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Merger Monday Is Back
The last full week of June kicked off with a bevy of merger and acquisition activity. The drug industry saw the merger of a pair of niche players, Biovail (BVF) and Valeant Pharmaceuticals (VRX). At the same time, there were numerous smaller acquisitions, with a handful of food companies looking to bolster and expand their product portfolios.
Canadian drug maker Biovail and industry peer Valeant led the way, joining forces. Under terms of the proposed merger, Valeant stockholders would receive 1.7809 shares of Biovail stock for each VRX share held, in addition to a special cash dividend of $16.77 per share. The new entity would retain the Valeant name and is expected to benefit from significant cost savings through a 15%-20% workforce reduction. The company also would obtain a more-favorable tax structure (estimated at 10%-15%), just as Valeant's tax credits were set to expire this year. Upon closing, Biovail shareholders would own a slight majority of the combined entity. The union brings together Biovail’s antidepressant and pain-relief drugs, with Valeant’s treatments for chronic illnesses and its generic pipeline. Shared areas of focus, meantime, include the central nervous system and dermatology, as well as the Canadian and diverse global presences both possess. All told, the pair generated revenue of $1.65 billion, when combined, in 2009. The deal, which is subject to regulatory and shareholder approvals, is expected to close before the end of 2010.
Elsewhere, Global corn refiner Corn Products (CPO) entered into a definitive agreement to purchase National Starch, a specialty starch producer, for $1.3 billion in cash. The deal would broaden both Corn Product's ingredient portfolio, as well as its market footprint, and add around $1.2 billion in annual revenues, to around $5 billion. In addition, the company anticipates it will garner about $50 million in annual savings through manufacturing, procurement, and logistic synergies. The transaction is expected to close by the third quarter and be accretive to earnings by the end of 2011. Investors were not quick to agree with management’s assessment of the purchase, however, as Corn Products’ stock price traded sharply lower following the announcement.
Staying in the food space, Ralcorp Holdings (RAH) continues to build its franchise through acquisitions, adding to the Post cereal brands it purchased from Kraft Foods (KFT) not too long ago. To start things off, Ralcorp will venture into the spaghetti arena, agreeing to acquire American Italian Pasta for $1.2 billion in cash. The company will fund the deal through cash and current borrowings, as well as possibly new debt or equity issues, the prospects of which probably did not go over well with stockholders. In fact, RAH shares also fell sharply on the acquisition news. But it was not Ralcorp’s only move of the day. In a smaller turn, the company’s bids to buy privately held North American Baking and JT Bakeries were also accepted (specific terms were not disclosed). These two businesses should help Ralcorp build its gourmet cracker lineup.
Ketchup maker Heinz (HNZ) also got in on the act, in an attempt to bolster its footing in the Chinese market. The company purchase Foodstar, a soy sauce maker implanted in the fast-growing Asian nation. At a mere $165 million offer, the condiment acquisition is not quite as sizable as the aforementioned activities of Heinz’s food processing counterparts. But it may prove to be a steal over the long haul, as it opens the door for the company to dive into the $2 billion Chinese soy sauce market.
The M&A bug did not just bite the drug and food industries. Diversified manufacturer ITT Corporation (ITT) and electronic components distributor Arrow Electronics (ARW) also put some funds to work. ITT welcomed Godwin Pumps to its eclectic platform, paying $585 million for the pump maker. Godwin, which generates revenues topping $200 million annually, should help ITT enhance its already solid position in the water and wastewater service industries. Arrow, meanwhile, purchased Sphinx Group, a British distributor of security and networking products, for an undisclosed amount.
This recent activity may be just the beginning of an active M&A summer, as many companies look to take advantage of attractive valuations, while simultaneously seeking out quick ways to expand, whether it be tacking on new products, segments, or stretching their geographic wingspans. Although these deals still require standard regulatory and shareholder approvals, most are expected to contribute to results this year. Their long-term impact may potentially be much greater.