By Kevin Ketcham and Justin Zacks
Each trading day, Dealreporter analysts pick out hints of future material developments in merger arbitrage and special situations by combing through dozens of transcripts, SEC filings, analyst reports and news stories. This raw data is combined with proprietary insights and commentary to produce an exclusive report that offers short and long-term ideas for investors. Here they highlight the most intriguing deals of 2018 as well as trends to watch in 2019:
M&A Sector Trend of the Year
Restaurant deals were the toast of the town in 2018. Fresh off completing the acquisition of Buffalo Wild Wings earlier this year, Roark Capital launched the multi-brand restaurant company Inspire Brands and wasted no time in striking a deal for Sonic in September for a roughly 20% premium, or about 15x the last 12 months’ adjusted EBITDA. The deal came shortly after The Wendy’s Company sold its 12.3% stake in Inspire Brands back to the company for $450 million. Wendy’s also didn’t shy away from potential acquisitions this year, reportedly breaking off talks to acquire pizza chain Papa John’s, which itself continues to battle 30.9% shareholder and founder John Schnatter over the strategic direction of the company. The November announcement that Bojangles would be taken private at about 10x LTM adjusted EBITDA may have thrown some cold water on valuations in the sector. Deal activity shows no signs of cooling, however. After completing the sale of its Qdoba Mexican restaurant chain to Apollo Global Management for about $305 million, Jack in the Box confirmed its own process to explore strategic alternatives. Like the majority of these deals, Jack in the Box was pressured by an activist. Outback Steakhouse owner Bloomin Brands is currently dealing with activist Barington Capital and with the board nomination window now open, things may heat up.
T-Mobile US’s acquisition of Sprint
The Why: $6 billion in expected annual run rate cost synergies with a net present value of $43 billion; marrying Sprint’s 2.4GHz spectrum holdings (essential in a 5G build-out) with T-Mobile US’s ability to develop it; the ability to compete nationally with Verizon Communications and AT&T.
The reasons the US’s third and fourth largest wireless carriers want to merge are clear and Sprint, at least, may not survive on its own without a transaction. Getting the deal past the finish line could be the hardest part.
The How: Sprint dropped its bid to acquire T-Mobile US in 2014 amid regulatory blowback. The question this time around is: has the competitive landscaped changed? And which way are the political winds blowing? In an encouraging sign, the parties have received national security clearance, while approval from the Federal Communications Commission and US Department of Justice still awaits. Verizon and AT&T have done little to lobby against the merger, but pressure has come from a variety of small organizations regarding consumer protection and the fallout of the merger on the companies’ workers.
Deal Most Influenced By Politics
Qualcomm’s proposed acquisition of NXP Semiconductors
This planned mega merger dominated the headlines in 2018. Qualcomm bowed to shareholder pressure back in February, upping its offer for NXP by 16% to $127.50 a share in cash. At the time, the deal had received eight of the nine antitrust approvals needed and Qualcomm was “optimistic” it would soon receive the final approval out of China. Just three weeks later, the White House unveiled an unprecedented order to prevent Broadcom’s attempted takeover of Qualcomm on national security grounds. Not long after, the US proposed tariffs on Chinese goods, kicking off a trade war and curbing any momentum Qualcomm may have had with Chinese antitrust authorities. As it became more apparent that approval was being held up by trade tensions, Qualcomm maintained its optimism but began to guide for a plan B. A headline-driven roller coaster ensued over the coming weeks. Trade tensions never truly moderated. And with no word out of China as the 25 July end date passed, Qualcomm officially terminated the deal.
Bag Holders – Worst broken deal
Ant Financial’s failed attempt to buy MoneyGram
Back in early 2017, shareholders of MoneyGram saw their shares almost triple in value after the money transfer company was involved in a bidding war between Ant and Euronet Worldwide. An increased offer from $13.25 a share to $18 a share in cash from Ant was enough to seal the deal in April 2017. By the fall of 2017, the failure of a couple of deals involving Chinese suitors, including Lattice Semiconductor’s proposed sale to Chinese state-backed Canyon Bridge Capital, as well as tough talk from across the aisle from Senate Minority Leader Chuck Schumer calling for vigilance on foreign takeovers of US companies, had led to questions surrounding the Committee on Foreign Investment in the US review of the MoneyGram transaction. In early 2018, with shares trading near $13.30, the parties called off the merger after failing to receive CFIUS’s blessing. Shares are now trading near $2, down some 84% since the deal was called off and a whopping 89% lower than the $18 a share deal price. Higher compliance standards related to questionable transactions as well as growing pains in switching to a digital/mobile platform also hurt the stock in 2018.
Kevin Ketcham and Justin Zacks write a daily editorial column for Dealreporter that offers proprietary insights and commentary into event driven situations including M&A. They can be reached at firstname.lastname@example.org