Giant deal in the pharmaceutical sector: Bristol-Myers Squibb buys Celgene

Giant deal in the pharmaceutical sector:  Bristol-Myers Squibb buys Celgene

Last 6th January, US drug manufacturer Bristol-Myers Squibb (NYSE:BMY) and Celgene Corporation (NASDAQ:CELG) announced that they have entered into a definitive merger agreement under which BMY would have acquired Celgene for an equity value of approximately USD 74bn.

The board of the two firms welcome the acquisition which will imply that Bristol-Myers Squibb’s shareholders will own about 69 percent of the merged company, while Celgene’s owners account for the remaining 31 percent. After the merger, the company will have nine blockbuster products with sales exceeding USD 1bn annually. The companies also see “significant growth potential” in the core areas of oncology, immunology, inflammation and cardiovascular diseases.

Celgene stock price decline on drug’s sluggish sales

Celgene is a biotechnology company based in New Jersey with around 8’000 employees. The firm develops, discovers and commercialises medicines for inflammatory disorders and cancer. Celgene had a troubling year 2017 as the stock price declined 37 percent from October to September. In the same year, the firm decided to abandon a late-stage Crohn’s disease drugs as well as two clinical trials along with it. Also, during the period the firm encountered lawsuits associated with its patents which suggested possible jeopardies in revenue. The firm had a troublesome 2017 missing its revenue expectations for the last two quarters and disappointing sales for the drug Otezla. Bad sentiment and business continued in 2018 as the shares lost nearly 40 percent in value during the year. Lately, the stock price has been trading 39.5 percent under its 52 week-peak value and changed 13.94 percent from the 52 week-bottom stock prices.

1Figure 1: Celgene Stock price’s slump in 2017


The buyer’s rationale of the deal

The deal creates a new pharma company with numerous blockbuster cancer drugs and many enhanced strengths to respond to the competition in the immunotherapy market. In fact, the competition has grown as Mercks’s rival treatment Keytruda has gained market share in the lung cancer treatment which is the most lucrative oncology market. Giovanni Caforio, chairman and chief executive officer of BMY explains that: “Together with Celgene, we are creating an innovative biopharma leader, with leading franchises and a deep and broad pipeline that will drive sustainable growth and deliver new options for patients across a range of serious diseases”. The acquisition creates a firm with nine drugs, each of them generating more than USD 1bn in annual sales, as well as a large pipeline of treatments which expect the potential peak sales of USD 15bn.  Some analysts claim that the acquisition will address the importance for Bristol-Myers to diversify from immunotherapy with the opportunity to generate enhanced margins, strong combined cash flows as well as robust EPS accretion. Mark Alles, Chairman and Chief Executive Officer of Celgene explains that: “For more than 30 years, Celgene’s commitment to leading innovation has allowed us to deliver life-changing treatments to patients in areas of high unmet need. Combining with Bristol-Myers Squibb, we are delivering immediate and substantial value to Celgene shareholders and providing them meaningful participation in the long-term growth opportunities created by the combined company”. Furthermore, he adds that: “Our employees should be incredibly proud of what we have accomplished together and excited for the opportunities ahead of us as we join with Bristol-Myers Squibb, where we can further advance our mission for patients. We look forward to working with the Bristol-Myers Squibb team as we bring our two companies together”.

2Figure 2: The greatest pharmaceutical deal summarised in key points


The largest healthcare deal ever: a financial overview

According to data elaborated by Bloomberg, Bristol-Myers Squibb takeover of Celgene Group values the target at USD 88.8bn, including net debt, even surpassing the Pfizer’s acquisition of Warner-Lambert, a deal occurred in 1999 for a total value of USD 87.14bn in stocks. With a forecast of achieving annual cost synergies of USD 2.5bn by 2022 and generating future earnings of over $6 per share, the Bristol-Myers acquisition became the largest pharmaceutical deal in history.

This transaction has been financed by a bridge loan of USD 33.5bn, the second highest US bridge loan recorded in the healthcare sector: Bristol has obtained fully committed debt financing from Morgan Stanley Senior Funding and MUFG Bank, while, on the other hand, JPMorgan Chase and Citi served as Celgene’s financial advisers.

3Figure 3: Top deals in Pharma consolidation (Deal value: $B)

One of the most relevant aspects of this deal, for Bristol-Myers Squibb, is access to a promising experimental CAR-T therapy. Celgene, indeed, acquired in 2018 Juno Therapeutics in a USD 9bn takeover deal: Juno Therapeutics is a biopharmaceutical company specialized on CAR-T cell therapy, a cancer therapy in which a patient’s own immune cells are genetically engineered to make them attack specific proteins on cancer, and infusing them back into the patient. CAR-T could become a highly profitable market over the next four years, with an estimated growth at a CAGR of 63 percent within 2023. Therefore, Bristol-Myers through this deal will have the potential for growth especially in oncology diseases, meanwhile taking advantage from the CAR-T market expansion.

Specifically, Bristol-Myers acquired Celgene through a cash-and-stocks deal, in which Celgene stockholders will receive one Bristol-Myers share and $50 cash for each Celgene share held. According to the boards of the two Companies, the deal, which they hope to finalise in the third quarter of 2019, will represent a 53 percent premium to the average closing price of Celgene shares over the past 30 days.

Besides this, the takeover is expected to generate 3 main financial benefits:

  • Strong Returns and immediate EPS accretion. The transaction’s internal rate of return is expected to be well in excess of Celgene’s and Bristol-Myers Squibb’s cost of capital. The combination is expected to be more than 40 percent accretive to Bristol-Myers Squibb’s EPS on a standalone basis immediately after the finalisation of the deal.
  • Strong balance sheet and cash flow generation to enable significant investment in innovation. With more than USD 45bn of expected free cash flow generation over the first three full years post-closing, the Company is committed to maintaining strong investment grade credit ratings while continuing its dividend policy for the benefit of Bristol-Myers Squibb and Celgene shareholders.
  • Meaningful cost synergies. Bristol-Myers Squibb expects to realize run-rate cost synergies of approximately USD 2.5bn within 3 years.

However, the days following the merger’s announcement showed a negative market reaction: investors indeed rewarded Celgene’s shares at a limited extent of 22 percent to $81.28, while shares in Bristol-Myers fell over than 16 percent to $45.1, that is USD 11bn of capitalization in less than 2 days (from USD 86.4bn to USD 76.5bn).

According to Brian Skorney’s words, senior research analyst at Robert W. Baird & Co., “this deal has not been driven by enthusiasm or excitement on either end”: Celgene investors were not thrilled after the deal, and Bristol investors were less than enthused. In this respect, Mizuho Securities USA after conducting a quick survey of about 100 clients, concluded that Bristol investors think the Company is overpaying for Celgene, therefore not approving the acquisition. This could be a possible justification for the slipping of Bristol’s shares.

4Figure 4: Bristol-Myers Squibb share price trend

5Figure 5: Celgene Group share price trend

What drives M&A in the Pharma industry?

The approval of US tax reform in late 2017 led to speculation that merger-and-acquisition activity would soon surge among pharmaceutical companies, due in part to tax-cut benefits accruing to sellers. In the first quarter of 2018, indeed, there were 212 deals in the sector worth more than USD 200bn. Bristol-Myers takeover follows a spree of tie-ups in the healthcare industry over the past four years: Japan’s Takeda last year has won shareholder approval for its USD 58bn megamerger with Shire, and a month ago GlaxoSmithKline announced it was buying Tesaro, a cancer-focused US biotech, for USD 5.1bn. According to some senior investment bankers who presented at the Forbes Healthcare Summit in NY last November, 2019 will be another active year for live science M&A deals, particularly in the biotech, payer, outsourced services and healthcare IT arenas.

