Tag / mergers

by Frank Maduri

Follow Up: CVS Merger With Aetna Under Scrutiny

The recent developments with the Federal court system and Judge Richard Leon have the potential to rollback the $70 billion merger of CVS with Aetna. In other posts on this site, this merger has been detailed from the beginning.

The renewed scrutiny from Judge Leon centers on the condition of the sale went it was originally approved which states that Aetna would be required to sell Medicare prescription drug plans that they currently administer. That was the deal made with the anti-trust regulatory bodies involved in this blockbuster merger.

The hearing is set for Thursday, when Judge Leon plans to hear testimony from various entities including representatives of the American Medical Association (AMA), who are opposed to the merger. Judge Leon is attempting to determine whether the sale of Aetna to CVS is within the public interest.

CVS is a large retail pharmacy chain and healthcare provider that also manufactures their own product lines. Aetna is a huge health insurance company with a Pharmacy Benefit Manager (PBM) arm as well. The deal from the beginning has struck some in the general public as a conflict of interest.

Earlier this week, another prominent judge called the potential for the CVS-Aetna deal to be reversed “catastrophic” to the industry. The merger is seen as lifeline of sorts for both companies amid a changing healthcare landscape that Amazon has shifted already and is looking to tilt completely in the coming years.

The move is seen as necessary to bring a stream of steady foot traffic through the CVS retail stores which they will need to compete with Amazon. This will be achieved by funneling those with Aetna health insurance coverage to have their prescriptions filled by CVS.

In an earlier piece, I detailed the potential pitfalls to that approach and I maintain that it is unfair to limit the choice of a consumer especially with healthcare related products that might put them into a scenario that is very inconvenient for them or a family member that is covered under their policy.

The proponents of this deal moving ahead will point to the recent struggles of Walgreens and their revised earnings adjustments as well as their recent adjustments to their overall annual forecast, which was revised down due to a decrease in customer traffic through the brick and mortar locations primarily. The industry media folks and the financial analyst types were speculating that Walgreens has to do something, they have to make a move to essentially “lock in” a customer base for prescriptions similar to the Aetna – CVS agreement.

The detractors will state that the insurance providers for healthcare should not be mingled with the retail pharmacy giants because of the changes it will bring to consumer choice, potentially to pricing of medications, and a host of other concerns. They would also maintain that Walgreens would be met with resistance if they tried a similar path to CVS.

It also should be noted that Walgreens expended time, energy, and money on a long-term pursuit of merging with Rite Aid, which met with so much push back that it was eventually disbanded by Walgreens. Then, Walgreens spent money to obtain many Rite Aid locations and transition them to the Walgreens brand in order to strategically grow their presence in certain markets.

The speculation will continue around United Health Care (UHC) being one of the last major health insurance players left that could become a partner for Walgreens, though it is difficult to see that they would sink money into a merger proposal until they have the precedent of the CVS-Aetna deal to utilize to their advantage.

The implications for this hearing today and the decision that rests with Judge Leon will have far-reaching consequences in either way he decides to proceed. The approval of the merger with the conditions would set CVS up to grow their customer base and could give Walgreens the proof it needs to move forward in a new direction of their own, given their current situation.

The deal could be scuttled which would send shockwaves through the industry and potentially give Amazon an advantage for entry into the market. It will be fascinating, so stay tuned.

(some background information courtesy of Reuters, Barron’s, and Fox Business)

by Frank Maduri

Follow Up: CVS – Aetna Merger Could Be Challenged

In a follow up to earlier pieces on this topic, the mega-deal that merged CVS and Aetna in the healthcare sector totaling about $70 billion could be challenged in federal court. The federal judge, Richard Leon, on Monday indicated that he could stop the activity of both companies to join forces and keep them as separate entities while he weighs the consumer impact of the merger.

This is out of the ordinary as the merger has met approval through the Justice Department and the federal court proceeding is often a mere formality. It should also be noted that Judge Leon is the same court officer which presided over the controversial AT&T / Time Warner merger proceedings; that was a recent topic here on Frank’s Forum, because of the content sharing issues taking place in that industry.

It is not a coincidence that Judge Leon, who has received plenty of criticism for his handling of the AT&T/ Time Warner merger, is now considering putting the brakes on this CVS/Aetna planned consolidation. The conflict of interest issue can be raised very easily in the case of CVS/Aetna because of what each entity specializes in separately.

The merger of a major healthcare/retail pharmacy company with a major health insurance carrier presents plenty of ethical concerns that could mollify the public interest. The concern is that Aetna-insured patients, whether it is individual policies or employer-provided policy coverage will be forced to fill prescriptions for medication at CVS locations exclusively.

