Monday, September 27, 2010

Three Big Deals Make It Merger Mania Monday!

Wow, there's plenty of deal action to blog about today. 

Wal-Mart wants to buy Massmart for $4.25B.  Let's run some basic numbers on Massmart (MMRTY.PK).  ROE is a whopping 36%, holy canole, and quarterly growth is an eye-popping 27%.  Unfortunately the P/E is 28, astronomical for a retailer.  Wal-Mart (WMT) is looking to shove their global supply chain into African wallets. 

Unilever wants to buy Alberto Culver for $3.7B.  Funny, I've never heard of Alberto Culver (ACV).  Let's see what they're all about.  Their P/E of 25 is almost at Massmart's nosebleed altitude.  Are they worth such a premium?  Their ROE of around 12% is less than the 15% I'd prefer.  At least their net income is steady and healthy, and big kudos to them for whittling their long-term debt down to under half a million dollars.  That's unheard of for a company with a market cap in the billions. Unilever (UL) likes what it sees, so this may be a halfway decent deal if they can get that ROE up after some serious cost-cutting. 

Southwest wants to buy AirTran for $1.4B in cash and stock.  Well, what's so desirable about AirTran (AAI) all of a sudden?  Their ROE is a paltry 6.26%, which must look good to Southwest (LUV) whose own ROE is an even more lousy 4.15%.  Southwest is assuming AirTran's debt, which could jeopardize its long run of profitability if a renewed recession hurts air travel.  Finally, AirTran's P/E has climbed into thin air at almost 44.  I wouldn't pay $44 for dollar's worth of earnings anywhere, certainly not up in the wild blue yonder. 

All of these deals have something in common.  The acquirers seem to be paying a premium for market share in mature industries driven by consumer spending.  That is not at all a smart move if the world economy is headed for zero growth or a double-dip.

Full disclosure:  No positions in any company mentioned at the time this post was published.