Thomas Sheehan, head of global healthcare investment banking at Bank of America Merrill Lynch, stated that we are in a “biotech bubble” which is difficult to predict how long it will last.

We showed in the chart below the climb of the number of M&A transactions implemented in the pharma industry over the last 20 years.


According to this graph, we can point out that the pharmaceutical industry probably sees more M&A activity than any other industry, both in the number of deals and the amount of money spent on mergers-and-acquisitions operations. There are two main key drivers which justify the large amount of M&A activities in this industry:

  • Lowering R&D expenses. Most companies can no longer afford to carry out R&D to find innovative drugs: today, a company needs to invest between USD 2bn and USD 4bn per year in R&D to have a meaningful portfolio of drug development programs. In the long-term, only companies with revenue of US 10bn or higher can afford to have a substantial drug development program. The growing cost for the development of a new pharmaceutical drug drives large pharmaceutical companies in using M&A to exploit innovation sources outside of Big Pharma.

  • Capture synergies by scaling up. Pharma companies adopt such transactions in order to implement strategic changes: expanding their pipelines, broadening their product portfolios or reducing their investment costs.

In conclusion, deal-making is a fundamental tool to implement game-changing strategic moves to build companies fit to master future challenges, but M&A is essential for pharma companies also to get access to innovation, to prune business portfolios and to streamline operations in manufacturing.


Authors: Giovanni Cola, Edoardo Hähnel


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Small investment bank boutiques cash in on mega M&A deals

Small investment bank boutiques cash in on mega M&A deals
(On the right side is Simon Warshaw and on the left side is Michael Zaoui)


While it’s normal that big name players take mega deals in M&A market, small investment bank boutiques in London have shared a bigger slice of the pie than ever before, and, many times, some of them are beating big names.

Robey Warshaw, a Mayfair based investment bank boutique with merely 13 members, had a market share of 20.4% and an announced deal volume of about $65.6 billion through 1H2018 in the UK M&A market, according to the Bloomberg Global M&A Market Review 1H2018, overcoming giants such as Bank of America Merrill Lynch ( UK market share19.1%, deal volume: $61.6 billion), Goldman Sachs (UK market share: 18.8%, deal volume: $60.6 billion) and Rothschild (UK market share: 18.4%, deal volume: $59.2 billion) etc.. Interestingly, Robey Warshaw had only 3 deals to achieve a deal volume as high as $65.6 billion, comparing to an average of approximately 30 deals for other top-10 investment banks on this list (as shown in the table). With an average deal size of $21.9 billion,Robey Warshaw beat almost every company on this criterion.


Finance 1

Finance 2


Another mega-deal investment bank kiosk is Zaoui & Co. Established in 2013 by Morocco-born brothers, Michael Zaoui and Yoël Zaoui, Zaoui & Co had 12 employees in 2015, of which only 7 were bankers. It is worth noting that both brothers held a senior role in major investment banks: Michael was the head of M&A division at Morgan Stanley and Yoël at Goldman Sachs. Although the company was not on the top 20 deal-maker list in the 1H2018 report, which is mainly due to a lack of large deals and a nearly 60% shrink in French M&A market, according to Michael Zaoui’s interview with Financial News, it showed a strong performance in 2014 and 2015, only two years after it was incorporated. In 2014, the company advised GlaxoSmithKline PLC (“GSK”) to acquire 36.5% of stake in Consumer Healthcare Joint Venture of Novartis AG (“Novartis”) for $13 billion. There are other transactions involved which push the total amount to $57 billion. The deal was closed on 1st June 2018. In the same year, Zaoui brothers also advised a major merger in the manufacturing industry, helping Lafarge and Holcim to form LafargeHolcim, now the industry’s biggest player. The transaction involved is about €40 billion. Different from Robey Warshaw, which mainly puts its focus on the UK M&A market, Zaoui & Co. has broader geographical coverage. It has been developing its market in France, Italy, and Switzerland and also working on deals in Israel, according to the Financial News.


Comparing to the similar size UK kiosk advisors (another name often used for investment bank boutiques), which often have deals with transaction volume between $10-300 million, these two investment bank boutiques had an eye-catching performance, often with multi-billion deals. Reason? Their owners were superstars in big-name investment banks long before building their own businesses. Robey Warshaw has a team with Sir Simon Robey, Philip Apostolides, and Simon Warshaw. Sir Simon Robey was the former co-head of global M&A at Morgan Stanley, while Mr. Apostolides also held a senior investment banking role at the same bank. Mr. Warshaw was the former head of investment banking at UBS, according to FT source. Michael Zaoui was a colleague of Simon Robey in Morgan Stanley for many years; even now, their offices in Mayfair are merely a few hundred meters away. While both were co-head of global M&A in Morgan Stanley, Simon Robey focused more on the UK deals while Michael on continental European ones. This is correspondent to the different geographical exposure and strategies of Robey Warshaw and Zaoui & Co now. The former did the most of deals in the UK while the latter focuses primarily on continental Europe. Yoël Zaoui had spent about 25 years in Goldman Sachs and left as the head of the global M&A before founding the company with his brother in 2013. There is “fantasy football team” of London’s leading merger & acquisition advisers on the wall in Zaoui & Co’s boardroom, drawn up by a financial journal, according to EveningStandard. In goal is Karen Cook. The right full-back is Simon Robey. At right center is Richard Gnodde. Occupying the two striking positions are Michael and Yoel Zaoui. When all-star players team up, no wonder they can hit the goal that even big banks cannot.


Robey Warshaw and Zaoui & Co. are just two typical examples of investment bank kiosks. LionTree Advisors LLP (example transaction: Liberty Global’s acquisition of Virgin Media, $23.3 billion) and many others are advising multi-billion deals with just a few bankers in the office. Nonetheless, M&A advisory was never a labor-intensive industry. Thanks to their structure, top tier boutiques can generate an incredible amount of profits with small teams. Zaoui & Co, for example, earned an approximate £17.3 million turnover and an £8.6 profit. Between these two numbers is an administrative expense of £6.4 million, and employee cost was more than £5.3 million for a total of 13 staffs. In conclusion, with a strong network of the top management and an experienced team loaded with talents who worked for big banks, these firms have proven the ability to win the trust from big clients and play a leading role in the most relevant deals in the market.


Autor: Yintao Hu







Consolidation in the luxury industry: acquisition of Versace by Michael Kors

Consolidation in the luxury industry: acquisition of Versace by Michael Kors

Authors: Alessandro Babbaro, Riccardo Lizzi

Michael Kors Holdings Limited announced the acquisition of Versace for $2.12bn, on September 25th. Upon completion of the deal, which is expected to be during Q4 2019, the group will rebrand as Capri Holdings with combined annual revenues of $6bn. This deal follows the £896m acquisition of Jimmy Choo, dated one year ago. The American company is trying to create a US rival to conglomerates such as LVMH and Kering.

Companies overview

Michael Kors, formally known as Michael Kors Holdings Limited, is a global fashion brand founded in 1981 with executive offices in London and operational headquarters in New York. The company sells accessories, footwear, and apparel with a presence in more than 100 countries.

Michael Kors went public in December 2011, raising $944m through the sale of 47.2 million shares. Through the IPO, the company reached a market value of $1.18bn. Seven years later, the market capitalization climbed to $8.7bn, with the shares trading at $57, as of November 6th. During FY 2018 (ended in March 2018), the company generated $4.71bn Sales Revenue, showing a 5% increase from the previous year. In terms of profitability, the company reported a $592.1m Net Income, which represents a 7.4% increase from FY 2017.