A related concern for the consumer is when their employer-provided coverage changes to Aetna from another carrier, which then could force them into an prescription arrangement with CVS after the individual has a long-term routine and trust with another pharmacy. A similar concern was raised during the discussions of the merger in some forums online regarding rural areas that will require the consumer to drive farther to a CVS location if they are insured through Aetna, and in areas of the U.S. where CVS does not have a large presence.

In fair balance, some proponents of the merger state that it will provide better care for less cost. The addition of Aetna to their ranks will help CVS gain leverage with PBMs for the negotiation of pricing on prescription medications, which I covered in an earlier related piece.

The federal court could make this situation both very interesting and very difficult for those involved at CVS and Aetna. Judge Leon used words like “less convinced” that the merger was not an anti-trust violation. That is a very bold statement on the record and certainly could be motivated by the flack that the judge received in the AT&T decision.

Americans have long been concerned by anti-trust or monopolies because they represent, at the core, a break from our national ideals of competition in the marketplace as well as limiting consumer choice. The American consumer favors both choice and competition to create favorable conditions for price and service. The limitation of either of these market forces is looked upon rather negatively in the court of public opinion.

Both CVS and Aetna have to be alarmed that they are potentially being painted with the monopoly brush, and that this deal could unravel in the eleventh hour, unhinged by a judge who is essentially trying to rectify a previous miscalculation with the AT&T decision, which looks more like a monopoly with each passing day.

The central question is whether or not the combination of CVS and Aetna is within the best interest of the consumer. It is starting to look like that answer may alter one of the largest healthcare mergers in American history.

(some background courtesy of Reuters, CBS Market Watch, and CNBC)

by Frank Maduri

Follow Up: Big Pharma Bust? The Takeda – Shire Merger

The mammoth deal that is the Takeda acquisition of the Ireland-based, Shire Pharmaceuticals, has had more bumps in the road than the New Jersey Turnpike. The regulatory review processes in China, the United States, and the E.U. each had their own type of issues relative to this enormous merger proposal.

The news this week is that now that the regulatory hurdles have been largely negotiated successfully (the European Union approved the deal on November 21) the former chairman of the board of Takeda has now come forward to the media in opposition of the merger.

Kunio Takeda, the last member of the family whose name is “on the door”, so to speak, who served in the top position for a period of 16 years; is against the deal because of the high level of risk the company is taking by swallowing up Shire. The full stockholders meeting which will feature a vote on this controversial strategic move will take place on December 5th.

The former chairman leads a group of investors that is also opposed to the deal and this move yesterday to bring those concerns to the media is a concerted attempt to subvert the perception of this proposed acquisition ahead of the crucial vote on the 5th. The merger is not without scrutiny, as many different factions from industry experts, to Wall Street analysts, to shareholders in Europe and the U.S. alike all had doubts that this merger could ever be consummated.

The risk to Takeda is heightened by their recent purchase of Baxalta, and many within the inner circles of the industry were openly questioning their pursuit of a consolidation of Shire. The Irish drug maker, at that time, had sold off their oncology portion of the business and trying to compete in a rapidly changing pharmaceutical landscape.
Takeda will take on significant debt overall from their own balance sheet, to the costs of pulling together a deal of this magnitude ($62 billion), and taking on the debt that Shire has accumulated on their balance sheet. This is the rationale behind the opposition that is being demonstrated within Takeda in recent days.

The argument could be made that Takeda could have stood pat with their success in diabetes and hypertension medications. The company looks to push through this M&A activity with Shire as a way to crack the Top 10 pharmaceutical companies in the world. It is apparent that some of the regulators have not considered that we have seen “too big to fail” companies in other industries collapse after biting off more than they could chew. It would be a devastating blow to the overall pharma industry if Takeda went down the path to ruin because of this deal.

The original concerns from the beginning of this proposed deal are still lingering around: the value of the return to the shareholders, the debt taken on by Takeda to make it happen, and the overall valuation of Shire being perhaps inflated. These components, both collectively and individually, do not seem to be throwing the merger train off course here, with some industry news outlets reporting that reps from both companies expect that the deal will be completed in the first week of January.

Takeda is looking at the diamonds in the Shire pipeline, but reportedly have looked at other brands in the Shire domain as potential targets for sale to help pay down some of the enormous debt that will be incurred. These two companies on their own are huge, so the redundancy and lost jobs is another functional reality of such a large merger.

It remains to be seen whether the consumer will benefit from this deal, if it will translate into better leverage for the combined company with the pharmaceutical distributors, it could become a scenario where they jump up the prices on medications to help offset the debt load. This is where the consumer concerns over this merger could become an unfortunate reality.

(Some background information and statistics courtesy of Seeking Alpha, BioSpace.com, CNN, and Asia Nikkei)

by Frank Maduri

Follow Up: AT&T Content Ownership & The Impact On The Consumer

The debacle which was the AT&T merger with Time Warner, which is now known under the name Warner Media, has been a topic featured on this blog several times in the past. The detrimental effect it would have on competition in the media landscape is also a topic that has been part of my prior work on this merger.

