M&As boom as Costa and Sky change hands

It’s boom time for Mergers and Acquisitions, with Costa, Sky, Versace and Randgold Resources, all preparing for life under new owners.

Article updated: 25 September 2018 at 9:00am Author: Michael Baxter

At first, it felt like a puzzling contradiction; according to a report from Willis Towers Watson, the global M&A market underperformed in the latest quarter, as it did in the previous three quarters. But then, according to Thomson Reuters, global M&A deals have been worth $3.24 trillion so far this year, 40 per cent up on last year — and a record breaker.

But then when you look a bit closer at the Thomson Reuters report, you find that the number of deals is down, their value has increased.

Both reports agree on one thing, M&A in Europe is up.

The Brexit effect

The falls in sterling seen over the last couple of years have made UK companies seem cheap. While, at the same time, Brexit is not perceived in the same negative light in the US as it is in Europe. Meanwhile, the pound is weak, the dollar is strong. All these factors have driven up interest in UK firms among US companies.

Words written in the FT struck me as disturbing. “Companies are racing to remake themselves by snatching trophy assets or consolidating with rivals before the business cycle turns,” said the pink-en.

Doesn’t that strike you as bubble mentality? I wonder how many deals agreed during this period, agreed in haste, will look excessive in a few years time, with lots of leisure time to repent.

Comcast Sky

Shareholders in Sky have reason to celebrate — as Comcast’s £17.28 a share offer for Sky trumps the 21st Century Fox bid. The deal leaves a question mark over what Fox will do with the 39 per cent of Sky it currently owns.

It seems that Rupert Murdoch’s dream to own Sky outright was destined to always fail — with the News of the World bid scuppering his previous attempt to gain control of the company.

But this time, the Comcast deal is about something bigger. Disney and Comcast are trying to get into the market that Netflix and Amazon have made so lucrative. Sky’s customer distribution, original content and indeed its deal with HBO to distribute Game of Thrones on this side of the pond, have made it very attractive.

And so Disney wins the battle over Comcast to own Fox, Comcast wins the battle with Fox to own the majority of Sky.

Meanwhile, the BBC’s drama the Bodyguard becomes the channel’s most successful drama this decade. I cite the example of the Bodyguard to illustrate a wider point. The battle that rages between Netflix, Amazon, Sky, Disney, Comcast and indeed with Apple waiting in the wings is about content. The BBC, ITV and Channel Four, which have talked about plans to pool resources in a bid to take on Netflix outside of the UK, are worthy challengers. ITV may not have produced The Bodyguard, but it has outstanding content; shares could be interesting.

Costa

As for the Coca Cola deal to buy Costa Coffee from Whitbread for £3.9 billion, to me this makes a lot of sense.

I base this solely on a subjective judgement. As a consumer, I prefer Costa to Starbucks. Whitbread has a market cap of £8.5 billion, or roughly $11 billion. Coca Cola has a market cap of $196 billion and Starbucks $76 billion. I think that, under the ownership of Coca Cola, which needs to reduce reliance on a certain sugary drink, which I happen to love, but at a cost to my waist-line, Costa will become a serious rival to Starbucks globally.

There is a lot of potential with this deal.

Who's next?

Spotting companies ripe for takeover is not anyways easy, and especially if we are in bubble territory — hoping to find potential targets can be dangerous.

Prime candidates might be companies whose assets are disproportionately more valuable when combined with the assets of another company.

So it’s a case for scale. If the benefits of economies of scale are significant, then there might be a strong case for M&A in that sector.

One example relates to companies in the content business, whose content becomes more valuable when combined with other content producers to offer a compelling proposition to consumers. That is why I think ITV looks interesting.

Another example could be companies with data. So a media company for example, generating data, may find that data is worth more per unit, when combined with several other companies with a lot of data. The media/publishing industry could also be ripe for M&A.

Another area might be companies with expertise, but lack the scale required to capitalise on this expertise. I wonder whether Tesla might ultimately be such a company. It has expertise in AI, both expertise and scale in lithium ion batteries, but is struggling to ramp up production of vehicles. On the other hand, the Tesla share price might need to fall a lot further, before it becomes an attractive bid target.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

See what else we have to say