BusinessDay 26 Feb 2018

Monday 26 February 2018
@ FINANCIAL TIMES LIMITED 2015
C002D5556
FINANCIAL TIMES
COMPANIES & MARKETS
BUSINESS DAY
A9
Stocks to watch: Blue Buffalo,
Hewlett-Packard, Phoenix
Premium pet food maker is snapped up while RBS costs disappoint
BRYCE ELDER
Blue Buffalo Pet Products
rose 17 per cent in US
pre-market trading after
General Mills agreed to
buy the upscale pet food
maker at an enterprise valuation of
$8bn. The price tag is equivalent to
25 times Blue Buffalo’s 2017 ebitda
and more than 6 times sales.
Openheimer called the premium
paid by General Mills “fair”,
adding: “Although we see strategic
rationale for other players such as
Colgate-Palmolive, we do not see
another bid emerging.”
Hewlett-Packard Enterprise
gained around 12 per cent after its
first-quarter results beat forecasts
and nudged full-year guidance
higher, thanks in part to tax cuts.
The computer maker also set out a
$7bn cash return to shareholders
via buybacks and lifted its dividend
by 50 per cent.
“Despite the solid first quarter,
organic top-line growth, expectations
remain muted while operating
leverage seems largely driven
by restructuring,” noted analysts
at Berenberg, which repeated a
“hold” rating. “We see increasing
operational risk from both the latest
restructuring and the management
transition, and so believe it is
too early to be more constructive.”
In London, hedge fund manager
Man Group slipped after analysts
cut estimates to reflect a weak
performance through February for
its flagship AHL funds, which will
reduce performance fees. Merrill
Lynch lowered its 2018 earnings
forecast by 21 per cent.
General Mills is making a foray
into the fast-growing market
for natural pet foods after announcing
it will buy luxury dog food
maker Blue Buffalo Pet Products in a
deal worth about $8bn.
Described around the time of
its 2015 initial public offering as the
“Whole Foods of dog food”, Blue Buffalo
is one of the fastest-growing major
companies making natural pet treats
for dogs and cats within the $30bn US
pet food industry.
The Minneapolis-based company,
best known as the maker of Cheerios
and Lucky Charms cereals and Häagen-Dazs
ice cream, will acquire Blue
for $40 a share in cash, representing a
17.2 per cent premium to the target’s
closing price on Thursday of $34.12.
That gives the target an enterprise
value of about $8bn, taking into account
the total debt of $471m and
cash of $283m the company had on
its balance sheet as of December 31.
In pre-market trading on the
Nasdaq on Friday, Blue shares were
17.4 per cent higher to $40.05 while
General Mills was down 0.4 per cent at
$54.75. General Mills’ offer is double
Blue’s 2015 initial public offering
price of $20.
General Mills Chairman and Chief
Executive Officer, Jeff Harmening said
Phoenix was in demand after
announcing the £2.9bn acquisition
of Standard Life Aberdeen’s
insurance business, part funded
by £950m rights issue and £1bn of
vendor finance from Standard Life.
The deal will triple Phoenix’s assets
under administration.
Analysts at Barclays said Phoenix
has “acquired a material book
of business on attractive terms
that supports the current attractive
dividend yield of 6.5 per cent. The
question will be whether the deal
will allow the stock to be re-rated,
with the yield moving closer to its
UK life peers yields of Legal and
General and Aviva.”
British Airways owner IAG
was the FTSE 100’s sharpest faller
after its full-year earnings came in
slightly below consensus expectations.
BT Group jumped after regulator
Ofcom watered down broadband
price regulations, with BT’s
Openreach wholesale division allowed
to charge operators such as
TalkTalk higher prices than under a
September 2017 consultation.
Separately, Berenberg upgraded
BT to “buy” from “hold” with a 310p
target.
It told clients: “BT has been a
noisy, complicated story that we
believe many investors have found
easiest to ignore and avoid. We
believe the current share price now
represents an opportunity. In the
coming months, we will have more
clarity on many of the key aspects
of the investment case (regulation,
pension, capital expenditure risk),
after which newsflow should quieten
considerably.”
General Mills offers $8bn for luxury pet
food maker Blue Buffalo
Fast-growing market for pet pampering
PETER WELLS
in a statement on Friday the acquisition
of Blue represented a “significant
milestone” as the company reshaped
its portfolio in an effort to drive growth
and shareholder returns.
“In pet food, as in human food,
consumers are seeking more natural
and premium products and we have
tremendous respect for how attentive
Blue Buffalo has been to the needs
of their consumers, pet parents and
pets, as they have built their brand,”
Mr Harmening said.
“[W]e expect to help Blue Buffalo
by leveraging our extensive supply
chain, R&D and sales & marketing
resources. We will in turn benefit
from their experience building one of
the strongest pull brands in the CPG
world,” he added.
Blue on Friday announced a 10.9
per cent increase in annual sales to
$1.28bn in the 12 months ended December
31 and 24.3 per cent jump in
adjusted net income to $195m.
Analysts at Susquehanna said the
deal made sense for General Mills and
was not unexpected. “We think there
is potential for counter bids, either
from companies like [J M Smucker]
(trying to bulk up their pet food portfolio),
Nestle (pet food is a priority),
or from [consumer packaged goods]
companies not in pet food at present
trying to diversify into faster growth
categories,” they wrote in a note on
Friday morning.
Berkshire Hathaway gains $29bn on back of US tax reforms
Earnings rise by 87% even as Warren Buffett’s group steered away from mega-acquisitions
ERIC PLATT
Berkshire Hathaway, the sprawling
conglomerate headed by Warren
Buffett, on Saturday reported a
$29bn gain relating to changes to the
US tax code that were signed into law by
US president Donald Trump last year.