It was widely reported that an outage of HBO occurred last week for customers of Dish and Sling TV services. It is hard to believe that AT&T / Warner Media had no role in engineering this outage to damage the competition with AT&T owned DirecTV standing to gain potential subscribers as an outcome.

This type of disruption or potential withholding of content is precisely what the Department of Justice was concerned about relative to AT&T merging with Time Warner. This potential misuse of the control of content or content ownership to damage the competitors of DirecTV was a central focus of the DOJ lawsuit in this merger earlier this year.

In that court proceeding, one judge made the decision to allow the merger to proceed, no jury was involved. The judge sided with AT&T in “buying” their version of the case that they wanted to reinvent AT&T for the long haul. The government argued that the merger would impact competition because it would give AT&T too much influence and control over content. The government argued that AT&T would use that control to provide favorable pricing for their own enterprise, DirecTV, at the expense of Dish, Fios, Comcast, and other cable television providers. It was a conflict of interest that the government was concerned about with this merger.

The exact situation has played out and could become a factor when the content of certain premium HBO programs comes up for distribution as well as the March Madness NCAA basketball tournament which Turner Sports (part of Warner Media) has the rights to broadcast. The new AT&T/Warner Media could jack up the prices on that content to the competition, while at the same time create advantageous promotional pricing for DirecTV in order to siphon off subscribers from their competitors.

DirecTV Now is a service that allows people to stream content without having a satellite dish attached to their residence. The service is opening up a new subscriber base to the DirecTV platform with less equipment and front-end costs. The development is one that can be viewed as positive, and the reviews are good overall for the service to this point. In some ways, this advancement will help competition because it gives the consumer another option if they are not a candidate for a satellite dish and they may feel locked in to one cable television provider.

However, this service can become problematic if AT&T influences the content available on this service and withholds that content from their competition in some way. This ties in to the other big media news of the Warner Media streaming app-based service that is built and being pushed to launch ahead of the long-awaited Disney app launch. Warner Media is trying to beat Disney to the punch on getting their streaming service up and going in the marketplace.

The question within the media industry at this point is whether that is a smart strategy by Warner Media if they rush the service to market and then have some glitches that lead to customer disappointment.

In the event that the outage or the disruptions that have involved Warner Media content and the competition for DirecTV in the marketplace are, in fact, valid that is a sad state of affairs for the whole industry. This has led to some analysts with greater knowledge of the industry space than myself to produce some insightful commentary pieces on the potential for the Department of Justice to reintroduce legal proceedings to reverse the merger.

That would certainly create a ripple effect throughout the media, telecommunications, and cable/satellite TV services industries all at the same time. The counterpunch to that effort was a group of businessmen writing op-ed type pieces of their own to implore the court system to not entertain the reversal of the merger. It is going to get interesting.

The issue in my own view of this situation is not the streaming services being offered to provide more choices to the customer. The issue is that you cannot set the playing field up in a way that is going to unfairly treat competition in the marketplace or set the rules up so that one party gains from them and everyone else is at a competitive disadvantage. That is what I want all the readers out there to think about in this circumstance; because those consequences will be felt across other industries that will have a much greater impact on your life than just being able to watch a program on your television set.

(Some background courtesy of Reuters, CNBC, CBS MArketwatch, and CNN)

by Frank Maduri

Follow Up: CBS / Viacom Merger News: The Saga Continues

The CBS and Viacom saga continues to loom within the media landscape following the sexual misconduct allegations against former CBS Chief Executive, Les Moonves, which led to him being removed from that post recently. This has caused many within the financial sector to have renewed speculation regarding the potential for a CBS merger deal with Viacom to get back on track.

In a follow up to earlier pieces on this topic, the interplay between CBS, Viacom, and their common parent company, National Amusements (NAI) has been a mess over the past couple of years. The struggle between Moonves and Shari Redstone from NAI and the discord that conflict created within the CBS board has shaped most of the news around this merger over the past several months.

The removal of Mr. Moonves from the equation seems to indicate that the merger will take place at some point between CBS and Viacom. This can be simply because no other external entity has indicated any type of interest level in obtaining CBS at this point.

The potential merger of these once-joined media conglomerates (CBS and Viacom were once under the same roof until they split apart several years ago) would make sense from a financial perspective as Wall Street analysts have stated that the merged CBS-Viacom unit would have a better valuation. Some analysts have estimated that the total valuation would increase in value between 20-30% compared to the two remaining single entities.

While that valuation impact is significant, the most critical issue facing CBS at this point is to find a new CEO. The reports have been centered around the likelihood that this candidate will be hired externally to bring a fresh perspective to the network and the corporation.

