US Takeovers Are Hot Stuff - Provided Buyers Can Afford Them

This should be the time when forward-thinking bosses can launch a takeover without having to fight a counterbid from a private equity firm, and hopefully end up paying a sensible price. And yet the shareholders of corporate buyers are punishing acquisitive ambition. What looks like an open goal is actually a trap.

Take Brenntag SE. Shares of the German chemicals distributor have slid more than 10% since Bloomberg News revealed it was mulling the purchase of US peer Univar Solutions Inc. A deal would enhance Brenntag’s US position at a time when European customers are grappling with a fragile economy and insecure energy supplies. The cost savings, estimated by Barclays Plc analysts at 400 million euros ($412 million) annually, appear to justify paying a typical takeover premium on Univar’s undisturbed market value of $5.1 billion.

Univar is in that sub-$10 billion sweet spot where private equity has historically been active. With financing for leveraged buyouts still gummed up, such targets are theoretically easy purchases for corporate buyers today. Just not in practice.

Shareholders have been similarly nervous about other recent US deals, with savage market reactions to Regal Rexnord Corp.’s offer for engineering peer Altra Industrial Motion Corp., Ritchie Bros. Auctioneers Inc.’s for auto retailer IAA Inc. and Chart Industries Inc.’s for industrial machinery rival Howden Group Ltd. The principal worry appears to be adding leverage and management distraction at a time of acute economic uncertainty.

Regal guided that its net debt could hit four times combined earnings before interest tax, depreciation and amortization on its deal – more than double the current level. Ritchie’s would increase to around three times, from having negligible leverage today. Chart’s would rise to more than four times Ebitda. All three stressed their commitment to de-leveraging.