The tax reforms helped increase the
company’s net earnings by roughly 87
per cent from a year earlier to $44.9bn,
even as it shied away from the types
of mega-acquisitions for which it is
known and its insurance business faced
a string of catastrophes, including hurricanes
in the US and Puerto Rico and
wildfires in California. Berkshire’s net
worth increased by more than $65bn
in 2017.
Mr Buffett wrote in his annual letter
to shareholders that “2017 was far from
standard: A large portion of our gain did
not come from anything we accomplished
at Berkshire. The $65bn gain is
nonetheless real — rest assured of that.
But only $36bn came from Berkshire’s
operations. The remaining $29bn was
delivered to us in December when Congress
rewrote the US tax code.”
The $29bn bonus stems from the
billions of unrealised gains Berkshire
has accumulated over the years on its
enormous portfolio of stocks and for
which it had estimated potential taxes
on. The reduction in the corporate tax
rate to 21 per cent from 35 per cent cuts
the group’s tax liabilities.
While the US tax reform has led
to a flurry of mergers at the year’s
start — with multibillion-dollar tie ups
agreed by Blackstone and Thomson
Reuters and JAB Holding and Dr Pepper
Snapple — Berkshire has been
conspicuously absent. On Saturday, Mr
Wall Street rebounded and
Treasury yields slipped
on Friday as markets eye
a string of speeches from Federal
Reserve officials.
After finishing mixed on Thursday,
US stocks regained their footing
with the S&P 500 rising as much
as 0.7 pe r cent to 2,722.64, while
the Nasdaq Composite and Dow
also advanced.
Attention remains on the bond
market however amid a string of
stronger-than-expected inflation
Buffett assailed the dealmaking spree,
warning of the use of “extraordinarily
cheap debt” to finance acquisitions
and the lack of rational valuations.
“In our search for new standalone
businesses, the key qualities we seek
are durable competitive strengths;
able and high-grade management;
good returns on the net tangible assets
required to operate the business;
opportunities for internal growth at
attractive returns; and, finally, a sensible
purchase price,” he wrote. “That
last requirement proved a barrier to
virtually all deals we reviewed in 2017,
as prices for decent, but far from spectacular,
businesses hit an all-time high.
Indeed, price seemed almost irrelevant
to an army of optimistic purchasers.”
Mr Buffett, who will host shareholders
in Omaha in May for the company’s
annual meeting, added that investment
bankers “smelling huge fees” and executives
envisioning higher remuneration
often cheer such transactions that
Berkshire avoids.
Dealmaking is running at its fastest
pace since the Dotcom boom of 2000,
with more than $550bn of mergers and
acquisitions proposed so far this year,
according to Dealogic. And companies
and private equity firms have been willing
to pony up for targets. The average
price to earnings multiple on deals this
year is at a record high.
“The CEO job self-selects for ‘cando’
types,” he wrote. “If Wall Street
analysts or board members urge that
brand of CEO to consider possible
acquisitions, it’s a bit like telling your
ripening teenager to be sure to have a
normal sex life. Once a CEO hungers
for a deal, he or she will never lack for
forecasts that justify the purchase.”
readings, expectations of stronger
real economic growth, and debate
on whether the Federal Reserve
needs to accelerate the pace of rate
rises and if it risks falling behind
the curve on tightening.
Treasuries were rallying once
again with the yield on the US 10-
year down 2.9 basis points to 2.88
per cent, having nearly hit the 3 per
cent level earlier this week.
With little economic data of
note investors will instead tune
into remarks from a handful of
Fed officials. New York Fed president
Bill Dudley and Cleveland
Investors and analysts have awaited
a large deal from Mr Buffett ever since
Berkshire and Brazilian private equity
group 3G Capital failed to secure a
$143bn agreement with Unilever, the
consumer goods giant, last year. Berkshire
has amassed more than $114bn of
so-called float, a pool of capital grown
out of the insurance premiums it collects
that the company then uses to
fund equity purchases and corporate
takeovers.
On Saturday, Mr Buffett said that
Berkshire “will need to make one or
more huge acquisitions”. In the company’s
annual report, released on the
same day, Berkshire reiterated that it
was after acquisitions between $5bn
and $20bn in size, although Mr Buffett
and Charlie Munger, the company’s
vice-chairman, have said in the past
that a deal could stretch far beyond
that.
While responsibility for takeovers
still falls to Messrs Buffett and Munger,
Berkshire has lined up two heir apparents.
In January Mr Buffett promoted
two of his top lieutenants to vice-chair
roles. The ascent of Greg Abel, the
chief executive of Berkshire Hathaway
Energy, and Ajit Jain, the Omaha-based
group’s reinsurance chief, was interpreted
by investors as an endorsement
of a future leader of the $500bn group
that includes Fruit of the Loom, Geico,
NetJets and Lubrizol.
Succession questions had long
swirled at the company, among the 10
largest publicly traded groups in the
US, and news on Friday that Mr Buffett
would retire from the Kraft Heinz
board confirmed that the billionaire
investor would continue to reduce his
non-Berkshire responsibilities.
Wall Street rebounds as markets await Fed speakers
Investors shrug off possibly messy election in March
MAMTA BADKAR
Fed head Loretta Mester — both
voting members of the monetary
policy setting Federal Open Market
Committee — and Boston Fed
head Eric Rosengren are slated to
speak at the 2018 US Monetary
Policy Forum Annual Conference
in New York.
Meanwhile, San Francisco Fed
president John Williams, also a
voting member, will speak in Los
Angeles.
Elsewhere in markets the dollar
index, a gauge of the buck against
a weighted average of six global
peers, was up 0.2 per cent to 89.87.