In my prior work on this topic, the dynamics between Ms. Redstone, Mr. Moonves, and Viacom head Bob Bakish were explored. The interpersonal issues between all of these figures has been at the center of the saga between CBS, Viacom, and NAI. The reports from multiple media outlets are that the new external CEO of CBS will be the individual in charge of the combined CBS – Viacom and not Mr. Bakish.

This added responsibility increases the importance for CBS to find the right candidate on what is probably a very short list of people who have the requisite skills and background to run such a complex, diversified combined media corporation.

The terms of the settlement in court between NAI and CBS stipulate that NAI cannot initiate any offers to consolidate CBS and Viacom for a period of two years. However, the settlement does not preclude either CBS approaching Viacom or vice versa, with a potential merger bid.

The likelihood of that happening after a new chief executive is named at CBS is seen as highly possible. In my prior work within this merger proposal saga, I have always maintained that Verizon would be the “dark horse” that would come out of the woodwork and purchase CBS for some inconceivable amount of money.

The media landscape has evolved though, and my view is starting to shift in thinking that Verizon may not be interested in CBS at all. They may not be interested in the capital outlay and the organizational changes that would need to take place in order to integrate CBS into the Verizon umbrella.

The other major networks and “old media” companies are out of the mix for CBS for mostly anti-trust reasons. Some have rumored that maybe CBS – Viacom combine and then merge again with a major studio such as Lions Gate or another television outlet such as AMC. In my view, that could happen because both CBS and an outlet like AMC would have to grow larger or else be swallowed up by another conglomerate.

The rumor that a “new media” entity such as Amazon, Apple, Netflix, or Google could snap up CBS seems unlikely at this point too. That sort of consolidation is delivered at a significant cost because of the complexity of the merger, the legal proceedings involved, and the integration of the key business units within CBS into an existing corporate and operational structure.

The content that CBS controls is a tremendous asset, and at the end of the day, content is king. The CBS app called All Access is a subscription-based service that has a robust base of viewers. It will be interesting to see if those variables are a motivating factor toward a “new media” entity taking a shot at consolidating CBS, especially if they would also hold the rights to the Viacom content.

The major shifts in the media industry this year have created a climate where CBS and Viacom both must make some sort of strategic growth move in order to stay relevant. It may become a merger of necessity rather than joining together willingly and with enthusiasm. The combined entity of CBS-Viacom would have certain strengths that would help them compete in an increasingly competitive and margin conscious industry.

The content and streaming app as well as other business units could position CBS – Viacom to better meet the demands of viewers that are changing the way they access media, television, and movies. The timing will all be predicated on how long it takes for CBS to complete their search for a new CEO.

The changes in the media and television industry has already seen some incredible M&A activity during 2018. The future for both CBS and Viacom could highlight the industry merger news in the new year ahead.

(Some background information courtesy of CNBC and AP)

by Frank Maduri

Disconnected: Rite Aid and Albertsons Merger Update

The proposed merger between Rite Aid and Albertsons faces a key crossroads type moment on Thursday, August 9th, when a pivotal vote will be made by the Rite Aid shareholders. The proposal on the table would give the shareholders of Rite Aid a reported 30% stake in the new company.

The prior piece on this merger focused on the transition of the pharmacy / drug store channel and the healthcare landscape. This landscape has adjusted further with the entry of Amazon into healthcare with their acquisition of Pillpack and their partnership with Xealth.

A report in Forbes describes a scenario where the Albertsons merger could be done just strictly out of fear of the impact of Amazon’s entry into the marketplace. The merger proposal is for $24 billion to bring the two companies together to compete against CVS (who is in the process of combining with Aetna), Walgreens (a giant company with Alliance Boots growing their presence in Europe), and Amazon.

A report by Bloomberg states that Rite Aid is set to announce a 2019 net loss of $125 million to $170 million, which far exceeds the numbers in the original guidance that they had reported earlier in the year. The speculation is that the people behind the scenes at Albertsons leaked this information ahead of the crucial vote on Thursday. The thought process being that the fear of the loss of value in Rite Aid will force the hand of their shareholders to vote in favor of the merger.

The Amazon partnership with Xealth provides them access into healthcare networks. The pharmacy side of Albertsons and Rite Aid also have clinics that they operate, which if the merger was approved would create a network of 319 clinics nationwide.

The detractors to the Rite Aid merger feel that the company could compete well on its own in the new landscape. The sentiment from some of the shareholders remains that the proposal from Albertsons does not place the proper valuation on the Envision Rx piece of the Rite Aid business model.

Envision Rx is the pharmacy benefit manager (PBM) piece of Rite Aid which has always been a sticking point in this proposed merger. This is a unique attribute of Rite Aid, which many maintain is an undervalued asset of the current proposal. This all comes at a time where two major investment consultant type groups have issued reports that caution the Rite Aid shareholders to consider rejecting the merger proposal.

