Let’s Make a Deal, Brexit Edition
Last week I half-jokingly promised my editor that I wouldn’t mention Brexit in today’s column since we’re all tired of hearing about it. But breaking news that Paris-based yogurt maker Danone (DANOY) will buy American organics food producer The WhiteWave Foods Company (WWAV) has compelled me to renege. While this transaction had been in negotiations well before the outcome of the Brexit vote was known, I believe it may portend a wave of similar deals driven by European companies wanting to diversify with U.S. holdings.
This deal makes sense even if the Brexit vote had gone the other way. Danone will immediately double its sales in the United States without cannibalizing any of its other businesses. And Danone didn’t have to surrender a king’s ransom to get the deal done: it will spend $12.5 billion in an all-cash transaction at a cost of $56.25 per share, or roughly 20% higher than the price WWAV shares closed at the day before the deal was announced. That’s a healthy premium, but hardly exorbitant.
(WhiteWave was a holding in Investing Daily’s Breakthrough Tech Profits. We recommended it on March 21, and sold it when the deal was announced—pocketing a healthy 38.4% gain. I explain how we picked WhiteWave below.)
Although WhiteWave had been the subject of takeover rumors for a long time, most of them centered around American companies such as General Mills and PepsiCo. But the outcome of the Brexit vote most likely motivated Danone to up the ante to lock up WhiteWave before someone else nabbed it. There aren’t many companies like WhiteWave available in the food sector, especially one that is such a good fit with Danone’s existing business.
This may be only the first of many large transactions by European companies that can see the writing on the wall. If Brexit ultimately results in a full or partial breakup of the European Union, then a lot of companies headquartered in England, France, Germany and Italy will need a new game plan to achieve long term growth. And right now it doesn’t look like China will be the answer to their prayers, given its decelerating economy and fiscal shenanigans. That leaves American companies as the most likely source of future growth.
So it looks like investors have a new game to play: Let’s Make a Deal, Brexit Edition. The rumors will fly, and a lot of money will be made and lost as speculators either win big or lose big by trying to guess what’s behind door number two: a takeover bid or empty rumors.
Winning the Game
But it doesn’t have to be guesswork. You can give yourself an edge by applying a logical system for identifying likely takeover targets. Our WhiteWave pick came from one of our Breakthrough Tech Profits experts, Dr. Joe Duarte, who recommended WhiteWave because it scored highly in his Applied Technology Investment System (ATIS), which hones in on undervalued companies using technology to disrupt mature industries.
Of course, Joe had no way of knowing that this particular transaction was imminent, but he did know that WWAV was applying technology to the food business in a way that allowed it to create competitive products more quickly and cheaply than its competitors. And that is precisely the kind of company that a potential buyer would like to own. By purchasing WhiteWave, Danone is also gaining its management team, intellectual property and other resources that can be applied across the entire enterprise.
Unlike conglomeration, where a number of disparate businesses are cobbled together to mitigate sector risk, these Brexit-inspired acquisitions will be foreign businesses buying firms within their own sector to reduce geographic and currency risk.
Sounds good in theory, but the hard part is in figuring out which combinations will work, and which will not. For every successful intra-sector merger there is also an AOL/Time Warner fiasco that can nearly kill a business. That’s why most companies will not be as quick as Danone and WhiteWave were to agree to terms: The costs of Brexit is not yet clear, nor are the benefits of taking extreme action to avoid it.