Versace is an Italian luxury fashion company founded by in 1978 by Gianni Versace in Milan as Gianni Versace Spa. The Versace family retains 80% of the ownership, with the remaining 20% held by Blackstone since 2014. The American PE Fund is expected to exit this investment with a €156m capital gain.

Upon completion of the deal, the Versace family will retain a €150m equity stake in the combined entity. According to The Financial Times, the company in 2017 generated $680m in revenues and roughly $15m in profits. Revenues are expected to climb to $850m next year. Versace, as opposed to Michael Kors, generates the majority of its revenues from the clothing business line. This transaction comes after Versace had delayed its plans to launch an IPO due to unfavorable market conditions. Indeed, in January, the CEO told Reuters that they were in “no rush” to list on the stock market.

Industry overview

The structure of the luxury fashion retail industry is not going to change significantly, but recent notable mergers & acquisitions have further shaped the industry landscape since certain brands are looking for opportunities to expand. The reasons behind the willingness of luxury fashion houses to expand are attributable to several factors. Firstly, it is important to mention the disruption brought by the e-commerce, which has greatly affected the bottom lines of brick-and-mortar stores. As more and more consumers are buying online, as it is possible to see from the graph below, retail sales have declined. In fact, there has been a noticeable decrease in the number of consumers willing to buy in shopping centers and department stores in North America.

MK 1

Another reason that has created a shift toward mergers and acquisitions is the change in consumer preferences. Until a few years ago, customers gravitated more towards luxury brands that fell in the middle range in terms of price and style, which are also referred to as “middle market luxury brands”. Now, consumers are going toward the opposite ends of the spectrum and seem to be split into two groups, one that is loyal to high-end luxury brands and another that prefers more affordable fashion retailers. Some high-end luxury brands are using M&A to fight changing environmental factors in the industry for years, by merging into “luxury brand super groups” or a “family of brands”. LVMH, one of the largest luxury brand conglomerates in the world, is composed of 70 brands with reach in six different industries, ranging from fashion and leather goods to wines and spirits. Even though consolidation in the luxury retail sector will likely increase, some heritage brands, such as Chanel and Hermès, are resisting the trend of M&A. One reason why heritage luxury brands would resist attempts to be taken over is that these brands have historically been associated with their founding fashion designers. In relation to this deal, Mr. John Idol, Chairman and CEO at Michael Kors, said the Versace brand had been “terribly under-developed” and that Capri would invest in 100 new stores as well as take ownership and invest in its own factory base to control production. Michael Kors is seeking to become a “luxury brand supergroup”, like LVMH and others, and for this reason Versace can take the opportunity of this acquisitions in order to develop synergies with Michael Kors and expand in Europe, Korea and Japan. The latter is a market that represents hundreds of millions of dollars a year in sales for Michael Kors, while Versace brand has not penetrated the market yet.

Deal rationale

Michael Kors has taken an additional step towards becoming a luxury conglomerate with the acquisitions of Jimmy Choo first and then Versace.  This move will make the company compete with the likes of LVMH and Kering.

Michael Kors believes that this transaction represents an opportunity to reach the long-term goal of $8 billion in sales. In addition, the deal diversifies the geographic presence of the group with forecasted sales in Americas representing 57% (from 66%), Europe 23% (from 24%) and Asia 11% (from 19%). Japan, for instance, represents a real opportunity for the group as the CEO of Michael Kors said that Versace’s business was insignificant in that area. Michael Kors has a strong presence in the Americas while Versace next year is expected to generate 46% of sales from Asia. As reported by Erinn E. Murphy, a managing director and senior research analyst at Piper Jaffray covering global fashion and lifestyle brands, there is room to grow in the American market for the Italian fashion brand. Interestingly, Versace generates $58 per follower while Michael Kors a much higher $357 per follower. As part of the $8bn goal the company expects Versace’s sales to climb to $2bn (2.5 times current level), increase the number of stores globally from 200 to 300, focus on online and omnichannel sales, and accessories and footwear to represent 60% of revenues. In terms of the long-term revenue breakdown by brand, Michael Kors would generate c. 62.5% of them, followed by Versace at c.25% and Jimmy Choo at c.12.5%.

Deal Structure

It was reported on the 24th of November 2018 that Michael Kors Holdings may acquire Versace in a deal valued at €2bn, and an official announcement could be made during that week. Just one day after, on the 25th of November, the US luxury group announced that has reached an agreement to acquire Versace at an enterprise value of €1.83bn. Michael Kors has acquired Versace, the luxury fashion designer clothing manufacturer from GiVi Holding SpA, which holds an 80% stake in the target, and The Blackstone Group LP which holds the remaining 20%. The cash for the deal will be financed from the acquirer’s cash resources, existing bank facilities, new bank facilities from J.P. Morgan and Barclays. Michael Kors will also pay €150m in Capri Holdings Ltd shares, which will be the acquirer’s new name upon completion of the acquisition. Based on Michael Kors closing share price of $66.71 on 24th September, it can be calculated that approximately 2,649,378 shares will be sold. Based on the acquirer’s 149,321,694 shares outstanding, the consideration shares represent a stake of 1.774% in Michael Kors. GiVi Holding will retain a minority stake in Versace. The deal is expected to be completed during the 4th quarter of 2018. Upon closing, Michael Kors will start trading under the name Capri Holdings Ltd and it will have a combined annual sales of $6bn. A value that Mr. John Idol hopes to bolster 33% to $8bn across the three brands, according to his recent presentation to investors. Donatella Versace together with her brother Santo and daughter Allegra own 80% of the fashion house, they will retain a €150m equity stake as part of the deal. The remaining 20 percent is owned by the US private equity firm Blackstone that is selling its holding. Mr. Idol did not rule out other acquisitions but he said that there could be a “seamless integration” of Versace, they want to invest a great amount of money into the family-owned ”Milanese” fashion house. In conclusion, this is a crucial deal in the luxury industry and Versace family’s decision to sell follows disposals by other long fiercely guarded independent brands. Donatella Versace pointed out that as shareholders in the newly renamed Capri, the family remains committed to the business also thanks to the structure of the deal where GiVi Holding will retain a minority stake.


Bidding War fires up the largest European deal of 2017

Bidding War fires up the largest European deal of 2017

On May 15th, 2017 Atlantia has announced its intention to acquire its Spanish competitor, Abertis.

Atlantia, Italian toll operator whose main asset is Autostrade per l’Italia, the largest concessionaire on the Italian highway network, is a holding company belonging to the Benetton family. Under the management of its CEO, Giovanni Castellucci, former partner at the Boston Consulting Group and manager at Barilla, the company has produced revenues for more than €4 billion and generated a net income of €1.12 billion in 2016. Its assets are strongly exposed to country risk, and an acquisition would be a way to enter new markets and diversify this exposure.

Abertis, headquartered in Barcelona and listed in Madrid, is a leading toll operator as well. Present in 13 countries, with a net profit of €897 million in 2017, a 13% increase from 2016, has appeared as an attractive target for Atlantia’s needs: the new conglomerate, in fact, would be in charge of the management of more than 14,000 km of highways and present in 19 countries.

The Italian company, advised by Mediobanca, Santander and Credit Suisse, has proposed a cash-offer, financed by Bnl-Bnp Paribas, Credit Suisse, Intesa San Paolo and Unicredit[1] valuing the Abertis at €16.50 per share and making up a €16.3 billion deal.