There is a disconnection between factions of the Rite Aid shareholders over the Albertsons deal. The one side of the scenario is that Rite Aid is a much smaller company now that they have transferred so many store locations to Walgreens. The management of Rite Aid is stating that they feel that they are better positioned now because they will no longer be tied up with the sales of the locations to Walgreens and can focus on improving operations. The central message is that they can survive and compete as a smaller, leaner company without merging.

The other side of the scenario is the faction that feels that Rite Aid must “grow or die” with the “bigger fish” of CVS Caremark (Aetna), Walgreens, and Amazon. The merger with Albertsons will provide a combined company with 4,345 pharmacy locations, which will allow for a much more competitive company in the new landscape of the industry in the future.

Furthermore, there is the reality that Rite Aid stock has lost 77% of its value in the last two years. The Albertsons people are circulating a message that essentially is that Rite Aid will have no other interested parties for a potential merger if this falls through.

In truth, that is probably an accurate assessment because the government shutdown the Rite Aid merger proposal with Walgreens, CVS has no interest in acquiring Rite Aid, and there are not really any other suitors out there in the industry.

Another argument is one that is against the merger which in brief, is that Rite Aid and Albertsons are both struggling in low-margin businesses (pharmacy/drug store and grocery channel) and merging them together will not remedy those core issues related to being niche focused in industry channels that have low profitability.

The grocery channel could potentially provide a regional partner for Rite Aid that could be interested in buying their Northeast and Mid-Atlantic based locations such as Royal Ahold (parent company of Giant, Eagle, and Stop & Shop grocery chains). This is pure speculation on a potential future course for Rite Aid because so many within the financial industry believe that the Thursday vote is going to sink the merger with Albertsons.

This potential merger between Albertsons and Rite Aid has been a mess from the beginning. The path forward for both companies if this merger does not materialize is unclear. Albertsons could shift their focus to an acquisition within the grocery channel, a regional sort of consolidation move to grow the company.

Rite Aid could move forward alone and try to “keep swimming” in the industry without a larger merger partner. They could maximize their revenue streams by executing a strategy around their clinics and with marketing Envision Rx.

The harsh reality is that the pharmacy channel is running scared from the entry of Amazon into their market. The potential for Rite Aid to make it on their own while being squeezed by larger competitors could spell the end for the iconic American drug store chain.

The merger vote on Thursday will impact both the grocery and the drug store channels and could drastically alter the course of the strategic growth for two companies in the future. The consumer will be impacted by a lack of choice and a lack of competition in the industry which will force many consumers into a situation where they are facing increased out of pocket costs for pharmaceutical products in the years to come.

(Some background information and statistics courtesy of Forbes, Bloomberg, and Supermarket News)

by Frank Maduri

Dr. Pepper Snapple Merger With Keurig – Impact on the Beverage Aisle

The merger of Dr. Pepper Snapple Group with Keurig Green Mountain, which was initially announced in January, was finalized recently. The deal creates the new publicly traded company known as Keurig Dr. Pepper, according to Bev Net is the 3rd largest beverage company in North America.

The merger is going to have a direct impact on the beverage aisle because the combined entity will be utilizing their respective strengths together to create unique delivery systems for the consumer in the future.

The beverage industry is another sector of the economy which is in a “grow or die” phase at this point. In my professional experience in the industry as well as my time covering mergers and acquisitions, the key factor in this segment of business is the distribution network.

That is the main determining factor behind why Coca-Cola and Pepsi dominate the beverage aisle at the grocery store: it is all driven by distribution and shelf space. The smaller brands have a very difficult time competing with the big players in this space because of the costs associated with distributing the product and gaining shelf space for the product.

The executives at the former Dr. Pepper Snapple Group were faced with having to grow in order to compete with the top two players in the industry. The deal with Keurig allows them to do precisely that, it grows their business and their market share.

The deal also includes Allied Brands which is a distribution network that will now be run by the combined Keurig Dr. Pepper which features 125 different brands. This collection of brands are a mix of beverage offerings that are either wholly owned, partially owned, or not owned at all by Keurig Dr. Pepper.

The news over the past five days is about which brands will be dropping out of the new Allied Brands distribution situation. The ripple effect left by these changes will have a definite impact on the beverage industry. Some brands will be promoted on a regional basis in a more visible way.

Conversely, some brands most notably Fiji bottled water will be leaving Allied Brands, according to CNBC, in order to start their own distribution network. The result of these changes will most certainly have a price impact on the consumer, especially if the new or spin-off brands from the Allied distribution network fold into smaller distribution agreements.

The combined strengths of Keurig Dr. Pepper could translate into lower prices or more advantageous bulk sale pricing for the consumer, but that remains to be seen. The single serve delivery system technology that Keurig has mastered could translate into some new concepts that integrate the Snapple iced tea beverage line or create some new innovations on the delivery of Dr. Pepper and its signature flavor.

