Softbank shows the way in quantifying telecom M&A synergies

As a follower of the TMTE sector firms, I happened to browse through the Japanese telco Softbank offering presentation for its 70% acquisition for the USA wireless telecom operator Sprint. It had interesting facts on the USA market like AT&T/Verizon duopoly wrt subscribers and EBITDA(67% subscribers and 82% EBITDA), low mobile data speeds of 1Mbps vs markets like UK/Australia, high postpaid base etc. The comparison of USA/UK/Japan with BRIC was an eye opener. Read the entire presentation at http://www.sec.gov/Archives/edgar/data/101830/000119312513228092/d541834d425.htm

However, what really caught my attention were these two graphs breaking down estimated deal synergies. Many talk about synergies but few walk the talk while publicly stating it.


What is really stunning is the estimated opex synergies of $2bn from 2014-2017, and then $3bn beyond. of this, they estimate nearly 40% from device procurement-really I would not have thought devices margins are so high.Another 49% rests from their knowledge transfer on network opex, churn and customer care-all performance drivers of telecom. IT is probably non incremental since vendors are quite efficient there unlike for other components.

For capex, purchasing synergies again constitute 42% of estimated synergies, while knowledge management of traffic and core building would give another 42%.

Here, they have built on their core strengths of networks and smart management while deriving the synergies. The next time a telecom CEO wants to defend that pricy acquisition, then such graphs are a good start,

Praful Patel sells his BSE listed shell company for $50000 to Gopal Shekawat-interesting timing

While reading the Financial Express edition dated 10th Feb 2012, I noticed a public offer for this unknown company 'Parekh Distributors Ltd'. What prompted my attention while skimming through the offer document was the small size of the offer(Rs 2.5lakh for purchasing 25000 odd shares of public at Rs 10/share) and the name of the seller-powerful NCP politician and former aviation minister Praful Patel. That alone, coupled with the interesting timing(aviation crisis, impending elections) prompted me to take a closer look at the transaction.

The buyer-Gopal Mohansingh Shekawat is described as a 45year old businessman. The object of acquisition as detailed in the letter of offer(http://www.sebi.gov.in/cms/sebi_data/commondocs/parekhdps_p.pdf)  are detailed below but basically intend using it as a shell vehicle.
The object of acquisition is to expand the business horizon under corporate status for diversifying
into different activities subject to approval of the shareholders. The Acquirers reserve the right to
modify the present structure of the business in a manner which is useful to the larger interest of
the shareholders...


Interestingly, the present sellers had themselves acquired their 74.5% stake through a similar open offer in 2007(read about it here-http://www.sebi.gov.in/takeover/public/parekhpa.pdf) when they had purchased their shares for Rs 5. Hence, they have realized a 100% capital gains in 4years, around 18% CAGR which is a good return albeit small in monetary terms. Then also, the intent was The Acquirers propose to use the Target Company as a vehicle for developing business activities in various areas in which the Acquirers currently have an interest such as real estate, pharmaceuticals etc. The Acquirers may also consider using the Target Company or new businesses based upon the opportunities from time to time. As per the offer document, Mr Patel's then business interests included diverse interests in tobacco, bidis, agriculture, packaging, pharmaceuticals, finance, real estate. However, the minority shareholders did not accept the open offer and maintained their stake at 24.5%, which Mr Shekawat is now trying to purchase.

By any standards, this is a bargain basement price for acquiring a listed company-as setting up a company nowadays needs Rs 5lakh+ capital investment upfront, besides the various fees/formalities/stamp duty/listing fees/merchant banking fee etc-which could easily amount to Rs 20lakh+take upto a year. And then, the open offer would just take 2 months for completion, which is much faster than setting up any other legal vehicle. For anyone seeking a reverse merger of existing business interests, such fast formalities and ready business vehicle would carry its own value.   Hence, on a replacement cost basis, the value of the shares is much more than the Rs1/share valuation opinion given by BY&Associates.

Besides the low transaction costs, what is interesting is the transaction timing, and the names of the parties. The Bombay Municipal Corporation(BMC) and UP elections are approaching, so has Mr Patel decided to divest the stake to avoid any accusations later on(the amount is too small to have been done for liquidity reasons)? Also, a google search shows the name of a Congress MP as Gopal Shekawat(and also Pratibha Patil's spouse has the same surname & belongs to the Congress, so could be a relation). Whatever the reasons, there is more to this deal than meets the eye.

LUBRIZOL acqusition agreement-some interesting features

Warren Buffet is undoubtedly one of the most savvy investors and acquisition experts out there. Hence, any M&A agreement entered into by him does bear some interest. I read through 50+ pages of the acquisition agreement signed to acquire Lubrizol(DEF14A filing in 8-K) and below are some observations.

• Material Adverse Change definition:- While this boilerplate clause does exist, Lubrizol has a lengthy list of exceptions(generally geopolitical, macroeconomic,capital market related) which apply only to the extent such conditions have a disproportionate effect on the Company and its Subsidiaries, taken as a whole, relative to others in the industries in which the Company and any of its Subsidiaries operate. That clause makes it harder for the acquirer(Berkshire) to wriggle out, merely if the industry declines,
• Representation as to published earnings guidance:- Even though companies routinely disclaim liability for their earnings guidance, Lubrizol assured that its the earnings guidance included in the Company’s February 2, 2011 press release continued to be reasonable, based on and subject to the assumptions stated in such release, and (ii) no event, circumstance, change, occurrence, state of facts or effect has occurred which would cause the Company to change such earnings guidance.This is a very interesting clause, because that means the acquirer can explicitly rely on that guidance. 
• $200MM break fee:- This is payable only by Lubrizol to Berkshire(not vice versa) which goes to show the signalling effect of the latter. Even if any other acquirer buys Lubrizol within a year, the break fee is still payable, probably to reflect the due diligence value that Berkshire brings to the table

The deal is now nearly closed, but these 3 points are of interest to wannabe bankers and anybody involved in deal documentation. That is why this post.