Thinking out aloud about BGA
Bega is an interesting one. The rationale for acquiring Lion Dairy and Drinks (LDD) makes good sense (a close competitor with a complementary product range)…
and is large enough to be meaningfully transformational…
The multiple paid was high (10x EV/EBITDA) and synergies assumed are material (~6x inc synergies).
But bolting businesses together is just hard to do, synergies are hard to extract, and whilst at the low end, the overall multiple is still 20x…
…which now comes with material integration and execution risk. How much extra return is there to juice out (or at least, maintain) is a key question…
…and whilst they’ve not put the balance sheet at material risk, to our mind, gearing (at net debt to EBITDA) is still circa 3x, which isn’t nothing.
All of the above is really just throat clearing, thinking out aloud about the obvious. Perhaps all that really matters is our general frame that unless a merger/acquisition is done at really attractive terms (to a marginal investor) it is perhaps best to wait for evidence on how things are going.
Certainly, if you’ve already got a couple of stocks in the portfolio with corporate activity underway (WPL/BHP) or prior acquisitions still to be digested (TPG) that “integration risk” lens can be a useful one to consider.
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