Authors: Bill Shu Commodities Analyst, Gohulan Sivakumar , M&A and Deal Flow Analyst , Chris Jin Co-VP Education/Research, Jason Sohal Co-VP Education/Research
Mergers, Acquisitions and Deal Flow
Media & Technology
On Thursday, October 11th Apple Inc. (AAPL.O) struck a massive deal with the focus of taking control over the power-management technology. The deal with Dialog Semiconductor (DLGS.DE) totaled $600 million allowing APPL to acquire a number of employees from Dialog for $300 million, with the remainder used a pre-payment for a three-year chip supply agreement. The U.S. tech giant has effectively added a prevailing German manufacturer of semiconductor-based system solutions to its team. Honing greater collaboration between the two companies as well as allowing Apple to take advantage of PMIC technologies and assets seems to be the underlying rationale of the deal. As a result of the deal, Dialog’s shares surged approximately 34%, their largest single day gain since 2002.
The Anglo-German chipmaker announced their commencement of a share buyback program for up to 10% of its stock subsequent to the update of its next quarterly trading activities. As the $600 million deal will add to Dialog’s already strong net cash position of $525 million, it has positively impacted Apple’s stock price to rise approximately 3.6% since the deal was complete.
Insurance & Investments
As South Africa’s biggest insurer, Sanlam has closed a $1.1 billion deal on the acquisition of a 53.37 percent stake ownership in SAHAM Finances. This deal is Sanlam’s largest acquisition to date. As a result, Sanlam enhances its global presence with SAHAM Finances ranging over 33 countries across Africa. In 2016, a 30 percent stake ownership of SAHAM Finances was held by a unit of Sanlam via a joint-venture, Sanlam Emerging Markets Ireland Ltd. The following year this joint-venture unit amplified their stake ownership to 46.6 percent. By the end of last year, Sanlam had a consolidated $850 million worth of net assets along with earnings of $77.4 million. It will be interesting to see how Sanlam expands their business and if they consider exploring foreign markets to operate within.
Health & Pharmaceuticals
Pharmacy chain CVS Health Corp. won U.S. antitrust approval for its $69 billion acquisition of the health insurer Aetna Inc. in March 2018 allowing to build a combination to cut overall U.S. health care costs. The merger of the two companies will be advantageous for Aetna customers as this deal will focus on guiding Aetna customers to walk-in clinics in CVS for significantly less costly medical services. Moreover, CVS aims to cut their overall costs by $750 million annually by the end of the second year following the completion of the deal. Taking a deeper analysis of the deal, the U.S. Justice department approved with the condition that companies must sell Aetna’s standalone Medicare prescription drug plan business for Americans aged 65 and older. With this, the shares of CVS along with Aetna each rose by approximately 1 percent on Wednesday October 10th which was when the aggregate market was abruptly lower with Aetna trading at $206.48 and CVS trading at $80.20. As the antitrust experts described this merger as “vertical” combinations it will be quite interesting to see how the U.S. Justice Department will play a role in the healthcare industry as the CVS-Aetna merger may have started a wave of health-care deals.
The U.S. WTI Crude Oil benchmark posted a 4% loss, the first weekly loss in the past 5 weeks. According to the International Energy Agency, global oil demand will grow at a slower pace than initially expected due to fears of economic slowdown caused by trade tensions, which is the main reason for the past week’s loss. On the other hand, concerns over oil supply restrictions, which is the main driver of past month’s oil price rise, have been mitigated as a recent OPEC monthly report revealed a rise in OPEC and Russian crude-oil output in September, the size of which is more than enough to make up for the decline of Iranian production due to recent U.S. sanctions. According to Rob Haworth, senior investment strategist at U.S. bank, “while there are risks of Middle East conflicts and further outages in production, growing output from the U.S., Saudi Arabia and Russia is likely to keep markets reasonably supplied.”
On the other hand, gold price rose in the past week as the stock market had a volatile week of price correction, which engendered investors to move to safe haven assets. Gold futures posted the first weekly gain in 4 weeks, rising 2% on just Thursday and Friday, as illustrated in the chart. Other precious metals have also experienced a rapid price rise, with Platinum hitting 6-week peak and Palladium hitting a 5-month high. If the market sentiment continues to concern over the ongoing trade tensions and higher interest rates and bond yields, price of gold and other precious metals will continue this surge.
The Discount between WTI and WCS
Despite the past week’s slight decline, in general, oil prices have been spiking up in the past year. The WTI index, which is the primary U.S. crude oil index, is currently sitting at around US$72 a barrel. Therefore, according to the law of one price, crude oil in other countries, especially in North America, should also stand on the same level. Yet, surprisingly, Western Canadian Select (WCS) crude fell to just US$26, which marks an “outrageous” discount, given that the price differential averaged US$11.71 a barrel last October.
The key reason to this seemingly surprising price differential is capacity constraints. As mentioned by Ryan Lewenza, senior vice president and portfolio manager at Turner Investments, “we’ve got a bunch of oil, we can’t ship it. And so Canadian and international investors are basically avoiding Canada, and so that’s going to leave a cloud over the energy sector until we can get [the Trans Mountain expansion] pipeline built.” Ultimately, the problem is the high supply of oil cannot be delivered to satisfy the demand, an issue that can be only resolved by building more pipeline projects as speedily as possible.
Another factor attributing to this unusual spike in price differentials is that two of heavy Canadian oil’s main exporters, BP Plc’s Whiting refinery in Indiana and Marathon Petroleum Corp.’s Detroit refinery, have been undergoing maintenance and experiencing production outages. This is a rather idiosyncratic event, which makes the price differential worse than it should be. Thus, this would not be a main concern in the longer run.
Meanwhile, it’s also worth noting that China is currently seeking to take advantage of this discount and increase its oil import from Canada (to replace oil purchases from Venezuela). According to cargo-tracking and intelligence company Kpler, in September, China bought 1.58 million barrels of Canadian crude oil, which is 50% higher than the 1.05 million barrels in April. In addition to the low price, Canada’s oil is also quite rich in Bitumen, a residual that is valuable for road-surfacing and roofing projects, which makes it very attractive for the Chinese under the President Xi’s current reform to strengthen infrastructure construction. Therefore, the increased demand in China would be a rather reassuring news to hear for investors and producers of Canadian oil.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.