In a move to control distribution costs, PepsiCo. offered on April 20 $6 billion to purchase PepsiAmericas and Pepsi Bottling Group. According to Indra Nooyi's talking points, there are at least $200 million in negative synergies that can be eliminated through this transaction! PepsiAmericas (the local tie) filed its obligatory 8-K the next day.
Why isn't this grabbing the attention of the local press! $6 billion is never something to yawn at, but especially when there's a dearth of deal activity here in town!
The Pohlad family owns PepsiAmericas (PAS). PEP is offering $23.27/share of PAS -- 50% of the consideration is cash, and the remainder is PEP stock. With an extra 17% per share over the April 17 closing price, we could really compete in the AL Central (or purchase snow removal equipment for next April's games)!
PepsiCo. expects the deal to be immediately accretive by $0.15/share upon full realization of synergies. Because both companies are public, it's fairly easy to model this and test it. I am working on that, and will get back with my findings.
On a legal note, though, much of the buzz is discussing the structure of the deal. Whether it's a forward- or reverse-merger has significant tax obligations.
In short, in a reverse merger PepsiCo creates a subsidiary (which ultimately extinguishes by operation of law) and gets a "stepped-up basis" in PAS. This reduces its future tax liability when/if it sells off PepsiAmericas and PAS shareholders are forced to pay capital gains. PEP wins; PAS loses.
In a forward merger, PepsiCo again sets up a subsidiary, but this time the sub "swallows" PAS
so that PAS extinguishes by operation of law. Its a tax-free transaction for the Pohlads, but PEP receives a lower basis (read, higher tax bill in the future). PEP loses; PAS wins.
We will see how this plays out...
Wednesday, April 29, 2009
Saturday, April 25, 2009
Piper Jaffray IPOs Rosetta Stone and BPI
Last Friday I met Andrew Duff -- CEO of Piper Jaffray -- while attending the Board of Advisors meeting for the UST MBA program. Our conversation quickly turned to the recent "thawing" of the IPO market, as evidenced by the recent (week of April 13) IPOs of both Rosetta Stone (RST) and Bridgepoint Education (BPI).
For RST, Piper acted as co-manager of the offering alongside Robert W. Baird. Assuming the standard management fee of 20% of the 7% gross spread, Piper hauled in 0.7% of funds raised for RST (20% of 7%, split two ways). On the $112.5mm raise, then, Piper received an estimated $787,500.
For BPI, Piper acted as co-manager alongside Signal Hill and BMO Capital Markets. Assuming the standard management fee of 20% of the 7% gross spread, Piper hauled in 0.47% of funds raised for BPI (20% of 7% split three ways). On the $202.5mm raise, then, Piper received an estimated $945,000.
Being a "manager" of an IPO is different than being an "underwriter". The manager assembles the syndicate of investment banks to underwrite the offering, while the underwriter guarantees the issuer that it will purchase an agreed number of shares at an agreed price. The underwriter therefore assumes the pricing risk inherent in the transaction (assuming it's a "firm underwriting", as most are).
Norwest Equity Partners had a 40% stake in RST -- I wonder how this local connection affected/enabled PJ to play a managing role in this successful issuance.
Note the bunching of offerings that has recently occurred in the for-profit post-secondary education sector. Even though the IPO market has been non-existent, BPI just IPO'd and in November Grand Canyon Education (LOPE) also did so. As HBS' I-Banking prof Josh Lerner says, "the bunching of offerings is even more dramatic when patterns are examined on an industry basis." p400.
This sector is booming given its counter-cyclical nature, demographic trends, and the education income gap. I recently convinced the Aristotle Fund to invest $60K of our $1.8mm endowment in Strayer Education (STRA) at $157/share.
For RST, Piper acted as co-manager of the offering alongside Robert W. Baird. Assuming the standard management fee of 20% of the 7% gross spread, Piper hauled in 0.7% of funds raised for RST (20% of 7%, split two ways). On the $112.5mm raise, then, Piper received an estimated $787,500.
For BPI, Piper acted as co-manager alongside Signal Hill and BMO Capital Markets. Assuming the standard management fee of 20% of the 7% gross spread, Piper hauled in 0.47% of funds raised for BPI (20% of 7% split three ways). On the $202.5mm raise, then, Piper received an estimated $945,000.
Being a "manager" of an IPO is different than being an "underwriter". The manager assembles the syndicate of investment banks to underwrite the offering, while the underwriter guarantees the issuer that it will purchase an agreed number of shares at an agreed price. The underwriter therefore assumes the pricing risk inherent in the transaction (assuming it's a "firm underwriting", as most are).
Norwest Equity Partners had a 40% stake in RST -- I wonder how this local connection affected/enabled PJ to play a managing role in this successful issuance.
Note the bunching of offerings that has recently occurred in the for-profit post-secondary education sector. Even though the IPO market has been non-existent, BPI just IPO'd and in November Grand Canyon Education (LOPE) also did so. As HBS' I-Banking prof Josh Lerner says, "the bunching of offerings is even more dramatic when patterns are examined on an industry basis." p400.
