Mergers & a Buy

The first full week of 2019 was busier than usual with three mergers completed – and I still haven’t completed the year end conversion on my blog data.  I’m getting there though – although one unexpected item was the decision of three of my companies to change their names exacerbating the conversion even further.  I figured this week we would dive a little deeper into the mergers and the subsequent purchase.

Guaranty Bancorp

This one was straightforward with Independent Bank Group (IBTX) shares swapped for GBNK shares on January 1st.  On September 13th I had sold my IBTX shares at $66.15 which was prescient in that the 4th quarter selloff hit Financials particularly hard.  I now have more IBTX shares than I previously had with a cost basis of $48.67.  So my arbitrage angle worked out nicely on this one.

Green Bancorp

The next one was Veritex (VBTX) shares swapped for GNBC shares, also on January 1st.  Holding both sides to completion was a losing proposition as both were impacted with the 4th quarter swoon.  Making matters worse was the forced sale of the new shares (computer glitch on the broker side) locking in a loss on the transaction.  I still retain the old shares so my booked loss is $6.54 per share.  At least the prior one was a nice offset.

Shire Plc

As with a number of investors, I incurred a paper loss on the Baxalta spinoff from Baxter on July 1, 2015 along with the subsequent acquisition by Shire on June 3, 2016.  While this loss was offset to a degree by the cash component of the Shire merger, a loss was carried forward.  On January 8th, the Takeda Pharmaceuticals (TAK) acquisition of Shire was completed.  While the shares have arrived, the cash component is expected next week.  Citi (the ADS sponsor) has provided initial indications that this merger is a fully taxable event (cash and stock) under the new tax law.  Chalk another unintended consequence onto the Trump plan as the intent of the IRS ruling was to increase revenues, I’ll finally be able to book my remaining loss on next years’ taxes decreasing their take (if the ruling holds).

Becton Dickinson

Tom at Dividends Diversify recently performed a Deep Dive on BDX, which I won’t go into here, but I had been researching preferred issues of which they had made the cut.  In general terms preferred stock pays a fixed dividend, has less (or no) voting power, but has a higher standing in the event of bankruptcy.  Each issue is different so it is wise to review the prospectus.

This is my first foray back into preferreds since 1978.  Becton’s pfd A (BDXA) is not callable, yields 5.34% (at my purchase price) and matures May 1, 2020 when it converts to .2361 shares of BDX stock.  The proceeds were used in financing the CR Bard acquisition.  I bought on the 8th making me eligible for the February 1st dividend.  I suspect we’ll see a little dilution in BDX when these mature.


So there we are with my ‘week in review’ and hope you had a good start to your year!


 

 

Advertisements

Takeda/Shire Merger

This morning, the long-rumored merger between Takeda Pharmaceutical Company Ltd (TPKYY) and Shire plc (SHPG) has been approved by both companies boards for the consideration of $30.33 in cash and either .839 shares stock or 1.679 ADS for each Shire share.  (Takeda’s current NYSE listing is at a 2:1 ratio, hence the differential).  Shire shareholders will also be entitled to dividends paid or declared through the merger effective date.

The combination is expected to complete in the first half of 2019 and will result (I believe) in the eighth largest pharma company.  Takeda expects to maintain both its’ dividend policy and investment grade rating.

My investment came about via Baxter’s spin of Baxalta which was subsequently acquired by Shire.  The overall investment is currently a little under water but the cash portion of this deal should mitigate this to a degree.  Apparently a major concern is that some large holders don’t care to hold Japanese paper.  Although Japan’s monetary policy (and resulting exchange rate) is a potential issue, my belief is that the combined company will have enough of a worldwide footprint to offset this.

Therefore I favor this deal and expect to increase my Shire holdings enough to avoid a weird fractional allocation of shares based on the merger terms.

