Merger Chatter Heating Up In The New Year

Includes: GHC, KO, MDLZ, NYT, PEP
by: Valuentum

StreetInsider reported recently that the New York Times (NYSE:NYT) may be catching the eye of a suitor. Chen Guangbiao, chairman of China Huangpu Renewable Resources Utilization Group Co, is reported to be interested in making a bid for the firm. The likelihood and the terms of an announcement, however, remain extremely vague, and we point to only one source.

Newspaper outlets have certainly been of significant interest as of late, and the well-documented declines in newsprint circulation have done nothing to discourage buyers. For one, Amazon CEO Jeff Bezos recently acquired the Washington Post's namesake earlier this year in what we consider to be one of the most puzzling transactions in some time. On one hand, Amazon is doing away with traditional retailing via digital means, yet its CEO is personally gobbling up legacy print distribution mechanisms, which themselves are being phased out by digital news--the Washington Post Co recently renamed itself to Graham Holdings (NYSE:GHC). The New York Times is not cheap at present levels (above $16 per share), and we don't intend to participate in shares.

In other news, dealReporter noted that a merger of Pepsi (NYSE:PEP) and Modelez (NASDAQ:MDLZ) could be shaping up for January, this news on the heels of Mondelez selling its controlling stake in Snackwell.

There are no 13-Ds filed, but Trian Fund Management has been using the press to keep the pressure on Mondelez and PepsiCo. The activist reportedly wants PEP to split up its drink and snacks businesses and sell the latter to MDLZ. There has been talk for years that PEP should breakup, but the company has repeatedly touted its "Power of One" strategy. If Peltz or another investor wants to take on CEO Indra Nooyi, board nominations for the 2014 AGM are due by 31 January. The nomination window for MDLZ's next AGM closes on 21 January.

We prefer Coca-Cola's (NYSE:KO) operations over Pepsi's (find out why here), and we're not big fans of the fundamental trajectory of Mondelez's business, so a Pepsi-Mondelez deal itself is of little excitement to us. Still, a combination would provide significant opportunities with respect to cost-savings and distribution synergies that may make the deal worth considering. In any case, we wouldn't expect a significant buyout premium for either firm and would very much prefer a stock-swap (instead of Pepsi taking on any further debt to consummate any transaction). We favor Coca-Cola's dividend over Pepsi's due largely to the former's fortress balance sheet and Pepsi's net debt position.

Valuentum's Take

We're not ignoring some of the merger chatter that has hit the wires as of late. We'd welcome a transaction at current levels for New York Times shareholders, but if Pepsi needs to take on additional debt to complete a deal, we'd strongly oppose a combination between it and Mondelez. A merger of equals may be more palatable, leaving cost-takeouts and revenue synergies as the primary sources of economic value generation stemming from the combination, perhaps a disappointment to interested parties looking for a nice takeout premium. We're monitoring both situations closely and do not expect the announcement of any deal soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.