Some M&A Deals Entertain, Others Make You Eat Your Vegetables

In this episode of MarketFoolery, host Chris Hill and senior analyst Andy Cross have a pair of merger deals on their minds: One complex and still up in the air, the other simpler but less certain to deliver the goods.

As of now, Walt Disney (NYSE: DIS) has the leading spot in the bidding war for the best parts of the Twenty-First Century Fox (NASDAQ: FOX) (NASDAQ: FOXA) media empire with its offer of almost $72 billion. But it was nearly inevitable that Comcast (NASDAQ: CMCSA) would come back with another raise, and according to The Wall Street Journal, it’s gathering the ammo in the form of financing to the tune of $90 billion.

Meanwhile, in the packaged foods arena, ConAgra (NYSE: CAG) is buying Pinnacle Foods (NYSE: PF) in an $11 billion deal. But combining the owner of Birds Eye with the company behind Healthy Choice is a lot less of a power move than it once might have been.

A full transcript follows the video.

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This video was recorded on June 27, 2018.

Chris Hill: It’s Wednesday, June 27th. Welcome to Market Foolery! I’m Chris Hill. Joining me in studio today: Andy Cross, in the flesh. Thanks for being here!

Andy Cross: Hey, Chris! Always a pleasure!

Hill: There’s a big deal going on in the prepared foods world, and we’re going to get to that deal in a second. But I was looking through my notes and noticed that the last two Wednesday episodes of Market Foolery started with us talking about the whole Disney, Fox, Comcast thing. I kind of feel compelled to start there again, because there is more news, and I wanted to get your take on this.

It’s the report in the Wall Street Journal that Comcast — and, this shouldn’t be a surprise to anyone who’s watching this — is looking to sure up cash because they want to make a bid to top Disney’s $71 billion bid. That’s not surprising. The number that got floated in this article is, they may be looking for as much as … $90 billion?!

Cross: Yep. It’s big money, man.

Hill: That high?! You think it’s going to go that high?!

Cross: Boy, it would make Comcast one of the most levered companies in the United States. Not that they don’t have the cash flow to be able to pay for the debt, but Moody’s has already come out and said that that would put a significant ding into the Comcast balance sheet.

Whether they can line that up or not, it really goes to show you — and we’ve talked about this really since the end of last year during this entire saga — the value that these two companies are placing on the assets of Rupert Murdoch and 20th Century Fox, and what that may mean to both of these companies, especially Disney, who’s really hungry to get these assets. This is not a surprise to me. In fact, knowing the kind of deal-maker Rupert Murdoch is, he’s going to take the highest bid he can get, or at least try to push as far he can go.

It seems like right now, Disney has the slight upper hand, in my mind. Whether Comcast can pull this off … their $65 billion offer was an all-cash offer. There are some nice benefits to that, for him, his family, and shareholders — of which, Disney is a major shareholder of 20th Century Fox already. Still, as you and I were talking about earlier, Disney really wants these assets. It’ll be interesting to see if Comcast can pull this off.

Another big winner from this deal and all of these negotiations, Chris, is, there was an article in the Financial Times today about Goldman Sachs bringing in more than $100 million from helping negotiate this deal. I mean, the bankers are just licking their chops at these numbers getting tossed around. A $90 billion deal!

Hill: I’m glad that something finally went right for Goldman Sachs.

Cross: [laughs] They deserve it, right? They deserve it! Come on, nothing could go wrong for those guys!

Hill: They’re the true heroes in all of this.

Cross: I agree.

Hill: If we’re looking to get a handle on the timeline here, there was a joint meeting that was scheduled for July 10th, joint between Disney and Fox. That has been postponed indefinitely. If you’re Comcast, you’re happy about that, because that essentially buys you more time to sure up these assets.

I am curious to know what Brian Roberts and his team at Comcast are thinking, if they are thinking, “Let’s get the biggest offer we can right now and try and end this and force Disney to go higher than $90 billion,” or if they think, “No, let’s leave ourselves room for one more deal.” Right now, if the bidding starts at $71.5 billion —

Cross: Toss out a number, sure.

Hill: Exactly. They may be thinking, “OK, let’s come in at $80 billion, knowing that if we need to push it up to $90 billion, we can.”

Cross: I mean, Disney started this at the end of last year around $52 billion. It went to $65 billion with Comcast, now they pushed it up to north of $71 billion. And the number, as you mentioned, that at least has been kind of mentioned out there, could be as high as $90 billion, which is north of $50 a share for those assets. Whether Comcast can actually arrange that, and whether it’s private equity, other financing … like I said, it does make them extremely levered, and even partners might be a little leery around that.

