Image Source: Mike Mozart
A number of notable deals hit the wires over the weekend or Monday morning. Lets’ take a quick look. We expect to update our reports on the respective companies in the coming days.
By Kris Rosemann
Key Takeaways
Sprint and T-Mobile are officially tying the knot. Though the deal faces regulatory scrutiny, we think T-Mobile shareholders are getting the best of the deal. If the transaction is consummated and synergies are achieved as planned, both sets of shareholders should be happy though. The wireless telecom industry will continue to be extremely debt and capital intensive, however.
We think the Sprint-T-Mobile deal will ultimately get approved, but we are not particularly fond of betting on how regulatory processes will unfold as an investment strategy. Management sees the deal closing no later than the first half of 2019.
Marathon Petroleum and Andeavor have agreed to merge. The to-be-combined entity is expected to have the capacity to process ~3.1 million barrels of oil per day and will surpass Valero Energy as the largest US refiner by capacity.
The Marathon-Andeavor deal will significantly enhance Marathon Petroleum’s geographic diversification and scale, and the companies expect to realize more than $1 billion in annual run-rate synergies within the first three years after closing.
In other deals, Prologis has agreed to buy DCT Industrial Trust, and Marriot Vacations Worldwide and ILG have agreed to merge.
Sprint and T-Mobile Finally Tying the Knot
After years of rumors and reported talks, Sprint (S) has finally agreed to be acquired by T-Mobile (TMUS) for an implied enterprise value of $59 billion. Sprint shareholders will receive 0.10256 T-Mobile shares for each Sprint share, which is equivalent to 1 T-Mobile share for 9.75 Sprint shares. The merger is likely to face intense regulatory scrutiny as it would leave the US with three major wireless telecom companies, and shares of both companies faced pressure in the April 30 trading session following the announcement.
We think T-Mobile is getting a reasonable price based on our fair value estimate of $6 per share for Sprint, which is just below the merger price based on April 27 closing prices, and management expects to deliver $6+ billion in run rate cost synergies, which it claims to represent a net present value of $43+ billion (estimates will vary depending on discount rates applied). The equity price tag that is roughly in-line with our previous fair value estimate becomes increasingly appealing as management is able to extract its expected synergies. Enhanced free cash flow generation should be expected if synergies and merger benefits are realized, but the wireless telecom industry will remain extremely debt and capital-intensive.
Sprint and T-Mobile continue to tout the ground that has been made up with respect to the two industry behemoths, AT&T (T) and Verizon (VZ), and this combination is expected to further enhance competition in the upper tier of the industry. The to-be-combined entity, which will remain named T-Mobile, believes it has the capabilities to roll out the country’s first nationwide 5G network. Prior to the deal, T-Mobile and Sprint expected to begin launching their respective networks in 2019, while AT&T and Verizon expect to have regional 5G capabilities before the end of 2018.
In addition to the enhanced capabilities in the area of 5G, the to-be-combined entity expects to have lower costs, greater economies of scale, and the ability to compete more effectively with lower prices, which has been a major selling point for both Sprint and T-Mobile in the ultracompetitive wireless environment of late. The deal has a tremendous level of strategic rationale for Sprint and T-Mobile, but it is certain to face a long and arduous road to regulatory approval, if it ever passes. Such disruption has the potential to impact not only synergy targets but the time sensitive “race to 5G” with the two other top players in the US wireless industry. We think the deal will ultimately get approved, but we are not particularly fond of betting on how regulatory processes will unfold as an investment strategy. Management sees the deal closing no later than the first half of 2019.
