With the bull market into its ninth year and counting, companies are allocating free cash flow away from share repurchases and toward M&A deals. The question is, who's going to hook up with whom?
While there's lots of liquidity out there in corporate America, the big wildcard in 2017 is Donald Trump. Should the president deliver pro-growth initiatives, such as reducing the regulation and bureaucracy companies face, CEOs are bound to make strategic acquisitions. If Trump pauses on plans for infrastructure, etc., as promised during the election, however, expect the level of deals to slow dramatically.
"If we go back into a period of higher market volatility, that will dampen the outlook for M&A," Gerry O'Meara, head of M&A at SunTrust Robinson Humphrey recently said in Forbes . "A lot of people are concluding we're going to get into a higher-growth mode as reflected by the equity market, but if we don't, then clearly we would have less activity."
With the AT&T Inc. (NYSE: T ) and Time Warner Inc (NYSE: TWX ) merger now expected to gain regulatory approval , investors ponder the next big deal. Here are seven M&A deals I think make a whole lot of sense.
Does anyone remember when Alimentation Couche-Tard Inc (USA) (OTCMKTS: ANCUF ) (now the world's second-largest convenience store operator, but much smaller back in 2010) tried to buy Casey's General Stores Inc (NASDAQ: CASY ) for $2 billion? I do.
Casey's fought off one of Canada's best-run companies by borrowing $500 million to repurchase 25% of its stock, a move that tripled its debt load. Casey's investors applauded. Since then, Casey's stock price is up 153.2% through March 9, which isn't bad until you consider that Alimentation Couche-Tard's stock is up 695.4% over the same period. Casey's might have won the battle, but it lost the war.
Casey's continues to miss quarterly earnings estimates , a big reason why its stock has gone sideways the past year; yet, its only solution is to continue repurchasing shares. Casey's shareholders might want to pray Alimentation Couche-Tard comes calling a second time, because that's the only way management's going to add value to its stock.
M&A Deals: Brown-Forman (BF.B) and Boston Beer (SAM)
If you take a look at Brown-Forman Corporation's (NYSE: BF.B ) roster of brands you'll notice that while it has some of the best names in Whiskey (Jack Daniel's, Woodford Reserve), Scotch (The Benriach), Tequila (Herradura), Vodka (Finlandia) and Wine (Sonoma-Cutrer), it has no representation in the beer category.
That wouldn't be so bad if it were firing on all cylinders, but its most recent earnings report suggests that it's run out of growth vehicles (the exception being legacy products such as Jack Daniel's). Jim Cramer recently suggested that tequila is where the growth is in the spirits business, while craft beers rule the roost when it comes to beer.
My thought is that Brown-Forman buys Boston Beer Company Inc (NYSE: SAM ) - its stock is cheap right now at 21 times earnings and near a 52-week low - which then goes on a craft beer buying binge, picking up several of Boston Beer founder Jim Koch's favorite craft beers not named Samuel Adams. It then repeats the process in each category, especially tequila, buying craft distillers and winemakers that are capable of driving revenue and profits higher.
Jack Daniel's will always be at the heart of its business, but it needs to take a few risks if it wants to be a global player in the liquor industry.
M&A Deals: General Motors (GM) and Fiat Chrysler (FCAU)
"There's no doubt that I think Mary (Barra, GM CEO) and her team are focusing on improving the profitability of the house and this is seen as a quick fix to a problem which has been sitting inside GM for a long time," Marchionne said while attending the Geneva Motor Show. "I understand that they (GM) want to get out just to get rid of the problem, but you may have thrown out the baby with the bathwater."
Marchionne sees a merger between the two companies as the most desirable tie-up for the maker of Jeep SUVs; I couldn't agree more. Value investor Mohnish Pabrai recently called Marchionne a genius , suggesting you would have made a boatload of money over the years simply by investing in Marchionne-led companies such as FCAU.
Jeep is a cash cow that any car company would love to have on its side and it's expected to generate $4 billion in pre-tax earnings in 2018. Fiat has a huge presence in Europe something GM sorely lacks. A combination would help FCAU in North America and other parts of the world while GM would be able to ride Fiat's coattails in Europe.
Marchionne's stepping down in 2019 … GM, the clock is ticking.
M&A Deals: International Speedway (ISCA) and Speedway Motorsports (TRK)
The white flag you see being waved at racetracks across the country is Nascar surrendering its hold on the American consumer. Once upon a time it could do no wrong … now, it can do no right. Attendance figures have fallen off a cliff to the point where racetracks are removing hundreds of thousands of seats and replacing them with anything that can help regain the sport's former glory. Unfortunately, that might be part of the problem.