Also interesting, both Bob Iger and Roberts from Comcast certainly have been piecing together their empires over the years. This is not a new thing. This would be a huge chunk for both of those companies, but still, they are empire builders. Brian Roberts is a huge shareholder in Comcast, having his family start it. So, trying to really solidify this empire for them, I think, is important for both of these people.

Putting together partnerships, and whether that could work or not — I mean, Disney has not necessarily said that they would be open for that. Brian Roberts might be more interested in maybe partnering with someone to do something like that. That could be a potential. But you’re talking going from $71 billion up to north of $90 billion, or $80 billion. He is itching to get something on the table to compete with Disney. He does not want to lose the access to these assets, or at least the opportunity to bid higher for these assets, and put another offer in front of Rupert Murdoch, who’s never shy of money.

Hill: Let’s move on to the deal of the day, and that is Conagra, which has reached a deal to buy Pinnacle Foods for just under $11 billion in cash and stock. That assumes the debt. You’re basically seeing two numbers today — $8.1 billion for the deal; but when you throw in the debt, it gets it up to just under $11 billion. In terms of, these are two huge conglomerates. The result here would be the second-largest frozen food company in the United States. One way to think about this is, if you’re consumer and you’re going down the frozen food aisle, the company that owns Healthy Choice is buying the company that owns Birds Eye.

Cross: [laughs] Right. Among other brands. This is just more evidence that the consumer packaged goods companies, CPG companies, are under more and more pressure to try to boost sales growth any way they can. These are, like you mentioned, multibillion-dollar organizations. They do multi-billion dollars in sales. Their brands are not the freshest thing in the world, and there’s been some criticism CPG companies, that they are not refreshing their brands. The power of food brands is not what they once were, in my opinion, and I think we’ve seen that over the years, with some of these big, large companies — whether it’s Kraft or others — struggling to be able to grow the top line. So, consolidating, making acquisitions.

In this case, like you mentioned, Conagra generates north of $800 million in profits every year. They spend a lot of money buying back stock. They pay a little dividend, so they have the capital to put to use. They’re going after a company like Pinnacle Foods, which is about half the size. Leveraging up the balance sheet a little bit more, as they will have to do, but they can probably afford it.

It’s just not the fastest-growing business. In my mind, those businesses are going to continue to be under pressure from the likes of an Amazon – Whole Foods having much more pricing power than what these companies may have had in the past, with those brands not being quite as valuable. We’re seeing that in the marketplace. The valuations just aren’t all that exciting.

Hill: As you said, Conagra has been a good operator. They do turn out those profits every year. Shares of Conagra down about 8% on this news. I’m wondering, is that a sign that people think they’re paying too much for Pinnacle? Or, as you indicated, is it a sign of, this is about the toughest industry going right now?

Cross: I think it’s probably the latter. The price for Pinnacle, I wouldn’t say it’s a steal, but it’s not exorbitant. In my mind, this space is in a tough spot right now. It’s much more of a value paradise. You’re going to get a little bit of a dividend yield from some of these companies. You’ll get them buying back stock. You’ll get a few growth numbers at the top line, maybe somewhere in the neighborhood of GDP, maybe a little bit higher. And then they can wring out profits, drive cash flows, drive profits for investors, buy back stock, and pay those dividends. There are some investors who may like that.

Personally, in a world where the S&P is now 26% technology-driven, and that will only increase over time, in my mind, looking out at the next three to five years, these CPG companies are just going to have higher and higher hurdles to be able to compete against a world that is moving less and less in their favor. And, the competitive pressures from the supermarket space, from other consumer companies, upstart companies that are coming aggressively against them. The headwinds facing them are a little stiffer now than they were ten, 15, 20 years ago.

Hill: One little piece of that, of how it’s a little bit more challenging now, is, you go back 20 years. One of the arguments in favor of these types of companies — whether we’re talking about Conagra or Pepsi Frito-Lay, that sort of thing — was their ability to negotiate shelf space with the grocery stores. So, you could look at this deal and say, “Oh my gosh, when it comes to the frozen food aisle, this combination of Conagra and Pinnacle Foods is going to have tremendous leverage against the grocery stores!” I mean, it’s an advantage, it’s just less important than it used to be.

Cross: It is. And with online sales, I mean, just look at the competitive space. Much like we’re seeing in the airline industry, when players and companies became much more rational, same with the grocery market. Whether it’s Wegmans, one of the best operators out there, or Whole Foods, now Amazon, running a retail operation and being extremely price-conscious. As we all know, going against Jeff Bezos on the pricing level doesn’t work out very well for many people.