The ‘New’ Xerox

Nothing like trying to wrap your head around a convoluted deal before the first cup of morning coffee.  This one is likely tailored to provide an exit strategy for activists Carl Icahn and Darwin Deason.  The end result is that Fujifilm Holdings (FUJIY – 4901.TSE) will acquire majority ownership (50.1%) of Xerox (XRX).  This will be accomplished by Fuji Xerox first buying Fujifilm’s 75% stake in the current Fuji Xerox / Xerox joint venture followed by Fujifilm buying 50.1% of ‘new’ Xerox shares.

When completed (July/August 2018), the entity will retain the Fuji Xerox name, be traded on the NYSE (probably XRX) and shower existing Xerox shareholders with an estimated $9.80 special dividend in addition to a minority ownership stake.

Even though this combination is of two troubled companies, with cost cutting and synergies this could evolve into an interesting arrangement – particularly if R&D is applied more towards emerging technologies (think the AI/AR space).  The other question is the dividend scheme where Xerox pays quarterly (Jan/Apr/Jul/Oct) and Fujifilm pays on an interim/final (Jul/Dec) cycle.  The old Xerox annual dividend rate has been affirmed on a continuing basis.

While I already obtained what I was after in this investment with the prior Xerox spin of Conduent (CNDT), with the special dividend this moves from a slight loss on the books to a 5.3% gain.  I’ll continue to monitor this one as it progresses but my guess is this will be my first Japanese holding albeit gained through a back door approach.

Let The Spend Begin

Curious minds have pondered the meaning of the Great Tax Reform Act of 2017, properly known as the Tax Cuts and Jobs Act of 2017.  The debate has centered on whether repatriation or employee salaries or buybacks or dividend increases or debt repayment or capital investment.  Until Walmart, announcements have centered on bonuses or hiring pledges.  Not wages.  Not anything, really, that is a truly lasting benefit to the working stiff.

 

And this week is no different.  In a nod to the roughly 50% of population that own stock, Thursday, DST Systems announced they were being acquired by SS&C Technologies Holdings in an all cash deal valued at $84 per share.  While M&A activity is not an unexpected byproduct of the tax bill, there were two noteworthy items in the release.  The first being SSNC’s deal financing being a combination of debt and equity.  Current SSNC shareholders will be facing some level of dilution.  The second item is that the “significant leverage” will be attenuated through “cost synergies to stem from data center consolidation and reductions in corporate overhead”.    This sounds like code words for force and facility reductionAre there that many data centers on the company books?

Not being a SSNC shareholder (current or apparently future) appears to be a blessing in this merger.  As a DST shareholder I will be happy to tender my shares (and vote my proxy in favor of) the deal.  My only regrets are two: 1) Kansas City (for which I have a fondness) losing another company’s headquarters , and 2) that I didn’t own more shares.

My shares were purchased in four tranches with an average (post split) basis of $62.71.  Total gain will be $21.29 per share or 25.3% total gain (annualized average gain would be about 11.7% depending on when it closes).  Not too shabby a return and a good start towards equaling last years’ results.  The merger is expected to close in the third quarter.

The only other negative is the (new) tax impact with these gains likely locking me into the higher bracket I was attempting to avoid.  My philosophical observation being unless you’re extremely wealthy, the best way to avoid taxes is to make no money.  A theory to which I don’t subscribe!

Small Bank Frenzy

After a pause in action due to the post election run-up in valuations, it appears the action is opening up once again in merger activity.  One of the positions I initiated in October is the latest target.  I entered Stonegate Bank (SGBK) due to their US government sanctioned Cuban interaction as well as being a potential takeover target.  In fact, Vivianne (Well Rounded Investor) and I had this very discussion.  Low and behold, Home Bankshares (HOMB) saw the benefits that I did.

The terms of the deal are not purely defined probably due to potential market volatility.  It will be a cash and stock deal with the ratio defined nearer to close.  Per the 8-K, the combined stock/cash value is $49.00 per SGBK share.  Considering my entry point was $34.17, a roughly 43% gain over 5 months is not too shabby.  The only disappointment is the $49 total is a less than 6% current premium which would indicate HOMB believes a significant part of SGBK’s rise in share price was due to emotion (Trump rally) rather than fundamentals.

