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M&A/Commodities Market Update

Authors: Chris Jin Co-VP Education/Research, Jason Sohal Co-VP Education/Research, Gohulan Sivakumar M&A and Deal Flow Analyst, Bill Shu Commodities and Currencies Analyst

Mergers, Acquisitions and Deal Flow

Utilities & Natural Gas

On Tuesday, October 23rd, Aqua America Inc. struck a massive deal to acquire privately-owned natural gas utility Peoples in an all-cash deal for USD $4.3 billion, including $1.3 billion of debt. With this deal, it will create a powerhouse American utility company as this is the first material acquisition of a gas utility company by a water provider. This deal will result in creating the second-largest water utility company along with becoming the fifth-largest stand-alone natural gas local distributor in the United States.


This strategic acquisition results in the formation of a newly-structured company that can uniquely position themselves to have a high magnitude impact on the nation’s economic prosperity. The new company will be able to position themselves to generate increasing shareholder value via a balanced portfolio along with a solid capital structure


Health Care & Consumer Goods


Source: MarketWatch

On Tuesday, October 23rd one of the largest U.S. healthcare conglomerates, Johnson and Johnson, has acquired all the outstanding shares of Ci:z Holdings Co., Ltd., a Japanese cosmetics firm, equating to approximately USD $2.1 billion. This is a tactical move for J&J as they will pay 5,900 Yen per Ci:z share, which comes out to a 55 percent premium over Tuesday’s closing price.


Following the transaction, J&J’s stock price (NYSE: JNJ) experienced a gain of 0.83% leading to a closing price of $138.93. Albeit a temporary increase in stock price, the potential upside of this acquisition is that it will bolster J&J’s skincare portfolio as it expands its market presence in Japan. If all goes well, this deal will enhance the long-term growth and value creation for Johnson & Johnson’s Consumer business which could lead to increased shareholder benefit in the form of an increased share price. It will be interesting to see the long-term outlook of broadening their business operations into Japan.


Industrials & Technology


On Thursday, October 25th, the world’s largest smartphone contract manufacturer, Wingtech Technology Co. Ltd., sparked a massive deal to acquire the Dutch semiconductor firm Nexperia Holding for USD $3.63 billion. With this deal, Wingtech Technology Co. Ltd. is positioning themselves to enter the automotive electronics industry as it represents Nexperia Holding’s largest business. As Wingtech already encompasses 10 percent of the global market share in the original design manufacturer industry, it is looking to expand off tailwinds from business demand from more sectors in the 5G era. Nexperia is a major component supplier in the semiconductor industry and with clients including Samsung Electronics and Apple Inc., it will be interesting to see how it can help bolster Wingtech’s market share even more.


Commodities

Crude Oil



Oil prices have experienced a significant plunge in the past week, as the WTI index tumbled 2.2%, indicating a 12% loss from recent high of $86.73 on October 3rd. The reason for this price drop is multifaceted but can be summarized into the expectation of increasing supply and decreasing demand, both of which push the price down.


Despite the supply declines in Venezuela (due to its economic breakdown) and Iran (due to the U.S. sanctions), Saudi Arabia, Russia, as well as the OPEC nations have all increased their oil output in the past few months, which is more than enough to cover the gap. Meanwhile, the continued economic uncertainty imposed by the Trade War, the Fed’s current sentiment to continue rate hikes, along with the stock market volatility, have contributed to softening oil demand. Indeed, as the oil drop has coincided with the recent stock market correction. As indicated from the graph, in October, many long investors have cashed out while many more are now betting against crude oil.


Gold


In contrast to the oil market and the volatile equities market, gold prices have been rising rather steadily in the past few weeks, as December gold futures are trading near a three-week high, up more than 1% from the previous week. The primary reason is, of course, the recent stock market correction, as gold is often seen as a safe haven asset by the investment community. Therefore, an empiric inverse relationship between the prices of equities and gold arises. In the short run, the only possible factor that may drive down gold prices would be the Federal Reserve’s decision to continue its rate hikes, which makes the U.S. Dollar stronger and more attractive as a safe haven asset than gold.


Many investors may regard now as a great time to buy gold, especially those who are pessimistic about the stock market. In addition, the uncertainty around the midterm elections in the U.S. may also be another catalyst for gold prices.


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.

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