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US Takeovers Are Hot Stuff – Provided Buyers Can Afford Them

This should be the time when forward-thinking bosses can launch a takeover without having to fight a counterbid from a private equity firm, and hopefully end up paying a sensible price. And yet the shareholders of corporate buyers are punishing acquisitive ambition. What looks like an open goal is actually a trap.

Take Brenntag SE. Shares of the German chemicals distributor have slid more than 10% since Bloomberg News revealed it was mulling the purchase of US peer Univar Solutions Inc. A deal would enhance Brenntag’s US position at a time when European customers are grappling with a fragile economy and insecure energy supplies. The cost savings, estimated by Barclays Plc analysts at 400 million euros ($412 million) annually, appear to justify paying a typical takeover premium on Univar’s undisturbed market value of $5.1 billion.

Univar is in that sub-$10 billion sweet spot where private equity has historically been active. With financing for leveraged buyouts still gummed up, such targets are theoretically easy purchases for corporate buyers today. Just not in practice.

Shareholders have been similarly nervous about other recent US deals, with savage market reactions to Regal Rexnord Corp.’s offer for engineering peer Altra Industrial Motion Corp., Ritchie Bros. Auctioneers Inc.’s for auto retailer IAA Inc. and Chart Industries Inc.’s for industrial machinery rival Howden Group Ltd. The principal worry appears to be adding leverage and management distraction at a time of acute economic uncertainty.

Regal guided that its net debt could hit four times combined earnings before interest tax, depreciation and amortization on its deal – more than double the current level. Ritchie’s would increase to around three times, from having negligible leverage today. Chart’s would rise to more than four times Ebitda. All three stressed their commitment to de-leveraging.

A decent all-cash offer for Univar would be a relatively big deal for Brenntag, which has a market cap of 9.2 billion euros and would have to pull on every financing lever available. 

Contrast the deals that are nudging stock prices higher. Germany utility RWE AG got a warm market reception for its $7 billion purchase of the renewables unit of New York-listed Consolidated Edison Inc., and its shares have only slightly underperformed the European utilities sector since. But that deal is comfortably below half RWE’s market value, the target sector is in vogue and RWE lined up Qatari funding in support.

Likewise, Aegon NV’s agreement to merge its domestic operations with ASR Nederland NV has gone down well. It’s a low-risk transaction in the Dutch insurer’s home market, which will see Aegon receive cash plus a minority stake in the combined business.

Investors’ selective support for dealmaking poses a particular challenge for European companies that want to make acquisitions in the US seeing it as an economic safe haven.

Are investors wrong to be so cautious? Probably not. Taking on leverage right now — whether for acquisitions or buying back shares —  does indeed demand special justification. It’s entirely reasonable to expect acquisitive chief executives to show they have the skills to integrate a mammoth acquisition at a time when running the existing business is likely to become increasingly challenging. And the onus is on bosses to show M&A isn’t about compensating for weakness in their existing operations.

They also need to be cognizant of not springing surprises. It hardly helps Brenntag that a deal would fundamentally alter an investment case that’s hitherto rested on organic growth and smaller deals, as Barclays research points out. You need to soften up investors for game-changing moves. Unilever Plc’s failed attempt at a whopping £50 billion ($60 billion) bid for Haleon Plc made that all too clear in January.

Corporate M&A departments should certainly scout for opportunities. But no CEO has a free pass to do takeovers that add financial risk, whatever the industrial and strategic logic. Successful dealmaking today must be about much more than exploiting the weakness of private equity.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

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