The merger also helps both entities compete in a grocery channel that is being shaped by Wal-Mart and Amazon/Whole Foods. The persistent pursuit of low prices by Wal-Mart which they require of their suppliers can put the squeeze on profit margins. The combined Keurig Dr. Pepper now has the distribution and production capabilities to compete in a profitable way against the forces of Wal-Mart and Amazon.

It is in this perspective where the consumer will see enhanced value on their favorite soft drinks whether it is Dr. Pepper, 7UP, A&W Root Beer, or Snapple. The distribution of Keurig and their famous pods of all types and varieties and the Green Mountain Coffee products will all see a significant increase into the grocery channel. In addition, perhaps the drug store channel as well given the relationships that Dr. Pepper/Snapple/Allied Brands have developed over decades of time.

The other consideration here is that the combined Keurig Dr. Pepper company can now be an active player in acquisitions which will alter the landscape of the beverage industry. The combined publicly traded entity could target consolidations within the beverage industry, or could seek to enhance their delivery systems or packaging with a purchase of a smaller player in those industry sub-classes.

Keurig Dr. Pepper has a significant positive component working for them in the future: they have a very loyal base of consumers. The consumers in various survey data have identified as “fans” of Keurig and “fans” of Dr. Pepper. The new leadership team of the combined company will utilize new technologies through social media to build deeper relationships with those loyal consumers with cross-branding opportunities to grow revenue further.

The newly combined company features brands that are iconic in America: Dr. Pepper, Snapple, A&W, 7UP, and Sunkist. These brands have multiple products merchandised around them from tee shirts, cups, keychains, and more. They have an identity of their own and this merger promises that these brands will be relevant for a long time to come.

Keurig Dr. Pepper is the largest beverage merger in history and it will dynamically shape the future for the beverage aisle and provide new innovations to the delivery of beverages in an increasingly fast paced way of life for the consumer.

(some background information and industry data courtesy of Bev Net and CNBC)

by Frank Maduri

Follow Up: Toys R Us Comeback / Mergers Roundup

In a follow up to a recent post, bankrupt Toys R Us may make a comeback under a new plan outlined by a former CEO of their company, Jerry Storch, who is working to revive the brand.

Mr. Storch, according to CNBC, has been in talks with Credit Suisse and Fairfax (the group which successfully bid for the Toys R Us Canada division) to put together financing and a strategic plan to bring back a “few hundred” Toys R Us stores. The chain had 800 locations in the U.S. that are all in the final stages of shutting down at this time.

The plan being formulated by Mr. Storch would include former executives from the company in a new leadership team. It would, according to reports, place Toys R Us and Babies R Us in the same physical retail space under one large floorplan. The original way that the company operated was with two separate physical retail locations for each of those brands.

This would streamline operations, shipping, and receiving. It would also streamline hiring and provide other cost controls which were lacking in the original version of the brand.

The former Toys R Us corporation will be holding the final piece of business before it fully dissolves: an auction for their intellectual property. That auction will be held next week, and Mr. Storch plans to win the auction so that he can utilize that intellectual property in the “reboot” of the brand.

This situation merits watching as the entire toy industry would benefit from some sort of presence from Toys R Us in the future. The impact of the revival of Babies R Us would be helpful to parents, particularly new parents, and toddlers throughout our country.

Mergers Roundup

In other mergers and acquisitions news, the rumor that Kraft Heinz was looking to purchase Campbell Soup sent the share price of Campbell up significantly on Tuesday. The analysts on Wall Street, for the most part, feel that this merger does not make sense for Kraft Heinz or Campbell to do at this point.

The view of “the Street” is that Kraft Heinz needs to grow internationally and should focus their next acquisition on expanding their global business presence. The expense needed to purchase and recalibrate Campbell would be better used on a different purchase in the view of many analysts.

My own perspective is very different, in my experience in the food industry and having worked for a supplier to both those major companies, Kraft Heinz has some definite synergies with Campbell that would help both parties to grow. The expertise of Kraft and their distribution system could absolutely take Campbell in a whole new direction and create some great new product innovations for the consumer.

Furthermore, I think that Kraft Heinz can do both: they could purchase Campbell and still obtain a Mondelez or another company with a large international footprint.

The other aspect to watch here is that there are powers within Campbell that may not want to sell off the entire company, it may sell a piece to Kraft instead. This rumor is worth paying attention to because then the whole other area involved is what do you call the company? Do they part ways with the Campbell name that has been around since just after the Civil War?

Campbell is in disarray and has no CEO, the company is in need of a major overhaul and Kraft Heinz could be the right fit for them to ensure their survival.

