Monday <strong>26</strong> <strong>Feb</strong>ruary <strong>2018</strong> @ 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 <strong>Feb</strong>ruary for its flagship AHL funds, which will reduce performance fees. Merrill Lynch lowered its <strong>2018</strong> 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 <strong>2018</strong> 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.
A10 BUSINESS DAY C002D5556 Monday <strong>26</strong> <strong>Feb</strong>ruary <strong>2018</strong>