Alternatively, Atlantia has also offered stocks with the aim of making the offer attractive Criteria,  unlisted investment bank holding of the Caixa foundation and majority shareholder in Abertis with a 22.3 percent stake, with important investments in the Industrial and the Real Estate sector.
The Italian company would offer unquoted, locked-in stocks, at a fixed conversion rate of 0.697 Atlantia’s share per Abertis share[2], for up to the 23.2 percent of the total offer. This would value the Spanish operator at €17.34 per share; considering the latest trading price at €16.38[3], it represents a generous upside for the shareholders with a premium of around 6%.

This share-swap offer is not appealing for all of Abertis’ stakeholders. Instead, it is a strategic move to win the favor of Criteria, a strategic investor with long-term objectives: in facts, not only the holding keeps its current claims on dividends, projected to increase, but also acquires the right to appoint up to three directors in the Atlantia’s Board, whose size therefore increases from 15 to 18 members[4].

Should this scenario concretize, Edizione, the investment vehicle of the Benetton Family, would suffer a 5 percent dilution in Atlantia, with its stake diminishing from 30 to 25 percent, while Criteria would earn a 15 percent stake. Castellucci has stressed that the combined groups’ strongly performing Latin American assets would be transferred to Abertis, which would maintain its headquarters in Barcelona and would keep trading in Madrid[5].

According to the Spanish Financial Authority, the CNMV, on October 19th Abertis should have formally responded to Atlantia’s offer. Therefore, the bid carried forward by Hochtief, a German leading construction company operating worldwide, with important assets in the US and Australia and, controlled by the Spanish ACS[6], has been a surprise. Hochtief is offering €18.76 per share in cash, attributing to the target a value of €18,6 billion. Alternatively, Abertis investors may opt for a stock-swap option, the conversion rate being 0.1281 per newly issued Hochtief share. Should the Spanish constructor accept this offer, it would add more than 8000 km to the construction business of the German company and ACS, opening up the possibility to extend their operations in Brazil. Advised by J.P. Morgan, Lazard and Key Capital Partners, ACS and Hochtief are now tempting the investors with the promise of high dividends – the combined entity, whose stocks are intended to be traded in Frankfurt, is expected to generate revenues for €24.8 billion and has announced a retention ratio of 10 percent, meaning that roughly 90 percent of its profits would be paid out. Instead, some of the Abertis’ assets would be sold, among which shares in Cellnex Telecom SA and Hispasat SA.

The results of the takeover would be a decrease of ACS’s share in Hochtief, from 72 to less than 50 percent. This would cancel the leverage of the €12 billion net debt, contracted by its investment vehicle, to fund the cash payment, and would leave the company with a stronger position in the resulting entity8.

While Catellucci is considering raising its offer, that could be raised up to €19 per share according to some analysts5, and entering a bidding war, it also has to face a strong opposition by the Spanish government, which is concerned about the loss of the strategic assets owned by Abertis, and wants to prevent the company from falling under foreign ownership. In addition, in case of approval of the second offer by the CNMV, the Spanish Financial Authority, the government may still appeal to the administrative tribunal and cause severe delays in the execution process. The Hochtief offer, that would bring Abertis under the ownership and control of the ACS’ president, Florentino Perez, has encountered a much lower opposition, as the strategic assets owned by Abertis would remain under Spanish ownership. These governmental activities are not unusual: for example, in July 2017 the Macron government had decided to block the offer of Fincantieri and nationalize the building sites in Saint-Nazaire, considered of strategic importance for France, given the unique know-how of the employees, as reported by the French government’s spokesman Castaner[7]. Nevertheless, it is worth noting that such practices seriously harm free market competition and should be limited. Indeed, the issue of governmental interference in public utility companies has been long debated: a recurrent, and sometimes a bit abused, practice is the so-called Golden Share, which allows governments to acquire shares of capital and to appoint members in the Board of Directors of strategic companies and consequently to have a high influence on the decisions taken. This privilege has been, in some cases, sanctioned by the European Court of Justice as dangerous for the markets’ competitive functioning.

Financial markets have responded to the bids’ announcements. While Atlantia lost 1.2 percent, Abertis has been traded at a premium on the bid of the Italian company. The bullish trend has been followed also by ACS and Hochtief, which have gained 5.6 and 1 percent, respectively.[8]

In the end, Abertis seems to be the company benefiting the least from the deal: in fact, it is already well-diversified in terms of EBITDA sources. Additionally, the deal with ACS may be dangerous for Abertis’ creditors in terms of the exposure to the cash-flow volatility of the bidder.
Instead, Atlantia, whose main assets are located in the home market, could diversify its country risk away penetrating in Latin America. Furthermore, despite the poor synergies, it could benefit from an appealingly low acquisition premium embedded in its first offer and, in addition, may increase its cash-flows by building up scale. However, despite the higher acquisition premium of the eventual second offer these benefits would decrease, the Italian group would still enjoy substantial advantages.

With the recent approval of the second offer by the Spanish government, declared at the end of January, the two bidders are now free to compete. In the next 15 days the two companies will have to improve their bids, according to the Cnmv regulation, and then will submit their final offers.

What it is going to happen is still uncertain, but it is possible to see some general drivers in the wave of recent European deals. Low cost of financing, need of consolidation, low opportunities for organic growth are all factors that make M&A extremely attractive for European top players willing to compete in a global field. Just think about the deals between Johnson&Johnson and Actelion, Essilor and Luxottica, Mead Johnson Nutrition and Reckitt Benckiser, Toshiba and Consortium and Vodafone and Idea cellular. These are all examples of the cross-border trend of M&A in Europe, where external growth tends to be preferred more and more to internal expansion[9].


Author: Giacomo-Luigi Rossi


[1] Source: Reuters

[2] The conversion rate indicates the number of Atlantia shares that can be exchanged with 1 Abertis share

[3] Abertis’ share price on May 15th, 2017. Source: Yahoo Finance

[4] Source: Il Fatto Quotidiano

[5] Source: Financial Times

[6] Actividades de Construccion y Servicios SA – Spanish company whose President is Florentino Perez. ACS is headquartered in Madrid

[7] Source: Il Sole 24 Ore

[8] Source: Bloomberg

[9] Source: Factset

Johnson & Johnson to Acquire Actelion for $30 Billion With Spin-Out of New R&D Company

Johnson & Johnson to Acquire Actelion for $30 Billion With Spin-Out of New R&D Company

Johnson & Johnson (NYSE:JNJ), the world’s largest healthcare holding company, with total registered worldwide sales of $71.89bn in 2016, has unveiled its intention to acquire the Swiss drug-maker Actelion Ltd (SIX:ATLN) with a move that will cost $30bn to the US company.

Johnson & Johnson

Johnson & Johnson is an American multinational medical devices, pharmaceutical and consumer packaged goods manufacturer founded in 1886. It has more than 250 companies located in 60 countries around the world while their products are sold in over 175 countries. Their companies are broken down into several business segments: consumer healthcare, medical devices and pharmaceuticals. Johnson & Johnson’s consumer healthcare segment produces a variety of consumer care products in the areas of baby care, skin and hair care, wound care, oral health, OTC medicines and nutritionals.
Johnson & Johnson’s brands include numerous household names of medications and first aid supplies.
Among its well-known consumer products are the Band-Aid Brand line of bandages, Tylenol medications, Johnson’s baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses. Its common stock is a component of the Dow Jones Industrial Average and the company is listed among the Fortune 500. Johnson & Johnson had worldwide sales of $71.8 billion during calendar year 2016.

