Experts cautiously optimistic on Mid-Atlantic M&A

Provided exclusively by Mergermarket

Industry experts are generally upbeat that the steady pace of M&A that marked 2015 will continue in the first half 2016 in the Mid-Atlantic region, but they caution that the crystal ball is as yet a bit hazy given several macroeconomic factors.

“We’re seeing some volatility of markets,” said Scott Westwood, chairman of McGuireWoods’ M&A and Cross-Border Transactions Department. “There was the late December [interest] rate increase; Brazil is coming out with a recession; and then problems with China,” he said. With the economic uncertainty and market volatility, M&A will be opportunity-driven by strategics and private equity firms, which each have a lot of surplus cash, he added.

There might be fewer mega-deals — such as the planned USD 130bn merger of Midland, Michigan-based Dow Chemical and Wilmington, Delaware-based DuPont — in the Mid-Atlantic region than last year, said Michael Richmond, managing director at the DAK Group. But there will be many smaller deals including those involving middle market firms as corporates with cash look to grow and private equity players continue to enter the market, Richmond said.

Glenn McGrory, a partner at Cleary Gottlieb Steen & Hamilton, pointed to transactions including New York-based Pfizer‘s (NYSE: PFE) planned purchase of Allergan (NYSE: AGN), valued at USD 183.7bn, that made headlines last year. He said there were far more smaller transactions ranging from USD 10bn to USD 50bn and he expects more of such smaller-size deals in the first half.

The region will continue to see a lot of chemicals, construction, consulting, pharmaceutical, plastics, retail and technology deals – all active sectors for the region, the experts agreed.

“The theme is a continuation of the hot industries of 2015 bleeding into 2016,” Westwood said. This includes activity by companies in the oil and gas sector needing to raise cash by shedding assets; and Marcellus Shale gas companies that are “more highly leveraged, made a lot of land acquisitions, and have higher operating costs,” Westwood said. “You’re going to see a lot of activity in the Mid-Atlantic region as a result of the [oil and gas] price drops in 2015,” he added.

With Congress’s recent approval to extend the investment tax credit for renewables, M&A will heat up the region’s already hot solar industry, Westwood said. “We think there will continue to be development companies with solar projects underway that require additional capital and need to sell to the bigger players,” he added.

The continued availability of cheap credit, however, is an uncertainty that could have an effect on dealmaking in the first half of 2016, several sources noted. In late December, investors made a big exit from the high-yield bond market, said Ethan Klingsberg, a partner at Cleary Gottlieb. That could spell trouble for firms seeking to incur some amount of debt to make buys, he said, citing Chesapeake, Virginia-based Dollar Tree‘s (NASDAQ: DLTR) acquisition in July of Charlotte, North Carolina-based Family Dollar Stores. Dollar Tree, he said, incurred USD 9.5bn of debt to buy a company for an enterprise value of about USD 9.2bn. “There are a lot of deals that are in the pipeline out there that could be affected,” he added.

Westwood and Klingsberg said the disruption in the credit market could impact a broad spectrum of deals. McGrory said this could even be a factor on transactions that, while not driven by debt financing, will require debt refinancing. All sources agreed, however, that the market may quickly begin to distinguish between sectors that are in trouble and those that are not.

In the middle market, it’s still a good time to sell as valuations remain high, both strategic and financial buyers have a lot of liquidity, and banks are aggressive in terms of funding buyouts, Richmond said. All the sources agreed that strategics will continue to drive M&A.

“My sense is that PEs will still view the dual-track approach to selling but also be open to an exit sale,” McGrory said. In November a group of investors led by PE firms TPG Capital and Leonard Green & Partners agreed to sell San Diego-based PETCO Animal Supplies to New York-based CVC Capital Partners and the Canadian Pension Plan Investment Board for about USD 4.6bn. The announcement followed the IPO filing in August for PETCO with a USD 100m placeholder.

Westwood predicts that the IPO market will either remain slow or increase slightly “because capital is getting to be a little more expensive.”

Activist shareholders are expected to keep pressure on their investments as well, advocating for accretive transactions, sources said. Klingsberg said that some hedge fund activity will keep antitrust regulators busy in the first half as they review major transactions and require divestments. “Those are tough deals to do,” he said, adding “but they lead to a lot of M&A and keep lawyers at New York firms very busy.”

by Esther D’Amico

As seen in the mergermarket newsletter on 12/01/2016

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