Merger and Acquisition Investing

I poked at Post Holdings recently, particularly if there are investors out there owning the shares for the exclusive purpose of securing a buyout premium with the hopes that Kellogg, General Mills, Kraft, or Nestle wants it and pays 30% above the prevailing market price to get it. The reason I don’t like it is because the default/status quo option is that the business will continue to operate as a standalone entity and will eventually return to fair value which will be an unpleasant experience for shareholders that have to deal with high debt and a 30x earnings valuation for a billion-dollar revenue business.

This does not mean that I am against having an expected buyout be a part of a thesis for making an investment. Instead, it is my view that the antecedent conditions of desirable valuation and growth exist independently of the buyout.

I’ll give you an example. In August 2014, I wrote that the Craft Brew Alliance (BREW) was the only beer stock that had a realistic shot of tripling. Since that time, it has returned 15% annually.

I like it because it has four craft beer brands–Redhook Ale, Widmer Brothers, Omission, and Kona–that are growing profits at over 20% as they roll out across the West Coast. It also has a cider brand called Square Mile that is delivering double-digit growth, too.

The current price of $14, weighed against expected earnings next year of $0.50 per share, gives it a valuation of 28x earnings. For a company that is only valued at $250 million and growing earnings somewhere in the 15% to 20% range, that is a fair price.

But you know what also catches my attention? The fact that it distributes its craft beer through independent wholesalers that are aligned with the Anheuser-Busch network. As an aside, people that buy this beer out of a Big Beer boycott impulse probably do not know that they are sending about $0.25 Anheuser-Busch’s way because it is something you have to deliberately look for in the annual report.

I suspect that there is a possibility Anheuser-Busch might move to make an acquisition for it. It is moving into the craft beer market, and it would be a logical fit to buy a company that could move the needle a little bit which is already keyed into the Anheuser-Busch system. Shareholders of BREW stock could wake up one day to find themselves looking at a $25-$30 pay day as Anheuser-Busch gobbles it up.

But this situation is a far superior way to invest with takeover possibilities compared to Post Holdings. With Post Holdings, you need a buyout to intervene and prevent your stock from falling or stagnating for a long while as the valuation returns to normalcy. With Craft Brew, the Anheuser-Busch takeover is just a possibility that gives you wealth quickly. There is no intervention necessary. You are looking at double-digit compounding based on fundamentals alone, but you get a lottery ticket possibility of a quicker pay day. With Post, you are just getting the lottery ticket.

Originally posted 2016-11-03 15:28:51.

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