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Source: Bloomberg

It’s easy to say that J&J is particularly active in the mergers sector: In July 2016, J&J announced its intention to acquire the privately held company, Vogue International LLC, boosting Johnson & Johnson Consumer Inc. In September of the same year, J&J announced it would acquire Abbott Medical Optics from Abbott Laboratories for $4.325 billion, adding the new division into Johnson & Johnson Vision Care, Inc.

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In January 2017, J&J subsidiary Ethicon announced it would acquire Megadyne Medical Products, Inc., a medical device company that develops, manufactures and markets electrosurgical tools.


Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs. The company has its corporate headquarters in Allschwil/ Basel, Switzerland where it was founded in 1997. Its shares have been listed on the SIX Swiss Exchange (ticker symbol ALTN) since 2000. In September 2008, Actelion shares began trading as part of the blue-chip SMI® (Swiss Market Index). Since its founding more than fifteen years ago, Actelion has become a new kind of biopharmaceutical company: one that blends biotech‘s innovation, speed and flexibility with big pharma’s operating discipline and excellence in execution. With the intrinsic belief that innovation in all domains is the key to growth, Actelion has built a promising pipeline, seven approved products, and commercial operations in over 30 countries while employing more than 2,600 employees.

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Source: Bloomberg

Healthcare Sector – Overview

The value of M&A deals in the healthcare sector reached $546 billion in 2015, seeing a 2.5 times increase over the previous decade’s average annual value. During the year, 5 deals were announced over $20 billion, excluding the Pfizer-Allergan deal which was called off in April 2016. The value of this single deal would have been $160 billion and the merger was terminated after the U.S. government proposed regulations to crack down on corporate tax inversions.

Since in 2015 the global M&A deal value was nearly $5 trillion, it is possible to say that the healthcare sector accounted approximately for 10% of the total value. From 2012 to 2015, overall M&A grew at a CAGR of 24% while healthcare M&A grew more than twice as fast, at a 50% CAGR. By most measures, deal activity in the US health services industry declined in Q3 when compared quarter-over-quarter and year-over-year. The total number of deals decreased to 214, versus 252 in Q2 2016 and 262 in Q3 2015. Total deal value was recorded at $20.0 billion, increasing 23.8% when compared quarter-over-quarter. Although value decreased by 82.0% year-over-year, Q3 2015 is considered to be an exception compared to other quarters in terms of total deal value.

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Mergers by value and count in the Healthcare sector – Source: Bain Report

The factors that drove this sector to keep growing could be explained through:

  1. Economic strength: the combination of a low interest rate world with the continuing strength of the economic led to an outstanding scenario of M&A deals.
  2. Obamacare: this project along with the Affordable Care Act has deeply changed the health care insurance landscape. There was not only an improvement in affordability and availability of insurance coverage but also a reduction of uninsured people. These innovations might have influenced M&A activities both on a quantitative way, by increasing the number of deals, as well as on a qualitative way, by increasing complexity of deals in aspects related to the due diligence process.
  3. Health Insurance Mergers: there was a significant boost in this sub-sector. Despite the big growth rate, the governments are trying to stop the biggest mergers in the insurance sector. Two examples are provided: The justice department and several states sued Aetna and Humana in July to block their $37 billion merger deal, alleging that the acquisition would limit insurance choices for seniors in many parts of the USA and significantly boost prices. Moreover, the Anthem Inc. and Cigna Corp a Justice Department lawyer said at the beginning of November that the biggest merger in the history of the American health-insurance industry should be blocked because it will increase the companies’ dominance and cut consumer choice. An attorney for Anthem responded that the combined company will be able to lower rates paid to health-care providers and that those savings will be passed on to employers.
  4. Drug company consolidation and acquisitions: it is estimated that there were $221 billion in deals in the pharmaceutical sector during the first half of 2015. This is three times the amount than in the first part of 2014. In one of the largest deals of the year, Actavis bought Allergan in a stock and equity transaction valued at around $70.5 billion. In another deal, generic drug maker Teva Pharmaceuticals said it will buy the generics business in a spin-off from Allergan in a deal valued at $40.5 billion.
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CAGR of the mergers in the overall market and in the healthcare sector- Source: Bain Report

Deal structure

J&J will launch an all-cash tender offer in Switzerland to acquire all of the outstanding shares of Actelion for $280 per share, representing the biggest European drugs takeover in 13 years. French drug-maker Sanofi (SNYNF)had also been interested but was sidelined after J&J returned, and began exclusive negotiations in December. J&J said it expected the transaction to be immediately accretive to its adjusted earnings per share and accelerate its revenue and earnings growth rates. It will fund the transaction with cash held outside the United States. Now, following the merger J&J-Actelion, Actelion will spin out its research and development unit into a standalone company based and listed in Switzerland, under the name of R&D NewCo and led by Actelion founder and current CEO Jean-Paul Clozel. The shares of R&D NewCo will be distributed to Actelion’s shareholders as a stock dividend upon closing of the tender. The arrangements will result in R&D NewCo launching with cash of CHF 1 billion to be made available at the closing of the transactions. J&J will also receive an option on ACT-132577, a product within R&D NewCo being developed for resistant hypertension currently in phase 2 clinical development. Together, these arrangements with R&D NewCo will provide Johnson & Johnson with additional sources of innovation and value. R&D NewCo will inherit Actelion’s fully established and validated drug discovery engine based in Allschwil, Switzerland and its proven and experienced discovery and development team. It will be well positioned to continue Actelion’s strong legacy of innovation to discover and develop new and differentiated products in multiple therapeutic areas.

Benefits of the deal

  • This deal will give J&J access to the Swiss group’s range of high-price, high-margin medicines for rare diseases, helping it diversify its drug portfolio as its biggest product, Remicade for arthritis, faces cheaper competition.
  • The transaction structure will provide flexibility for J&J to accelerate investment in its industry-leading, innovative pipeline to drive additional growth.
  • J&J expects to retain Actelion’s presence in Switzerland and also leverages its complementary capabilities in shaping medical paradigms.
  • The transaction will deliver a significant and immediate premium to Actelion shareholders, with greater value certainty as compared to Actelion’s standalone prospects. Actelion shareholders are also expected to realize substantial additional value from their ownership interest in R&D NewCo.
  • The transaction is expected to be immediately accretive to J&J earnings per share and accelerate J&J’s revenue and earnings growth rates, while enhancing long-term growth and value creation of the Janssen Pharmaceuticals business. Post-transaction close, J&J expects the transaction to increase its long-term revenue growth rate by at least 1.0% and its long-term earnings growth rate by 1.5% – 2.0% above current analyst consensus while J&J estimates EPS accretion in the first full year of $0.35 to $0.40. J&J shareholders are also expected to realize additional value from the J&J convertible ownership interest in R&D NewCo.
  • Extends Actelion products’ geographic and commercial reach: The J&J global presence and commercial capabilities will help open new markets and opportunities for Actelion’s in-market products and provide additional support for the successful launches of its promising late-stage therapies in highly competitive therapeutic areas.

Roadmap to Completion

The transaction is expected to close by the end of the second quarter of 2017. Moreover, Actelion will convene an Extraordinary General Meeting for shareholders to approve the distribution of shares of R&D NewCo by way of a dividend in kind to Actelion’s shareholders upon closing of the tender offer. The Extraordinary General Meeting is expected to be held in the second quarter of 2017.

