A few links for another glorious summer Friday:
- The activist investors at CDK Global (CDK) have a new plan to keep the star spinoff stock rising: find a buyer. The company is apparently working with Morgan Stanley to sell itself and private equity firms are apparently the target audience. That is somewhat surprising because a PE deal for CDK would be massive – according to Bloomberg, at its current market cap of $8.3b, it would be the largest buyout deal of the year! I would expect some type of premium as well pushing the price even higher, although the stock already popped a bit on the news. The auto dealer services company was spun off from ADP (ADP) just last September, but activist shareholders Sachem Head, Elliott Management and Fir Tree quickly accumulated large stakes in the company (~20% combined). They appear to be driving management decisions and have focused on shareholder returns. One point to keep in mind is that there are typically tax consequences for a sale during the first couple of years post-spinoff and I imagine this is an area being studied in great depth.
- Mondelez International (MDLZ) is another company with its hands full working with activist investors. After settling with Nelson Peltz’s Trian Fund, Bill Ackman’s Pershing Square recently unveiled a massive stake in the company arguing that it should seek to sell itself. The big potential suitor mentioned was 3G Capital’s Kraft-Heinz (KHC).The Brooklyn Investor took a closer look at the company and the idea of a buyout and ultimately finds it plausible. Despite a high trailing and forward P/E, if a buyer were able to push MDLZ’s operating margins into the 20+% via cost cuts, he argues it would make a deal look much more reasonable. There aren’t many firms which can deliver that type of improvement, but 3G is one who has done it in the past and deserves credit for its track record. Here is his conclusion:”Still, it is highly unlikely that 3G will come out with a bid very soon. That doesn’t mean MDLZ can’t do pretty well on it’s own for a while. Some stability in Europe and emerging markets, continued cost-cutting etc. can make MDLZ a decent stock to own until someone is ready to really take costs out of this thing, at which point if sales are higher, MDLZ could be even more interesting to 3G or someone else who can do something similar. At it’s current price, someone like 3G would be able to ‘create’ an investment with some real growth potential at 12-14x P/E.”I agree that 3G is probably too busy right now and I think it’s a risky strategy to price deals based on achieving such high levels of cost synergies. They have done it before successfully though. There are other companies out there as well – The Deal tosses out Nestle (NSRGY) and General Mills (GIS) as possible options – and maybe they are more willing to pay a high price. Once again, Mondelez remains fun to watch.
Disclosure: Author holds no position in any stock mentioned.