My intention is to take the money, retain the shares and perhaps buy a little HOMB on weakness as I believe my initial Cuba premise still stands.  Besides, HOMB being a $13B bank post acquisition places them in the arena of being a potential acquisition target themselves.

Must Be Merger Monday

Just when I thought M&A activity was winding down for the year, Janus Capital announced today they were merging with Henderson Group plc.  The new entity will be called Janus Henderson Global Investors with Headquarters in London.  The combined company will apply for a primary listing in New York, keeping Henderson’s Australian listing (HGG.AX) but delisting in London.  Terms of the deal will provide Janus shareholders with 4.719 shares of the new company for each share held and is expected to complete 2Q 2017.

So it appears the rumored consolidation in the money manager space has begun.  For those unfamiliar, Janus is where Bill Gross set up shop following his departure from Pimco.

I like the synergies – the only issue I have being a twice per year rather than quarterly dividend.  But I was looking to enter a UK stock (with sterling being weak) so it appears one is landing squarely into my portfolio.

 

Sep 2016 Update

Last month saw the commencement of the Congressional take on the ‘bully pulpit’ with first Heather Bresch (Mylan (MYL)/EpiPen) then John Stumpf (WFC) called on the carpet.  One would think Heather would have been smart enough to avoid taking the same path blazed so brilliantly by Martin Shkreli (Turing/Valeant (VRX) fame).  Her show was overshadowed by the even greedier Wells Fargo with John either portrayed as ‘asleep at the wheel’ or a criminal mastermind.  Wouldn’t life be interesting if Congress actually did anything other than use hearings to frame media sound bites?  The S&P was basically flat for the month ending down 0.12%.  My portfolio was basically flat as well, ending up 0.04%.  This increases my lead for the year to 11.88% with one quarter left to go.

Headlines impacting my portfolio:

  • 9/1 – CHD 2:1 stock split
  • 9/2 – Ireland to appeal EU anti-AAPL tax ruling
  • 9/6 – ENB to acquire SE
  • 9/12 – AGU/POT reach merger agreement
  • 9/19 – REITs officially become their own sector
  • 9/26 – YUM spin set at 1:1 YUMC for 10/31
  • 9/29 – Supreme Court agrees to hear credit card surcharge case
  •           – PNY/DUK merger approved, closing set for 10/3

Blog Updates:

I’m a little behind this month but the portfolio data has been compiled and will be posted in the next couple of days with the goals update later in the week.  The Unabridged portfolio should be next week as per normal.

Portfolio Updates:

  • FMBH replaced FCLF due to merger
  • Added to TOWN – this ‘makes whole’ this holding following my sale of MNRK prior to the merger.  (didn’t want to hold TOWN across two accounts)
  • Added to AROW prior to ex-div for the stock dividend (shares added Sept 29)
  • Added to SBUX

All were funded by dividends with no ‘new cash’ deployed.  New cash was deployed for the  annual funding of the trust I manage (skip generation).  The trust is excluded from my DGI portfolio and WFC is this year’s addition.  This is only the second time I’ve duplicated one of my holdings – the other being DIS.  The other trust holdings are GIS, HSY, PG, WMT, WGL, UNP, KHC and TXN.

Dividends:

  • September delivered an increase of 24.7% over September 2015.  This was due about evenly between dividend increases (Y/Y) and late 2015 funding.
  • September was up 4.4% from the prior quarter.
  • Announced dividend increases currently average 12.91% with 63.09% of my portfolio having at least one raise so far this year.
  • Through September, dividends received were equal to 95.7% of all 2015 dividends, keeping me on pace to exceed last year’s total -now estimated to be October 4th (as compared to 2015 being Sept. 9th).

With the cash from PNY/DUK, I’ll be looking to redeploy primarily into existing Jan/Apr/Jul/Oct payers within my portfolio with no new positions expected.  Losing PNY and the expected loss of LSBG (another merger) will leave about a 5.07% hole in my January dividend receipts unless I act now.

Spinoffs:

The YUM spin has been set for Oct 31st with YUMC to begin trading Nov 1st.  I don’t think the XRX spin date and ratio have been set.