The transaction is conditioned upon:

  • At least 67% of all Actelion shares that are issued and outstanding at the end of the offer period, which may be extended, tendering into the offer
  • The approval of the Actelion shareholders of the distribution of the shares of R&D NewCo at the EGM called for this purpose
  • Further customary offer conditions described in the offer prospectus, including regulatory approvals

Tax clearances in relation to the spin-off of R&D NewCo have been received from both the Swiss Federal and the Basel-Landschaft cantonal tax authorities. Jean-Paul Clozel has committed to tender all Actelion shares he owns into the offer and vote his shares in favor of the transaction at the EGM. Actelion’s Board of Directors unanimously recommends that Actelion shareholders tender their shares into the offer and vote in favor of the distribution of shares at the EGM.

Johnson & Johnson is prepared to pay the price per tendered share to the retail shareholders in CHF and therefore provide a wholesale exchange facility. The exchange facility shall be provided only to persons who hold their Actelion shares in a bank deposit in Switzerland, and who hold no more than 1,000 shares each.


Lazard and Citibank are acting as lead financial advisor to Johnson & Johnson. Cravath, Swaine & Moore LLP, Homburger AG and SextonRiley LLP are serving as legal advisors to Johnson & Johnson. Bank of America Merrill Lynch and Credit Suisse are serving as Actelion’s lead financial advisors. Niederer Kraft & Frey, Wachtell, Lipton, Rosen & Katz and Slaughter & May are serving as legal advisors to Actelion.


While some Analysts argue that the transaction is overpriced with respect to comparable transactions, the premium can be explained as a way to defeat competitive bidders. Moreover, the transaction price payment allows an efficient use of the significant amount of cash that Johnson & Johnson holds offshore so that no US tax for this invested money will be due compared to transferring it to the US.

Marcel Kwiatkowski
Virginia Bassano
Niccolò Di Lilla

The Power of Sight: Essilor Luxottica Merger

The Power of Sight: Essilor Luxottica Merger

Companies Overview


Global leading Italian Company in design, production and distribution of high-technical quality fashion, luxury, sport and performance eyewear with a brand-names portfolio consisting of Ray-Ban, Oakley, Vogue Eyewear, Persol, Oliver Peoples e Alain Mikli. It also includes prestigious licenses as well as brand like Giorgio Armani, Burberry, Bulgari, Chanel, Dolce&Gabbana, Michael Kors, Prada, Ralph Lauren, Tiffany & Co., Versace and Valentino. The firm was founded in 1961 by the current Chairman Leonardo Del Vecchio in Agordo (VE), Italy. It nowadays employs more than 75.000 people and is headquartered in Milano. Currently Delfin S.a.r.l., controlled by Del Vecchio family, acts as a holding company with a 61.9% stake, having no common managing interest with the subsidiary from an operational perspective.

The business model adopted covers every step of the value-chain production: design, development, production, logistics and distribution. This allowed Luxottica to operate as manufacturer and retailer in more than 150 countries, through more than 7.400 shops. The Company went public on NYSE on 1990 and is publicly listed on FTSE MIB index on the Italian Borsa di Milano since 2000. Luxottica has recently been rumoured about the acquisition of the Brazilian optical franchisor Ótica Carol, which was established in 1997 with approximately 950 locations. The transaction is valued at €110m and remains subject to customary regulatory approvals.



Headquartered in Charenton-le-Pont, France, Essilor is a leading producer of optical lenses and is led by the French-Canadian chairman and chief executive Hubert Sagnierès. The Firm’s expertise is in the field of designing, manufacturing and distributing ophthalmic lenses and equipment for eye care professionals.While owning different brands such as Varilux, Crizal, Eyezen, Xperio, Transitions, Bolon, Foster Grant and Costa, the Firm distributes its products in more than 100 Countries, through 490 prescription laboratories and 16 distribution centres.

The 90.4% stake of the Company is publicly listed on the Euronext Paris Stock Exchange and is a component of the Euro Stoxx 50 share index. The remaining 9.6% are split within employees, partners and treasury shares. The major shareholders are Harbor Capital Advisors Inc (3.76%), Vanguard Group Inc (1.95%) and BlackRock Fund Advisors (1.13%). Founded in 1972 after the merger of Essel and Silor, the company became the third-largest ophthalmic optical firm in the world. Essel was founded in 1849 in Paris, while Silor started under the name Lissac in 1931 as a retailer of ophthalmic lenses. The Company now employs 61,000 workers worldwide, and it launched more than 250 products in 2015. It also claims to invest €200mln in research and innovation every year.


Industry Overview

The global eyewear market can be split into contact lenses and spectacles. Further, the spectacles market can be sub-segmented into: spectacle frames, spectacle lenses, and sunglasses. There are different challenges and entry barriers that make this industry hard to penetrate as well as extremely competitive. The last year dynamics are making the eyewear sector an “optimistic” sector, with a compound annual growth rate of 2.5 per cent forecast for 2015 to 2020, according to May Ling Tham, head of personal accessories and eyewear research at Euromonitor.

Source: Financial Times

The challenges that are increasing the pressure on the $90bln global industry are strictly related to the convergence point of fashion and health trends. This creates a synergy between the ophthalmic lenses and the fashionable eyewear sector, making the demand increase. The key forces which are driving the industry growth are the rising ageing population, the high potential of vision correction, the urbanization process, the under penetration of eyesight correction and the increasing technical and innovation demand in developed markets. 63% of the 7.3bln people are considered to be in need of vision correction, but only 1.9bln can afford it. More than 2.5bln live in Asia, Africa and Latin America. The areas in which demand ramps up are mostly located in Asian markets, where consumers buy most of the products via online channels. The industry is also carving out a niche in the luxury products sector, thanks to the celebrities promotion, who made sunglasses a “must-have”.

Deal drivers: 

The deal intention is to create a company that can produce eyewear in a large scale (lenses and frames) and sell them worldwide. Therefore, EssilorLuxottica would hold a competitive advantage through a comprehensive offering combining a strong brand portfolio, global distribution capabilities and complementary expertise in ophthalmic lenses, prescription frames and sunglasses. Potential revenue and cost synergies between €400mln and €600mln are expected. The combined entity would utilize widespread distribution networks and production capabilities. Through its 32 manufacturing facilities and 16 distribution centers, Essilor will leverage its operating capacity as it moves down in the value chain with an access to Luxottica’s 7.800 retail stores and 10 retail brands. In addition, Essilor will have an access to over 150 countries compared to the 100 pre-merger.

Beyond the production capacity, Essilor will be tied to some of the most valuable brands in the eyewear industry. Also, the Italian frames & sunglasses maker is an established innovative company (top 100 in Forbes’ ranking of the world’s most innovative companies), launching over 2.000 new eyewear styles a year.

Beyond the economics of the deal, succession considerations may have been a key factor for Luxottica’s main shareholder, Delfin. Mr Del Vecchio, Italia’s second richest man (net worth of €20bln) may indeed be implementing succession plans to secure the company’s future. Hence, the all-stock deal shows that the 81 years old founder believes in the upside of the merger, as well as in the management of Essilor. In addition, Luxottica suffered from a massive turnover in its top management, as 90% of its directors jumped ship in the recent years. In a piece published by The Economist (Issue of January 2017), manager painted Del Vecchio’s management style as concentrated, as he “could not foster a strong alternative leader and would not let any of his children become managers”. To overcome such issue, Mr Del Vecchio will be Executive chairman and M. Hubert Sagnières (CEO of Essilor) as Executive Vice-Chairman. Also, the Board of the new entity will be split between the two entities, ensuring a transition of power after M. Del Vecchio’s retirement.

