In recent months, it has been rare for a morning to pass without news of another merger or acquisition crossing the business wire. Bloomberg News reported last week that global deal volume will total $992B this quarter. This represents the most active M&A market since Q3 in 2007, one year prior to the Lehman Brothers collapse and the great recession that subsequently followed.
This dynamic M&A market is unsurprising given today’s low interest rate environment. For buyers looking to finance an acquisition with debt, the cost of borrowing hasn’t been this cheap in over half a century. Low interest rates, however, are living on borrowed time. Last week, members of the United States Federal Open Market Committee forecasted that their own committee will increase short-term rates to 1% by the end of 2014 and then to 2.25% by the end of 2015. As interest rates rise, financing acquisitions will become more costly for borrowers.
There are many candidates subject to a takeover attempt. One is perhaps High Liner Foods, a frozen fish producer with a sizable footprint in both Canada and the United States. With an Enterprise Value-to-EBITDA multiple 15% cheaper than its peers, its relative value presents an opportunity for shareholders and acquisitors alike. The company’s ability to generate free cash flow is significant enough that the board increased its dividend by a remarkable 200% (or 9 times) over the past five years. However, High Liner’s best days will appear in its future. Management aims to grow its EBITDA from $85.3M last year to $150M by 2016. With 70% of its sales stemming from restaurant traffic, a strengthening consumer will bolster results.
While High Liner may be the target, the acquisitor is uncertain. It could be a strategic buyer that competes within the food industry or a financial investor, such as a private equity firm. Bloomberg News attributes this quarter’s robust M&A market mostly to strategic buyers. Poultry producer Tyson Foods recently paid 15x 2014 EBITDA (6.6x 2016 EBITDA) to acquire another food manufacturer, Hillshire Brands. With High Liner trading at 7.9x 2014 EBITDA (5.2x 2016 EBITDA if it achieves $150M), a comparable multiple would represent a significant premium to shareholders. Because one holding company owns a sizable 37% of High Liner’s outstanding shares, any takeover would require a sizable premium to guarantee the shareholder votes required.
In addition to the potential for a strategic food buyer, a financial acquisitor is equally likely. Private equity firms have been actively acquiring seafood companies for the past several years. For example, one California-based private equity firm has acquired 8 seafood companies in less than two years. Recently, a former executive at a company inevitably acquired by High Liner joined the same private equity firm to manage one of its seafood businesses. Surely there are other private equity firms looking for value.
No investor should ever purchase a company based on a speculative takeover. Its business fundamentals must speak for itself. In the case of High Liner Foods, its ability to generate free cash flow, build a footprint south of the border, grow EBITDA, and consistently increase its dividend make the company a core investment holding as a stand-alone investment.
*Disclosure: Clients of Baskin Financial Services Inc. and this writer are shareholders of High Liner Foods (TSE:HLF).