"What made the sport was veteran drivers, stock cars, some hot tempers, and affordable tickets," fan Steve Taylor posted to an online Nascar forum. "You just can't turn a shade tree garage event into an elitist affair and expect the fans that made the sport to keep on liking it … There was a sincerity in the sport that got lost with the helicopter fly-ins, the $120 tickets, and the sameness of the cars."
Okay, so, if there are too many tracks and too many seats and not enough fans, the logical thing to do would be for the two big players - International Speedway Corp (NASDAQ: ISCA ) and Speedway Motorsports, Inc. (NYSE: TRK ) - to pool their resources by merging, finding cost-saving synergies, shutting unproductive tracks in much the same way retail is currently rightsizing and reducing the competition.
ISCA owns 13 tracks, including Daytona, while TRK has 8 properties, including a newly reconfigured road course at Charlotte Motor Speedway. In fiscal 2016, ISCA generated net profits of $76.3 million from $661 million in revenue; TRK generated net profits of $39.5 million from $512.2 million in revenue.
A combined entity could easily double profits with no uptick in revenue. Nascar fans are changing; the two big track owners should also.
M&A Deals: Lululemon (LULU) and Under Armour (UA)
The hunter becomes the hunted. Lululemon Athletica inc. (NASDAQ: LULU ) rules the women's athleisure market while Under Armour Inc (NYSE: UA ,NYSE: UAA ) is formidable in the men's athletic apparel market, and the two companies should seriously consider merging. Considering Under Armour's slowing sales, time is of the essence.
Adidas AG (ADR) (OTCMKTS: ADDYY ) has a new president who's committed to growing its fashion business and taking down its competitors in North America. "The lifestyle market is a lot bigger than the sports market, so we have to participate in that," Chief financial officer Robin Stalker said at a press conference, adding that casual wear now makes up about 30% of sales. "There are the Stan Smiths and Superstars, but there are also other products we will manage over many seasons.''
Translation: Under Armour CEO Kevin Plank better do something or he's going to find his business in total disarray over the next three to five years. A LULU/UA combination is a proactive way to stop Adidas before it gets going.
M&A Deals: Philip Morris (PM) and Canopy Growth (TWMJF)
Way back in early 2014 I already was talking about the tobacco companies getting into the cannabis business citing their expertise in producing huge amounts of product as a big positive in this rapidly expanding industry. Canopy Growth Corp (OTCMKTS: TWMJF ) has a $1.3 billion market cap despite the fact it generated just $30 million in revenue over the past 12 months and is currently losing money. Wisely, the company changed its stock symbol on the Toronto Stock Exchange in February to "WEED" from "CGC."
My rationale for Philip Morris International Inc. (NYSE: PM ) buying Canopy Growth is a simple one. When Philip Morris was spun off from Altria Group Inc (NYSE: MO ) in 2008 , it lost the right to sell cigarettes in the U.S. market. While it does sell in the Canadian market, it's a much smaller piece of the pie and not nearly as lucrative.
By acquiring Canopy Growth it gains two things: entry into one of the most potentially lucrative industries in the world and the opportunity to re-enter the U.S. marketplace, something all companies desire. It's kind of like a whale swallowing a minnow, but a win-win situation nonetheless.
M&A Deals: Polaris (PII) and Arctic Cat (ACAT)
PolarisIndustries Inc. (NYSE: PII ) and Arctic Cat Inc (NASDAQ: ACAT ) are bitter rivals for the affection of outdoor enthusiasts in the state of Minnesota where both snowmobile and ATV manufacturers are based - but that's where the commonalities end. Arctic Cat is David to Polaris' Goliath. I know what you're thinking, "Didn't Arctic Cat just get bought by Textron Inc. (NYSE: TXT ) for $18.50 per share?" They did indeed, but a guy can dream.
Arctic Cat had a market cap of $240 million when it got taken private, exactly 1/23rd the size of Polaris. While Arctic Cat has some excellent products, it just couldn't compete with Polaris and despite some hiccups in Polaris's business in 2016, the two companies under one roof would have been a good combination.
Textron's CEO would beg to differ.
"Arctic Cat is an ideal fit with our growing range of off-road recreational vehicles," said Textron president and CEO Scott Donnelly. "The addition of Arctic Cat to our Textron Specialized Vehicles business instantly gives us a deeper product line for customers, greater potential for innovation, and introduces new sales opportunities for our combined worldwide dealer network."
Personally, I think Arctic Cat is going to get lost within the industrial conglomerate's many businesses and won't be given the attention it needs. Here's to Textron making a mess of it so Polaris gets a second chance three-to-five years down the road.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.