Deal Structure:

On January 15th 2017, Essilor’s Board approved the agreement with the holding company of Leonardo Del Vecchio (Delfin). On the same day, the Board of Luxottica announced that the merger is in the best interest of the company and all its stakeholders. During the calls with the analysts and in various press releases, details of the Merger’s structure where made public and analysed. However, as the deal is still pending conditions may vary. The deal will be a stock-for-stock merger with an exchange of 0.461 Essilor Shares for 1 Luxottica share. The Italian company’s equity is valued at €22.79bln, based on the previous exchange ratio and on the Essilor share price of €102.1 and 484.16 million Luxottica shares outstanding. Such valuation implies a share price of €47.07 representing a -5.03% discount on the price of the day previous to the announcement (€49.56). On the day after the announcement price rose to €53.20, an 11.53% premium on the valuation. Together with the aforementioned equity Luxottica also has €1.13bln of net debt generating a total enterprise value of €23.92bln. Essilor has 218.51 million shares outstanding with market cap of €22.31bln at the initial price. After the announcement, the share price rose by 12.2% to €114.56 by 14:05 GMT of January 16 2017. With a net debt of €2.36bln, the French company had a pre-announcement enterprise value of €24.67bln. The new entity should thus have a combined enterprise value of about €48.6bln. As of the early announcements, newly issued Essilor shares will provide financing of the deal.

Throughout the transaction, with the values provided above, Delfin, majority shareholder of Luxottica, will exchange 62% of its shares retaining majority position in the combined entity. The holding of the Del Vecchio family, indeed, should keep a position of about 38% of the new entity. Most probably, EssilorLuxottica will become a holding company retaining control of Essilor International and Luxottica. Post-merger, the company will remain listed on the Paris stock exchange and becoming its 8th biggest company by market cap. Leonardo Del Vecchio will remain Executive Chairman and Chief Executive for the following years sharing managerial duties with Hubert Sagnières who would become Vice-Chairman and Deputy CEO. EssilorLuxottica’s Board will be made up of sixteen members of whom eight nominated by Essilor and eight by Delfin. The closing is expected in the second half of 2017 and should not face any regulatory constraint.


Essilor was advised by Rothschild’s and Citi’s investment banking teams (respectively ranked 1st and 6th in French M&A advisory), while Luxottica was advised by Mediobanca’s team (ranked 1st in Italian M&A advisory). Tax, corporate & competition due diligence are conducted by Cleary Gottlieb Steen & Hamilton LLP on behalf of Essilor, while Luxottica is advised by BonelliErede and Bredin Prat law firms.



Guglielmo De Martino
Imad El Ahdi
Filippo Zanini


The Kraft Heinz Co – Deal Report

The Kraft Heinz Co – Deal Report



The Kraft Heinz Company is an American worldwide food company formed by the merger of Kraft Foods and Heinz in July 2015, backed by 3G Capital and Berkshire Hathaway. The merger has been agreed by the boards of both companies, with approvals by shareholders and regulatory authorities. Alex Behring, 3G Capital’s managing partner, becomes the chairman of the new company; Bernardo Hees, Heinz’s chief executive officer (CEO), is now the CEO of the new company; and John Cahill, Kraft’s CEO, is now the vice chairman of the new company. The company will have dual headquarters in Pittsburgh and Chicago, the respective headquarters of Heinz and Kraft. The company and its stock are both fresh from the oven, but in their current forms, they have been in the works for some time.

Arguably, this entire process started with the high-profile buyout of H.J. Heinz by Warren Buffett and Berkshire Hathaway in conjunction with 3G Capital. That deal happened in 2013, with Berkshire and 3G Capital agreeing to purchase the condiments maker for a base price of roughly USD 23 billion, representing an approximately 20% premium to Heinz shares prior to the announcement.



On August 10, 2015, the Kraft Heinz Company (following “K.H. Co” or “the company”) reported its second quarter results for Kraft Foods Group and H.J. Heinz Holding Corporation for the periods ending June 27, 2015, and June 28, 2015, respectively. Both companies reported their second quarter results separately. The Kraft Heinz Company completed the merger of Kraft and Heinz successfully at the end of the second quarter.

2Q 2015 before-merger Performance Recap – Kraft

Kraft’s 2Q15 net revenues fell by 4.9%, and Kraft’s organic net revenues fell by 3.3%. It reported operating income of USD 923 million and diluted EPS (or earnings per share) of USD 0.92. Diluted EPS included USD56 million or USD 0.06 per diluted share in spending on cost savings initiatives, as well as USD 37 million or USD 0.04 per diluted share in merger-related expenses. It also included a USD 21 million or USD 0.02 per diluted share gain on the sale of assets, and USD 20 million or USD 0.02 per diluted share in unrealized gains from hedging activities.

2Q 2015 before-merger Performance Recap – Heinz

Heinz’s net sales fell by 4.1%, and Heinz’s organic net sales grew by 5.9%, driven by higher pricing across all segments. Organic adjusted EBITDA1 rose 16.3%, driven by more sales and lower SG&A (selling, general, and administrative expenses).

2Q 2015 Performance Recap – Kraft Heinz Company

Since the merger, Kraft Heinz reported combined results for the first time this quarter. It reported net sales of USD 6.4 billion. This was a fall of 9% compared to the same quarter a year ago. The organic net sales fell by 2% compared to 3Q14. A negative 8.2 percentage point currency effect caused the adjusted EBITDA to fall by 3.4% to USD 1.5 billion this quarter. The adjusted EPS (earnings per share) fell by 4.4% because of the change in the adjusted EBITDA and the impact of a higher tax rate compared to last year.


3Q 2015 Performance Recap – Kraft Heinz Company

On November 5, 2015, Kraft Heinz reported its third quarter results for fiscal 2015. The combined results after the merger were not good. As a result, the stock price took a toll on the disappointing quarter. The stock fell by 5% after the earnings release. It closed at $72.01 on November 6. The fall in net sales was primarily due to a negative 6.7 percentage point impact from currency and a negative 0.3 percentage point effect from divestitures. The volume or mix fell 2.7 percentage points because of lower shipments in ready-to-drink beverages, food service, cheese, and boxed dinners in the US and Canada. However, the rest of the world showed strong growth. The merger seems to have benefited the company despite the disappointing results this quarter. The company has shown various synergies among its brands including Kraft, Heinz, Capri Sun, JELL-O, Kool-Aid, Lunchables, and Maxwell House.


Dividend declared and EPS

As per the company’s press release, on July 31, 2015, it paid a cash dividend of $0.55 per share to all stockholders of record at the close of business on July 27 2015. This dividend was in lieu of the dividend declared on June 22 2015, by Kraft to its shareholders of record as of July 27 2015. The payment was conditional on the merger not having closed by that date. Kraft Heinz (KHC) in 2Q15 reported diluted EPS of USD 0.92 compared to USD 0.80 for the same quarter last year due to higher spending on cost savings initiatives and costs related to the merger with Heinz. These costs were partly offset by gains on an asset sale. The adjusted EPS was reported as USD 0.98 in the 2Q15. The EPS consensus estimate for the third quarter was USD 0.58. Yet Kraft Heinz reported an EPS (earnings per share) of USD 0.44 in 3Q15. It fell short of analysts’ estimates by 24%. It missed the EPS of USD 0.62 on revenue of USD 6.7 billion, according to the analysts’ forecast. The EPS fell by 41% compared to 3Q14. It fell 52% compared to 2Q15. The analysts that follow this company are expecting it to grow earnings at an average annual rate of 10% over the next five years. Analysts expect earnings growth of 12.6% next year over 2015’s forecast earnings.