ConAgra and Pinnacle Foods merged today in a deal worth somewhere between $8 and $10 billion depending on what report you access. That proposal came up quickly to the public (no doubt the behind the scenes channels have been at work here for a while) and it became finalized relatively fast.

This merger represents an aggressive push from ConAgra to keep expanding into the frozen foods area. They have made other smaller consolidation moves to support this new strategic growth area, but this Pinnacle move is a major gain by ConAgra.

I have watched ConAgra closely the last several months as they look to recalibrate their brand portfolio. They are chasing Nestle in the frozen food space, and this supports demographic trend data that reflects that millennial consumers are more likely to purchase frozen products.

Pinnacle has some other brands that make this move interesting from shelf stable products, and gluten free options because they purchased Boulder Foods recently who is a big producer of bread for those seeking gluten free alternatives.

The final merger rumor in the roundup today is the news of CBS and Amazon potentially joining forces. The news comes as a surprise to some, as no surprise to others, and as a “long shot” to still others with knowledge of that situation.

The “face value” of the proposal makes sense, Amazon needs more video content it is losing out to competitors for that reason. CBS has some of the most watched TV content in the mainstream broadcast categories, and would be the most cost effective merger target. CBS wants to merge with someone in “new media” to survive in the new TV landscape.

The acquisition of CBS would be the largest deal Amazon would have done to this point, if it does indeed ever come to fruition. The roadblock is the court activity surrounding the lawsuit between CBS and their parent company, National Amusements, (which I have covered previously on Frank’s Forum) over the Viacom merger.

The general industry sentiment is that CBS is going to have a hard time winning that suit to get out from under National Amusements in order to negotiate their own deal for acquisition.

The alternative way this could go is that the situation gets so acrimonious between CBS and their parent company (we are basically there now) that National Amusements may choose to sell off CBS. They would then take that money and invest it either into Viacom and their other holdings or make a series of other smaller moves to restructure their holdings.

The CBS – Amazon potential, in my view, has some merit to it. I still maintain though as I have for a while now that CBS is still more likely to become part of Verizon. That could be a very good merger for both parties involved.

These and other mergers will be covered as the summer rolls on. I can express one sentiment most will agree with me on: I am rooting for Toys R Us to come back for the next generation of kids.

by Frank Maduri

Follow Up: Disney & Comcast Bidding War Round 2

In a follow up to an earlier post on this topic, the bidding war between Disney and Comcast over the assets of 21st Century Fox entered round 2 on Wednesday.

Disney announced that they have increased their bid to Fox up to $71.3 billion with the ratios being half cash/half stock instead of an all cash bid. This represents an increase from the $31.00 per share offer Disney originally made for Fox to reflect a new valuation of about $38.00 per share.

The new Disney bid is also 10% higher than the bid that Comcast made recently. The financial news media has been buzzing about this activity all day in the most recent in a long series of events involving this potentially huge acquisition.

However, the perspective that is intriguing is the seemingly increasingly conflicted viewpoints from those in the industry about what Comcast should do and how they should respond. Some anticipate a new bid from Comcast, a counter punch to Disney which is rumored to be around $41.00 per share.

Then, there are others who maintain that Comcast should let it go, that they should walk away and let Disney acquire Fox. The rationale being that it is going to become an expensive and exhaustive process with Disney that will leave Comcast over-leveraged. The ultimate value of Fox will be offset by the damage it will do to Comcast in both the short-term and long-term through the process they would take to obtain the Fox content/assets.

In my perspective I can see both sides of the argument and can understand why Comcast could push even further into the bidding war, or why they could ultimately surrender their position. The question of value will certainly come up in the next week or so while this plays out: What is the value of Fox and what it can provide my business?

The answer to that question looms largely over Comcast HQ in Philadelphia today. The content that Fox holds is certainly intriguing, and content is the new currency in the media industry, as it has been explained on Frank’s Forum in the past.

Moreover, Disney has deep pockets and is a larger entity than Comcast. The impetus for Disney is all of the ways they can maximize new streams of revenue through the rights to the content that Fox currently holds. Disney is the best in the industry at taking characters and marketing/merchandising them to their maximum potential.

In addition, Disney can afford a bidding war here for Fox, where Comcast could be left with some damage from a war with Disney. Disney, as reported by CNBC, also needs the content for their new streaming app service. Comcast has content in the pipeline and has video on demand services for their customers.

The anti-trust regulations are another potential trouble spot for Comcast in this bid. My most recent work detailed the AT&T merger with Time Warner and the differences between horizontal and vertical mergers.

The U.S. federal regulators according to Bloomberg News are likely to approve the Disney bid for Fox. The rationale, as I have written previously, is because they view Disney as a content company that has no stake in telecommunications/cable TV services or broadcast television.