These companies, I think, are just seeing the market dynamics and trying to figure out, how can they best compete in a world of the competitive pressures, as well as trying to figure out, “We have a nice multibillion-dollar business that generates nice profits. How do we maintain those profits, and how do we invest those into shareholders?” And they have done that a little bit.

But like you mentioned before, today, the stock price is down. The stock price over the last three years for both of these companies, not all that exciting. Investors have gotten a little bit of a dividend yield, but they really haven’t gotten a lot of capital appreciation. In my mind, I think that will just be harder and harder to come by in the future.

Hill: Yesterday afternoon, I taped an interview with David Gardner for Motley Fool Money. That’s going to run this weekend. One of the things we talked about was — there’ll be more of this topic coming on podcasts on, etc. — the 25th anniversary of The Motley Fool. You are one of the few people at this company who precedes me, in terms of tenure here at The Fool. You were here when I joined the company back in 1997.

What stands out in your mind? When you think about 25 years — I’ve been asked this question by a few people, and I have a little bit of trouble wrapping my head around it, because there are so many things that we’ve gone through. There are so many changes that we’ve seen as investors, so many positive changes for investors. But, I’m curious, to the extent that you get nostalgic and think about the last 25 years of this company, what goes through your mind?

Cross: I will say — besides, as you mentioned, how so many millions and millions of people, whether it’s through our services, or whether it’s through our website, or podcasts, books, speeches, talks, member events, that we’ve been able to reach and really impact. That seriously is what I’m most proud of.

The way that we’ve gone about doing that, I think there are two important ways. One is being a different voice in the market, speaking for individual investors when there were very few other spots that were really, truly championing individual investors. Trying to focus them in a different way about investing. Teaching them about the benefits of long-term, tax advantaged, business-focused investing — which we’ve done, I think, better than almost anybody else out there.

And certainly, when you look at our stock returns, that David and Tom and many of us have rung up over the years, I think that’s justified. We’ve demonstrated the capability to go against the grain and beat the market and invest in a fun, Foolish manner, as we say here. I think, really just trying to bring a different voice to the market is important.

Second of all, as you mentioned earlier, the changing landscape for individual investors. When you and I joined, trying to even get on conference calls for some of these companies was impossible.

Hill: [laughs] Right.

Cross: Literally, you could not get on board. The access to the information was not nearly what it is now. Really, The Motley Fool was on the vanguard of that, pushing that, and trying to encourage the use of discount brokers when, back in the day, when you had Merrill Lynch and the rest of the gang really criticizing the internet, criticizing the use of discount brokers, basically calling them a threat to democracy. We were a voice out there — as The Economist called us, a beacon out there — for individual investors. I think that’s important.

There are still a lot more voices out there. There’s a lot more distributed content out there, for good and for bad. I think we, with others, continue to support the individual investor as well as anybody, and support the kind of investing that we do as really special. It’s probably the most important spirit I feel with the alignment around The Motley Fool.

Hill: It’s been so long that some of the changes that have taken place over the last 25 years are changes that, when I talk about them, with either my older children or just younger people who work here at the office, they do a double-take. It’s like, “Why would that be?”

Things like, when we started working at The Motley Fool, stocks were in fractions. [laughs] “Wait, why would it be $25.25 per share? Why wouldn’t it be down to the penny?” That sort of thing. And as you said, the conference calls. That’s something that we take for granted now, but that was a thing that so many companies were pushing against — and some of the companies that we really love were pushing against that.

Cross: Absolutely.

Hill: Then they saw the error of their ways and said, “Yeah, we’ll open up our conference calls, and anyone can have access to this information.”

Cross: Still — patting ourselves on the back aside — there’s still so much more to go. We know, really, since financial crisis, individual investors have not been investing in equities. With the explosion of ETFs and the so-called efficient market theory and funds out there — many of which under-perform — the individual investor who is truly trying to find great businesses and buy and hold them for many years, and do it in a diversified way, and have a lot of fun with that, we are still a minority out there. I know many of us listening to this today are part of that minority, and hopefully vocal about it, because we think it’s the best way to invest and to create capital and wealth for individuals over many years. And it’s a lot of fun, getting to know businesses and investing in businesses that we follow and love.

Hill: Andy Cross, thanks for being here!

Cross: Thanks, Chris! A pleasure!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening! We’ll see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Andy Cross owns shares of Comcast, PEP, and KHC. Chris Hill owns shares of AMZN and Walt Disney. The Motley Fool owns shares of and recommends AMZN and Walt Disney. The Motley Fool owns shares of MCO. The Motley Fool has a disclosure policy.

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