Could the Precision Castparts Deal Get Competitive?
Warren Buffett Acquires His Elephant: Precision Castparts
Could this deal get competitive?
For merger arbitrage professionals, competitive deals can make your quarter. If you get two companies bidding against each other, a 1% gross spread can easily become 10% by the time everything is said and done. We saw that happen in the Salix Pharmaceuticals deal. Could the Precision Castparts–Berkshire Hathaway transaction be broken up by an interloper?
The takeover premium isn’t all that high when you consider prices at the end of 2014
Precision Castparts was trading at $194 per share before the merger announcement, so the $235 takeout price works out to be about a 21% premium. That is about normal, however, Precision Castparts was beaten down somewhat by the weakness in the oil patch. It closed out 2014 trading at $240.88 a share.
Arbitrageurs will go straight to the background section of the proxy the second it’s released to see what sort of sale process was run for the company. At first look, based on Warren Buffett’s CNBC interview, it appears that there was no process run.
Note that Buffett also said that this was a “very high multiple” to pay. Could someone else come in for the company? Possibilities would be a customer, say, Boeing (BA) or General Electric (GE). A strategic buyer would be able to outbid Buffett because there would inevitably be synergies. That said, very few companies want to take on Buffett in a deal.
Deal comparisons
Arbitrageurs will often compare the price the acquirer is paying to other deals in the same industry. This is always more art than science, since no two companies are alike, interest rate environments change, and so forth. However, we do have two deals we can look at.
RTI Metals–Alcoa
Kaydon–SKF
These two transactions are about the closest comps we have to the Precision Castparts deal. In the PCP–BRK-B deal, Buffett is paying about 3.7x trailing 12-month revenues and 13x trailing 12-month EBITDA (or earnings before interest, tax, depreciation, and amortization) . These multiples are in line with the averages for the other two transactions, which work out to be about 2.3x revenues and 13x EBITDA.
Other merger arbitrage resources
Other significant merger spreads include the Freescale-NXP transaction. The merger of Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI) is anticipated to close by the end of the year. For a deep dive into risk arbitrage investing, please read Merger arbitrage must-knows: A key guide for investors.
Investors who are interested in trading in the industrials space can consider the S&P SPDR Industrials ETF (XLI).
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