Walmart’s announced acquisition of 51% of Massmart has gotten a great deal of press, mostly focused on union/labor relations. Sure, Africa’s got economic, regulatory and infrastructure issues and acquisitions aren’t fail proof. But, if one looks beyond the thicket, a different view emerges. As the accompanying map illustrates, the U.S., China, India, and several assorted European countries can be tucked nicely inside Africa. So, this deal positions Walmart for multi-decade international growth with a management team that knows Walmart intimately, wants to work with Walmart and happens also to be one of the continent’s top retailers. A steady diet of capital and operational heft is fuel for the boom. Source: Flowing Data
SUPPLIER ROUND-UP
It’s definitely a seller’s market. The year ended with a flurry of financial transactions for CPG manufacturers. A combination of high cash on hand, low returns on that cash, and low organic growth rates are a boon for CPG companies looking to cash out. Expect more consolidation.
Unilever acquired Alberto-Culver for $3.7 billion, paying a multiple of 2.3x revenue, 14.7x Earnings before Interest and Taxes (EBITDA) and about 22 times earnings. The deal is part of Unilever’s efforts to refashion itself more along the lines of Procter & Gamble. Here’s a recent slide deck from Unilever outlining their strategy.
PepsiCo is acquiring two-thirds of Russian Dairy firm Wimm-Bill-Dann (WBD). This transaction is about getting distribution in Russia, similar to paying a cover charge to go into a seemingly popular nightclub. The transaction values Wimm-Bill-Damm (more here) at $5.4 billion. WBD earns about $125 million annually On $2.6 billion in revenue and PepsiCo expects $100 million in “synergies,” so call it $225 million in earnings. That’s a multiple of 24x projected earnings. The yield on the investment is 4.2% ($225 mil. / $5.4 bil = 4.2%) which is higher than the return PepsiCo is getting on its ample cash balances, so the transaction is accretive to earnings in CFO-speak. WBD’s forecast for 19% annual growth in EBITDA for the next 6 years seems a stretch, but, if achieved, could make this a great deal for PepsiCo.
And, the Original Barbarian at the Gate, KKR is buying Del Monte for $4.0 billion. KKR, in the first leveraged buyout since Lehman Brothers failed, is paying a little more than 1.0x sales, 6.3x EBITDA and about 13 times earnings for the $3.8 billion growth-challenged pet and food products maker. If all goes according to plan, this one will be flipped back to public investors in 5 years or less.
OF FINANCIAL INTEREST TO THE HIGH-INCOME EARNER
The $50k College Club
Two years ago, a mere 5 institutions charged more than $50,000 per year for out-of-state tuition, fees and room & board. Today, 100 institutions have topped the $50,000 mark. And, for the first time, a public school, University of California at Berkeley joins the list. If your child has aspirations to attend a top college, there are effective planning techniques to help mitigate these costs. Source: Paul Kedrosky’s Infectious Greed, The Chronicle of Higher Education
[My wife and I have already put one through college with two more on the way. So, two members of our family will be traveling, eating out and socializing with friends; the other two will be putting in long weekends and subsisting on Ramen Noodles - probably me and my wife. – Scott Alaniz]
Real Estate
Bill Ackman, a long-time activist investor in retailers and CPG companies (Target, Borders, Barnes & Noble and Fortune Brands) makes a compelling case for buying a second home or adding to your real estate portfolio in this slide deck.
[Many of the executives we work with have most of their assets in company stock and deferred compensation program(s) and perhaps only 5-10% of their net worth in real estate; done properly, addition of real properties can lower risk and improve their wealth and income.]
The Hot Hand
The decade’s top money manager, Bruce Berkowitz, operates in exactly the opposite manner of brokerage firms and mutual funds. His philosophies and a few investment ideas for your own portfolio are found in the Fortune profile.
Long Term Care
Rates for long-term care are on the rise. John Hancock asked state regulators for a 40% boost in premiums recently. Apparently, insurers underpriced the policies and are now raising rates to cover expenses. Kiplinger has an excellent overview here. “There are only three ways to cover the potential costs [of long-term care]: (1) Pay for it out of pocket, (2) figure out how to qualify for Medicaid or (3) buy long-term care insurance.”
[This issue is as much emotional as financial. Many of our readers have had to deal with or anticipate dealing with their parent’s healthcare issues. And, many of our readers come from working-class backgrounds, often being the first in their families to attain a college degree, climb the corporate ladder and succeed financially – they don’t want to watch their parents have worked so hard to accumulate become depleted. Each situation is different, but generally, those with a net worth exceeding $5 million can self-insure while those with net worth from $1 - $5 million should evaluate the policy options.]
INSIDE THE MARKETS
Super-Long Bonds
Companies and governments are issuing 50-year and 100-year bonds at what may become incredibly cheap rates. With investors earning nominal rates on their savings, the temptation of a higher yield is alluring, particularly to unsophisticated investors. With few exceptions, the risks far outweigh the rewards. Even a rise in interest rates of a few percentage points could create painful declines in the value of these bonds, preventing one from reinvesting at much more attractive rates. Source: The Globe and Mail
From the issuer’s perspective, this is a classic case of “heads I win; tails you lose.”
Three Stages of Delusion
Here’s a lengthy, but insightful discussion of financial crises. The best part is the thrice-recurring cadence of delusion by responsible parties. Source: The Big Picture; John Mauldin, Outside the Box, Dylan Grice
Random Gleanings
The US’ share of world's 100 tallest buildings is projected to decline from 80% in 1990 to 18% by 2012. Source: Bloomberg.
The home of the The Godfather, Don Corleone, has been listed for sale.
Tips from the Old Timer
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”
–Warren Buffett, April 2009
The S&P500 is up 42% since Buffett made this comment.
Have a thought or comment? Give us a call or email.
Rogers (479) 657-6940
