Mergers and acquisitions are back on the front page, and there are some clear differences among the deals, notes Josh Peters of Morningstar DividendInvestor.
Think the price of one of your stocks is too low? Then just buy the whole company!
This is a dream beyond comprehension for most of us, but perhaps not for the famous activist investor Carl Icahn.
Apparently dissatisfied with the market value of Clorox (CLX), he recently made an offer to purchase the 90% of shares he doesn’t already own for $76.50 a share in cash. [An offer that Icahn boosted to $80 a share today, after this story went to press—Editor.]
Icahn submits that Clorox could be worth $100 a share to strategic buyers. What he’d like to do is see Clorox put itself up for sale.
This saga has been brewing in the background for a while, and it hasn’t had much effect on my view of the stock—which had been trading roughly in the neighborhood of our $68 fair-value estimate for Clorox as a standalone entity.
I think Icahn’s $100 figure is a bit fanciful, as is his assumption of potential synergies, and I doubt that most of the potential strategic acquirers he lists in his letter would be interested (Kimberly-Clark (KMB) in particular looks like quite a stretch).
I certainly wouldn’t be a buyer of Clorox here—the most likely outcome might be no deal at all. Icahn’s offer arrived with a letter from his investment bankers stating that the debt financing he would need should be available, but this is well short of a firm commitment.
On the other hand, I was reasonably satisfied continuing to hold Clorox in the $68 area for its long-term dividend-growth prospects. The premium the stock trades at now is not so large or so vulnerable that I feel a need to take the money and run.
Elsewhere in the merger game, the Energy Transfer Equity (ETE)/Southern Union (SUG)/Williams (WMB) story is still unfolding. Two weeks ago, ETE raised its offer for Southern Union from $33 to $40 in cash and/or ETE units; last week, Williams hiked its all-cash bid to $44; three days ago, ETE weakly responded with $44.25.
From our point of view as ETE holders, there’s a pretty strong strategic rationale for this link-up, as Southern Union’s long-haul interstate pipes would open up new markets for Energy Transfer’s intrastate system in Texas.
As a result, we’ve raised our fair values for both ETE and its subsidiary Energy Transfer Partners (ETP), which is predicated on ETE’s most recent offer having an 80% chance of going through as currently proposed.
Williams’ all-cash offer may look better at first glance, but since we think ETE’s units are undervalued, we value its bid at $46 for each Southern Union share—and investors who take ETE units instead of cash can defer their taxable gains while participating in ETE’s hefty yield and substantial distribution-growth potential.
Being no fan of M&A in general, though, I certainly hope that the bidding doesn’t go much higher from here; overpayment is clearly a risk for the winner. Both ETE and ETP continue to trade below my buy prices ($47 and $55, respectively), but I think I’d wait until the fate of Southern Union is nailed down before initiating new or increased positions.
Last week, our fair-value estimate for AT&T (T) was raised because of M&A potential too, as we fed part of the potential benefit of the proposed acquisition of T-Mobile into our valuation. We still estimate AT&T’s existing operations to have a standalone value of $32 a share.
With that as a starting point, T-Mobile could add as much as $5 if the deal goes through as announced, or subtract $1 through the break-up fees AT&T has agreed to pay Deutsche Telekom (OTC: DTEGY) in the event regulators turn the purchase down.
The average of plus-$5 and negative-$1 is $2, and with no way to estimate the odds of success with any precision, our fair-value estimate for AT&T is now $34.
This leads in turn to a buy price of $29, which I would find reasonable for interested buyers given the 5.9% yield it implies. [Shares were trading at $30.37 at 3:45 p.m. on Thursday—Editor.]
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