Below the shifting landscape that debates the notion as to whether tariffs are a negotiating ploy or the real deal, some pig farmers are now operating at a loss of thousands of dollars per week (futures markets have priced in tariffs) and soybean growers are considering whether to reduce their plantings to avoid the same fate. Meanwhile the impact on our NAFTA partners is also being considered across the borders. Canada can increase their soybean and pork sales to China but the net impact will still be negative to them considering the magnitude of trade volumes. Mexico is expanding ties to China in an effort to mitigate the ‘Trump’ effect. All the while, the administration has to be aware that China holds the ultimate ‘trump’ card in the debt held. Some bearish views posit US interest rates could rise to 14% if China ceases their bond purchases.
With these headlines staring at us, it would be excusable to have missed some of the underlying news – one being in healthcare. Two of my companies made the news this past week with possible or rumored deals; Shire (SHPG) and Humana (HUM). Takeda’s interest in Shire has all the appearances of industry consolidation, Wal-Mart and Humana’s discussions are more along the lines of being one of the last gorillas.
In the comment thread (regarding GIS), Lily from The Rich Miser muses, ” I would think it makes sense to invest in some small niche food companies that are doing good and you believe in -assuming they’re publicly traded- in hopes that they would be bought by a larger one eventually, and one can make a nice profit!? Or buy the big one when it’s low and just leave it alone for a few years?“. This was the strategy I used with bank stocks following the financial crisis. The problem with this approach is identifying the right candidates or going broad – which is one reason my portfolio contains 204 companies. From a pure M&A perspective, owning the acquired company prior to the rumor or announcement gets you the merger premium – which can be sizable. But you better like the company as there is no guarantee in this strategy.
If the ‘last gorilla standing’ is a correct strategic assumption, ponder this with me. CVS has a deal with Aetna and Cigna with Express Scripts. AmerisourceBergen and Walgreens talks failed even though WBA already owns about 26% of ABC. Now Humana and Walmart are rumored to be talking. Why? Probably the Amazon effect. AMZN is talking healthcare with BRK-A and JPM. AMZN already holds licenses in some states for medical devices, perhaps a CAH/OMI merger is on the horizon since both like the device market? Or one (or both) with AMZN?
Of course this is all speculation – but somewhat logical. All I know for certain is there is ongoing disruption in this sector.