement for the group to have a British chief executive—could deter even the friendliest foreign bids.
4. Sage Group
Always the bridesmaid and never the bride, Sage Group (London: SGE) has watched as countless other European software businesses have fallen into the arms of deep-pocketed US competitors. In the past, Sage has been linked to deals with the likes of Microsoft (MSFT) and other high-tech giants, but remains independent.
Nevertheless, with a market cap below £3.5 billion, a forward P/E of 13.4, and a prospective dividend yield of 4.2%, covered twice, surely Sage would be a nice fit for the likes of Larry Ellison’s Oracle Corporation (ORCL)?