Marathon Petroleum and Andeavor to Combine and Created Leading US Refiner
Marathon Petroleum (MPC) and Andeavor (ANDV) have agreed to merge. Marathon Petroleum will acquire all of Andeavor’s shares in a cash and stock deal with an equity value of ~$23.3 billion (total enterprise value of $35.6 billion) with Andeavor shareholders having the option of 1.87 shares of Marathon or $152.27 in cash (cash portion is subject to a pro-ration mechanism that is limited to 15% of Andeavor’s fully diluted shares receiving the cash consideration) for each Andeavor share. The to-be-combined entity is expected to have the capacity to process ~3.1 million barrels of oil per day and will surpass Valero Energy (VLO) as the largest US refiner by capacity.
The deal will significantly enhance Marathon Petroleum’s geographic diversification and scale, and the companies expect to realize more than $1 billion in annual run-rate synergies within the first three years after closing. No changes to Marathon Petroleum’s 2018 capital return program, and management approved another $5 billion in share repurchase authorization in conjunction with the deal’s announcement. It will remain committed to a balanced capital allocation strategy, which includes maintaining an investment-grade credit profile.
Increased scale for the to-be-combined entity’s midstream business and leading nationwide retail and marketing distribution operations that will benefit from efficiency gains position the company for attractive growth opportunities, and a more attractive position in the Permian Basin is one of a few factors that should increase its access to advantaged feedstocks. However, Marathon Petroleum may have paid up a bit too much for then enhanced opportunities. The ~$152 per share deal price is a substantial premium to our most recent fair value estimate for Andeavor ($110 per share), and represents a ~24% premium to Andeavor’s closing price on April 27. Shares of Andeavor surged towards the deal price following the announcement, while Marathon’s shares faced immediate selling pressure. The deal is expected to close in the second half of 2018.
Other Notable Deals: Marriott Vacations Buying ILG, Industrial REIT Consolidation
Industrial REITs Prologis (PLD) and DCT Industrial Trust (DCT) have agreed to merge in an $8.4 billion stock-for-stock transaction, inclusive of the assumption of debt. DCT shareholders will receive 1 Prologis share for each DCT share owned, and the deal is expected to close in the third quarter of 2018. REITs may continue to consolidate in the near term as they face less than ideal investment scenarios but still continue to search for areas of growth.
Prologis management expects economies of scale to be realized immediately thanks to the complimentary nature of the two portfolios in terms of product quality, market position, and growth potential, and it expects annual stabilized core funds from operations to increase by $0.06-$0.08 per share. This is expected as a result of expected near-term synergies of ~$80 million, which should come by way of general and administrative cost savings, operating leverage, interest expense, and lease adjustments. Revenue synergies and incremental development volume could generate $40 million in additional revenue and ultimately enhance the aforementioned improved operating leverage.
Marriot Vacations Worldwide (VAC) and ILG (ILG) have agreed to merge in a cash and stock transaction with an implied equity value of ~$4.7 billion. ILG shareholders will receive $14.75 in cash and 0.165 shares of Marriott Vacations for each ILG share owned. The company will be a leader in vacation experiences with improved scale, have an expanded footprint in key destinations, and have the largest portfolio of upper-upscale and luxury vacation brands, all of which should create a platform to accelerate top-line growth. ILG’s premier exchange networks are expected to provide additional high-margin, fee-based (recurring) revenue streams, which will diversify Marriott Vacations’ revenue stream and should lead to expanding margins.
Enhanced cash flow generation is expected to help Marriott Vacations maintain a flexible balance sheet, and management expects to pay a pro-forma annual dividend of $1.60 per share following the closing of the transaction, which is anticipated to be in the second half of 2017. At least $75 million in annual run-rate cost savings are expected within two years of closing from the optimization of general and administrative, operating, and public company costs. Despite the strategic rationale for the combination, Marriott Vacations may have overpaid for ILG based on the estimate price tag of ~$37 per share ($14.75 in cash and ~$22.18 in equity based on Marriott Vacations’ April 27 close price). Our most recent fair value estimate for ILG is $25 per share, and shares of ILG began trending towards the takeout price following the deal’s announcement, while Marriott Vacations’ shares traded off somewhat aggressively.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.