K.H. Co’s competitors in the industry include Mondelez International (MDLZ), Hershey (HSY), and Mead Johnson (MJN). They reported gross margins of 39%, 45.5%, and 64.5%, respectively, for their last reported quarters. Kraft Heinz’s competitors such as Mead Johnson (MJN), McCormick & Company (MKC), and Keurig Green Mountain reported operating margins of 23.1%, 13.1%, and 16.6% in their last reported quarters.



Demand is driven by food consumption, which depends on population growth. The profitability of individual companies depends on efficient operations, because products are commodities subject to intense price competition. As consumer demand for local, organic and fresh foods continues to grow, the enormous multinational firms that are collectively being called “Big Food” are in the position of having to rework, reshape and reimagine themselves. Although this changing consumer landscape has contributed to lacklustre growth among some of the industry’s major players, the consensus among producers, analysts and healthy food advocates is that the major food companies – and their influence – are still going strong. The issue isn’t profits, it is growth. Consumers’ growing appetite for foods that feel healthier, fresher and less processed is one of the significant obstacles to growth. At the same time, while fresher, healthier foods may be grabbing more room in the line-up, there is reason to believe that the appetite for convenient packaged foods remains strong. Kraft’s Q4 2014 earnings release points to increased sales of Lunchables pre-packaged lunches and “ongoing growth in bacon” as key factors driving higher revenues in its refrigerated meals category. The future is uncertain. Lash points to Kellogg and Campbell’s as two companies that have struggled. Kraft, on the other hand, has been doing a good job refocusing its marketing efforts. Companies compete largely based on cost and their ability to distribute the finished product. Large companies have economies of scale in purchasing and distribution. Industry is concentrated: the 50 largest companies account for more than half of industry revenue. The food processing and packaging industry is poised for growth in the coming years.

Industry Earning Forecast

Looking into earnings estimates within the Food Processing Industry in the current quarter, 33.33 % of companies, who provide earning guidance within Food Processing Industry have increased their earnings outlook for the current fiscal year. 55.56 % of companies, who issued earning outlook within Food Processing Industry, have reiterated their earnings per share outlook for the current fiscal year while 11.11 % cut their earnings outlook.

Industry Sales Forecast

Within Food Processing Industry there were no increases of sales guidance, more corporations reiterate their sales projections, 87.5 % of businesses within Food Processing Industry. On the negative side, 12.5 % of businesses within Food Processing Industry expect now to sell less, compare to the previous guidance

US Kraft Heinz operates in four segments—the US, Canada, Europe, and the Rest of World. The US segment’s net sales were USD 4.5 billion—a fall of 3.7% compared to the same quarter last year. The adjusted EBITDA for this segment rose by 1.4% to USD 1.1 billion. The Canada segment’s net sales were USD 539 million. The net sales fell by 18.9% compared to the same quarter last year. The Canada segment’s adjusted EBITDA fell 20.3% to $110 million. The Europe segment’s net sales were USD 599 million. The net sales fell 13.9% compared to 3Q14. The segment’s adjusted EBITDA rose 8.3% to USD 222 million. The rest of the world’s segment’s net sales were USD 684 million down 25.3% compared to the same quarter a year ago. The Rest of World segment’s adjusted EBITDA fell 29.4% to USD 125 million.



The Pittsburgh-based, privately owned H.J. Heinz Holding Corporation acquired Kraft Foods in October. After the merger, the company changed its name to Kraft Heinz (KHC), becoming the third-largest food and beverage company in North America and the fifth-largest in the world. The Company’s iconic brands include Kraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Maxwell House, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta, for a brand portfolio worthing around USD 500 m.

3G Capital, a Brazilian private equity firm, and Warren Buffett’s Berkshire Hathaway contributed to the merger by investing USD 10 billion in the deal together, making the Kraft Heinz Company worth around USD 46bn.


In addition, changes to the operations strategy can also contribute to cost savings. These could be targeted at reducing headcount, shutting down less efficient manufacturing facilities and implementing zero-based budgeting. Zero-based budgeting means that the managers have to explain every forecast expense for the year from scratch, without appealing to previous years’ trends. This helps the top management enforce a more stringent form of cost control and realize cost savings. Since the chairman-CEO team at the new company will be the same as that which implemented drastic cost cutting measures at Heinz, including a reduction in force of 4%, closing several factories and grounding corporate jets, there is reason to believe that the projected changes to the combined company’s operations strategy would be successfully implemented.

3.2.    TIMELINE

timeline kraft


3.3.    DEAL TERMS

The Kraft Heinz Co. (KHC) shares are traded since 2 July 2015 on the NASDAQ.

Berkshire and 3G Capital Company together invested around US$10 billion in the deal, making Kraft Heinz worth about US$46 billion. Buffet and his partner 3G are paying a significant amount of money in order to obtain the majority stake of 51%, in particular they are paying:

– USD 16,5 one-time dividend to shareholders of Kraft equal to USD 10bn

– USD 18 bn, equal to half the Market Cap of Kraft before the transaction

– USD 14 bn, equal to half the purchase price Berkshire and 3G Capital paid for Heinz in 2013.

The implied deal worth around USD 45 bn

On the 08/11/2015 K.H. Co shares were traded at USD 72,24 for a Market Cap of USD 86,4 bn of which the USD 44,06 bn are attributable to Berkshire and 3G Capital.



The combination of the two food companies companies pursues intensive synergies objectives among which the majority will be pursued through cost cutting.

3G Capital Company has proven effectiveness in operational improvement and cost optimisation, as it happened at Heinz 3G will probably replace a part of the management team and employ zero-base budget in order to justify every budgeted expense. Those moves, as happened for Heinz, are intended to drive rising adjusted profits and therefore increasing shareholders return. The expected cost synergies should be around 1.5bn $ by the end of 2017 and will include intensive job cuttings and plant closures due to the overlying operations in North America. The company started in this direction by cutting 2,500 jobs also due to the changing taste of customer, more health conscious. Other cost savings could possibly come from the enlarged business and therefore the increased bargaining power towards suppliers as well as clients, such as retailers and therefore a wider presence on the shelfs.

The company will probably try to leverage some revenue s synergies, among which the common distribution channel and the geographic presence.

The Kraft Heinz Company will have to decide how to handle the geographic business distribution, on one hand Heinz’s sales are mostly generated outside the US with a remarkable portion coming from the Emerging Markets that contribute for the 25% of sales; on the other Kraft produce nearly almost all of its sales within the North American market. A spontaneous idea would be to boost Kraft’s sales in Europe, but this is in part limited by the agreement with Mondelez Int., a spin-off separated from Kraft in 2012.

Both Berkshire and 3G stated that they have long-term projects and objectives therefor they intent to stay shareholders of the Kraft Heinz Co. in the long period. This is understandable because they have paid a consistent amount of money in order to obtain the 51% of the new company and they will need time to justify their investment.


Bernardo Hees, CEO of the newly formed Kraft Heinz, said, “The job cuts are not surprising, given the reputation of the company’s management on Wall Street.” Hees also stated that he has overseen cost cutting at Heinz, representing 20% of the workforce, since it was taken over in 2013 in a prior partnership between 3G and Berkshire. The 3G Capital Company is well known for its tight cost controls, meaning the cuts announced on August 12 mostly affected people on the Kraft side of the business.

According to company spokesman Michael Mullen, the job cuts were part of the company’s process of integrating the two businesses and designing the new organization. The company expects that this new structure to eliminate duplication to enable faster decision-making, increased accountability, and accelerated growth.

Wednesday the 4th November the Company confirmed that they could cut 2,600 jobs and seven factories over the following 12/24 months.



To contact the authors:

Amedeo Ferrari      

Luca Cartechini