This sector is booming given its counter-cyclical nature, demographic trends, and the education income gap. I recently convinced the Aristotle Fund to invest $60K of our $1.8mm endowment in Strayer Education (STRA) at $157/share.
Friday, April 17, 2009
Wall St. comes to Wacouta St.: What's a name worth?
I started this blog partially to highlight "deal" news that doesn't make the national/Manhattan level. But today the Wall St. Journal came to us!
In this article, the Journal discusses the Polaroid s363 auction out of Petters' Group's Chapter 11 filing. The deal was portrayed as a marquis example of the "new world of mergers and acquisitions" -- a world where Vultures soar high. Stephen Spencer of Houlihan Lokey handled the auction.
It appeared that Patriarch Partners (NY) auction bid of $88.1 million had won the iconic Polaroid. But later Judge Kishel announced that Polariod creditor committee preferred a $87.6 million cash-and-equity bid by PLR holdings, a joint-venture bid of Hilco (Trnto)/Gordon Brothers (BSTN). PLR offered the maximum 25% equity. Apparently, the creditors were attracted to the capitalization structure (particularly the minority shareholder's rights) that PLR offered.
Polaroid was purchased in 2005 for $426M. Ouch.
Given the utter implosion of the paper film industry, the purchase is primarily buying the goodwill/name-brand of Polaroid.
(The Strib had different bid #s: $86.4 for Patriarch and $85.9 for the JV.)
With $400M in FY08 revenue, the sale yields a 4.6x price-to-revenue multiple. Not a particularly helpful datapoint, but one nonetheless.
This is only the latest iteration of the Polaroid bankruptcy proceedings. There have already been 2 other 'sales'. On March 30, Partriarch appeared to have won with a $59.3M bid. PLR won the second 'sale' with $72.6M.
In this article, the Journal discusses the Polaroid s363 auction out of Petters' Group's Chapter 11 filing. The deal was portrayed as a marquis example of the "new world of mergers and acquisitions" -- a world where Vultures soar high. Stephen Spencer of Houlihan Lokey handled the auction.
It appeared that Patriarch Partners (NY) auction bid of $88.1 million had won the iconic Polaroid. But later Judge Kishel announced that Polariod creditor committee preferred a $87.6 million cash-and-equity bid by PLR holdings, a joint-venture bid of Hilco (Trnto)/Gordon Brothers (BSTN). PLR offered the maximum 25% equity. Apparently, the creditors were attracted to the capitalization structure (particularly the minority shareholder's rights) that PLR offered.
Polaroid was purchased in 2005 for $426M. Ouch.
Given the utter implosion of the paper film industry, the purchase is primarily buying the goodwill/name-brand of Polaroid.
(The Strib had different bid #s: $86.4 for Patriarch and $85.9 for the JV.)
With $400M in FY08 revenue, the sale yields a 4.6x price-to-revenue multiple. Not a particularly helpful datapoint, but one nonetheless.
This is only the latest iteration of the Polaroid bankruptcy proceedings. There have already been 2 other 'sales'. On March 30, Partriarch appeared to have won with a $59.3M bid. PLR won the second 'sale' with $72.6M.
Monday, April 13, 2009
Modeling Tip: Determine Price w/o Synergies
In determining Enterprise Value, buyers (either financial or strategic) firms must determine the Target's standalone value. The Buyer will often project realization of synergies, but these must be removed from the model for valuation purposes.
Thus two models must be constructed: a standalone and a synergistic model. The standalone model is the value of TargetCo by itself (ie, the present value of its future cash flows -- discounted by its WACC), while the synergistic value is the result of reduced expenses and/or increased revenues as a result of the merger of the two companies. The difference between these two is the "synergies spread".
I missed this distinction during the ACG Cup. I had constructed a single LBO model, and was presenting its findings to a fictional PE firm (in reality this "firm" was the judges of the competition, composed of Houlihan Lokey, NEP, Grant Thorton professionals). Alan Thometz of Grant Thorton (Head of its Transactional Advisory Services group) asked me "aren't you asking us to pay for some of the value we bring to the table?" The answer was yes, but I didn't realize it at the time.
To correctly model a synergy-based buyout, be sure to model both a standalone and a "synergized" model.
Thus two models must be constructed: a standalone and a synergistic model. The standalone model is the value of TargetCo by itself (ie, the present value of its future cash flows -- discounted by its WACC), while the synergistic value is the result of reduced expenses and/or increased revenues as a result of the merger of the two companies. The difference between these two is the "synergies spread".
I missed this distinction during the ACG Cup. I had constructed a single LBO model, and was presenting its findings to a fictional PE firm (in reality this "firm" was the judges of the competition, composed of Houlihan Lokey, NEP, Grant Thorton professionals). Alan Thometz of Grant Thorton (Head of its Transactional Advisory Services group) asked me "aren't you asking us to pay for some of the value we bring to the table?" The answer was yes, but I didn't realize it at the time.
To correctly model a synergy-based buyout, be sure to model both a standalone and a "synergized" model.
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