Conversely, the regulators view Comcast as a horizontal threat to create a monopoly because their core business is telecommunications and cable/broadcast television service. That perception is a big issue for Comcast in this bidding war.

In the end, some industry people have predicted that this bidding war will go another round with Disney winning the bid at $45.00 per share valuation of Fox. The other faction believes that this will not go another round, that either Comcast will announce that they have quit, or Fox will state that the Disney bid on the table is acceptable to their shareholders.

The fact will remain that it looks like Disney will get even larger as a result of this deal. They will have a treasure trove of new content and could have tremendous influence on how we, as consumers, gain access to content. The implications of this merger will have a profound impact on the media landscape in the future.

Comcast has the next move, and time will tell how “conflicted” they are over this potential acquisition.

by Frank Maduri

Bayer Announces End To Monsanto Name After Merger

The mega merger between Bayer and Monsanto was approved last week by the U.S. Justice Department ending months of anti-trust scrutiny. Bayer will have to sell off an unprecedented $9 billion in industry assets in order to clear the regulatory hurdles and the deal is expected to close on Thursday.

The news on Monday was that Bayer will end the Monsanto name after the merger due to the negative public image it has with consumers. The news is not surprising given the backlash Monsanto has received for years from the American public and the farming industry.

The news that the merger was going to move forward is a surprise to many people, the companies are both huge and have very diverse product portfolios. However, those product portfolios are clustered in the same types of industries especially when comparing the agriculture products holdings of both companies.

Therefore, that necessitated the big sell-off of assets by Bayer to make this merger happen. The precedent for a merger this large to actually be approved will have a tremendous impact on future M&A activity.

The Bayer – Monsanto merger will clear the path for mega-mergers to take place in other industries in the future. This is a merger that makes Dow-DuPont look small and that is a frightening prospect.

In my view I think the “Big Pharma” industry and the major media companies are going to try to capitalize on this merger with attempting to push through M&A proposals of their own in similar scale. The biotech field could also use this merger as an example of precedent for their own consolidation activity.
Furthermore, this merger between two titans in the agricultural industry will have an impact on the Disney bidding war with Comcast over the remaining assets of 21st Century Fox. That is a big decision that federal regulators will eventually have to make which will have an impact on the consumer who spends time watching TV or movies.

The Bayer – Monsanto deal is far more significant because, even though the Monsanto name is being erased from history, the products they manufacture will remain. The brand names such as Roundup will remain active and the merger with Bayer will not change anything, it is business as usual. This is bad news for the consumers, the farmers, and just about everybody.

Monsanto has built a negative public perception and an even worse brand image on the unabashed manufacturing of pesticides, herbicides, weed killers, and GMO containing seeds for food crops. The company has continued to make products that have been linked to certain cancers, autoimmune diseases, asthma, autism, and a host of other maladies.

The perception of Bayer in the U.S. is one that largely is shaped by the eponymous brand name of aspirin that is very popular as well as Alka Seltzer and some other branded products in the drug store channel. Those brands enjoy a largely positive image in America, and in my conversations with many people about this topic another theme came to the surface.

That theme is that German companies have a perception of integrity and for producing goods of high quality. The people I spoke with had the impression that Bayer would “turn around” Monsanto and that European influence would be for them to start making organic, environmentally friendly, and non-GMO containing seeds.

Unfortunately, from all the public statements we have from Bayer in Germany that will not be the case in this merger. They plan on keeping the U.S. headquarters for the new conglomerate in St. Louis, and they plan to continue to make those same products that Monsanto is producing currently. This is not to imply either that Bayer lacks integrity or that European companies are losing that sense of common values because that would be an inaccurate generalization.

Bayer is a microcosm of society: it creates some things that make the world better and it creates some things that make the world worse. It is also a perception versus the reality, some people feel that GMOs are safe and that having a good-looking lawn is more important than not using chemicals on the grass.

That strategic direction may surprise some people, especially Americans, but it is to be expected. Bayer will inherit brands from Monsanto that make billions of dollars in revenue each year. The American consumer and the farmers lose out here because this merger creates less competition in the seed and other agricultural products areas. The American consumer loses because the GMO and genetically altered food fight just became more difficult to win.

In the end, Bayer might enjoy a positive public perception in America right now, but it remains to be seen how that might change in the months and years ahead. The name Monsanto might be retired from the ranks, and Twitter is going to take the place of Monsanto in the S&P 500 this week, but Bayer is now tied to the legacy that Monsanto has built, and it is a rather negative one at best.

Bayer has made statements that they plan to “engage the consumer in new ways” I have no idea what that means. I do know that it does not include the discontinuation of Roundup or any of the other harmful chemical products produced by Monsanto.

This merger will have a direct impact on the American food supply, on the prevalence of genetically engineered ingredients in food, and on the future of mega-mergers. The effects of this merger will be seismic and will be felt for a long time to come.