November 30, 2020– Two significant trends in M&A have emerged over the past month that indicate perhaps the start of a new cycle in two sectors.
The first trend that has emerged is semiconductor consolidation. We previously highlighted specific sectors active in mergers and acquisitions, including biotech in the spring, gold this summer and energy last month. Recently, two large semiconductor transactions were announced:
- AMD’s all-stock, $35 billion merger with Xilinx at a 40.7% premium.
- Marvell’s cash and stock acquisition of Inphi for $8.5 billion, representing a premium of 42.2%.
The second trend that has grown into a consistent theme is the re-emergence of the leveraged buyout. We previously noted private equity’s absence throughout the pandemic-led bear market, when takeover candidates were at their cheapest. Now that equity markets are back to all-time highs and credit is readily available, private equity firms are announcing LBOs left and right. Recent buyouts include:
- Inspire Brands $11.3 billion buyout of Dunkin’ Brands at a 19.9% premium, the largest pandemic-era leveraged buyout. The deal was struck after Dunkin’s stock recovered to new all-time highs and at a valuation of 22.7x forecast EBITDA. Traditionally, private equity firms generated outsized returns by conducting buyouts at low valuations of 8x EBITDA or lower. Perhaps it is a new era where multiples always expand.
- Clearlake Capital’s $3 billion acquisition of Endurance International at a stunning 79.2% premium.
- Macquarie and GCM Grosvenor’s $300 million take-private of Alaska Communications at a 57.1% premium.
- American Securities $1.37 billion LBO of Foundation Building Materials at a 27.0% premium.
- Cerberus’ $1.2 billion management buyout of Dorel Industries at a paltry 0.8% premium highlights the risk of investing in management-controlled companies. Management is looking to take the company private at a rock-bottom valuation of only 5.2x forecast EBITDA, which is one of the lowest valuations I’ve ever seen for a buyout. It is not surprising that Dorel shares are trading above the consideration offered, indicating that minority shareholders expect a higher offer.
- Apollo Global’s $3.3 billion LBO of Great Canadian Gaming. While this deal was struck at a 34.9% premium and 12.3x forecast EBITDA, minority shareholders expressed dissatisfaction with the price offered. They will likely vote down the proposed offer unless it is materially improved.
Since last month’s Merger Monitor, fourteen U.S. mergers have been announced, representing an aggregate value of $80.9 billion, up from last month’s $73.8 billion.
The last ten announced merger deals offer an average merger yield of just 2%. On a relative basis, it is hard to allocate capital to these merger opportunities, which come with real and material downside risk, when we are forecasting returns as high as 10% for low-risk SPAC arbitrage. It is rational that, given this fact, the Accelerate Arbitrage Fund (TSX: ARB) now has 80% of its portfolio dedicated to SPAC arbitrage (up from 70% last month) and only 20% in merger arbitrage. Arbitrageurs who haven’t adapted and devoted their portfolios to SPACs have underperformed markedly in 2020, while SPAC arbitrageurs enjoy low-risk and consistent double-digit returns this year.
All is not uninteresting in merger arbitrage. Cardinal Resources, one of the top merger positions held in ARB, remains subject to a frenzied bidding war featuring three competing buyers that have lifted shares a stunning 425%. This bidding war continues and is one to watch, pleasing shareholders in the process.
The below AlphaRank Merger Monitor represents Accelerate’s proprietary analytics database on all announced liquid U.S. mergers. The AlphaRank Merger Arbitrage Effective Yield represents the average annualized return of all outstanding merger arbitrage spreads and is typically viewed as an alternative to fixed income yield.
Each individual merger is assigned a risk rating:
- AA – a merger arbitrage rated ‘AA’ has the highest rating assigned by AlphaRank. The merger has the highest probability of closing.
- A – a merger arbitrage rated ‘A’ differs from the highest-rated mergers only by a small degree. The merger has a very high probability of closing.
- BBB – a merger arbitrage rated ‘BBB’ is of investment grade and has a high probability of closing.
- BB – a merger arbitrage rated ‘BB’ is somewhat speculative in nature and has a greater than 90% probability of closing.
- B – a merger arbitrage rated ‘B’ is speculative in nature and has a greater than 85% probability of closing.
- CCC – a merger arbitrage rated ‘CCC’ is very speculative in nature. The merger is subject to certain conditions that may not be satisfied.
- NR – a merger rated NR is trading either at a premium to the implied consideration or a discount to the unaffected price.
The AlphaRank merger analytics database is utilized in running the Accelerate Arbitrage Fund (TSX: ARB), which may have positions in some of the securities mentioned.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). Visit AccelerateShares.com for more information. Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.