What’s been happening?
Back in January 2018, Melrose Industries attempted multiple times to acquire 100% of the UK based engineering company, GKN, in unsolicited bids valuing the company preliminarily at c.405p per share then c.430p per share. The board declined both offers stating that they saw the offer as "entirely opportunistic" and they believe that "its terms fundamentally undervalue GKN and its prospects." On Friday, GKN used a protective technique to a hostile bid by merging part of its Driveline automotive business with Dana (US based). In this instance Dana is the ‘White Knight’ in GKN’s attempt to fend off Melrose. GKN’s share price rose 3.5% on Friday and since Melrose’s first bid the share is up 30.8%. Melrose shares also finished Friday up 4%.
Meanwhile, International Paper, an American paper and packaging company based in Tennessee, put forward an unsolicited bid on Tuesday for the Irish gem Smurfit Kappa, a leading corrugated packaging company. The board put out two press releases to reaffirm that they strongly advise against the deal, stating "it does not reflect the Group’s true intrinsic business worth or its prospects." IP’s proposal included €22 cash and shares in the new company. Smurfit finished up 19.4% on the day and continued to rally throughout the week, ultimately closing 28.5% ahead.
What does CJExposure think?
In the most recent general meeting held on 8th March, 98% of Melrose’s shareholders backed the bid for GKN. This coupled with the fact the shares also rose on the back of the news of the Dana deal indicates to us that investors still believe that the Melrose deal could go through. It is likely that Melrose will respond with another bid next week to try and sway the shareholders their way; the last business day that shareholders can accept Melrose's current bid is the 29th of March.
Similarly, we also believe that IP will put another bid forward for Smurfit Kappa. The US packaging market has become saturated in recent years with players now needing an edge to fight for market share. This has led to companies looking elsewhere, and more specifically in Europe, which currently only accounts for 14% of IP’s revenue. With the current offer valuing the company "below the valuations set by recent industry transactions" and shareholders receiving most of the compensation in new shares, we believe that IP will need to step their bid up significantly if they want shareholders to vote their way.
Source: Smurfit Kappa
What’s been happening?
On Thursday, President Trump signed to officially impose 25% tariff on steel and 10% tariff on aluminum imports. The tariffs will come into effect in 15 days (Friday 23rd March), however, neighbours Canada and Mexico will be exempt temporarily while NAFTA (North America Free Trade Agreement) is renegotiated. The US has also allowed countries to apply for exemptions on certain products, however, in talks on Saturday, EU and Japanese trade officials said they are still seeking clarity on how their countries can apply.
The Dow Jones finished flat on Thursday and had a 1.8% gain on Friday after a positive jobs report showed the US economy had added 313,000 new jobs in February.
What does CJExposure think?
At the start of the week Trump’s top economic advisor, Gary Cohen, resigned in a disagreement over the implementation of the tariffs. We believe, along with other tensions in the White House, this shows the turbulent nature of the Trump administration.
In the short term, the steel prices are going to be pushed artificially higher in the US, therefore, we believe companies with US exposure should benefit and most likely at the expense of European names, as the imports are diverted from the US, naturally causing oversupply into the EU. Evraz plc is a stock of interest with exposure to the US steel market, in 2018 North American steel production is expected to exceed 2mn tonnes, up 10% YoY. Evraz is up 2.4% this week.
Source: UK steel producer
Top and Bottom Movers
Smurfit Kappa was this week’s top performer with the share price climbing 28.5%. As discussed above, the significant move higher was driven by the opportunistic takeover bid from International Paper. The rest of the paper and packaging sector were not far behind with DS Smith (+9.3%) and Mondi (+8.0%) the third and fourth best performers this week, respectively.
Rolls Royce were the second best performer and also enjoyed a significant rally this week, climbing 11.3%. Rolls reported full-year results on Wednesday, which saw all five of their divisions deliver better than expected performances, with free cash flow guidance for 2018 and performance for 2017 also ahead of expectations.
Just Eat was the biggest faller this week, closing down 11.2%, driven by the release of their full-year results on Tuesday, in which they announced a £76m loss for the year and warned investors of upcoming higher investment spend due to increased competition, and hence less profit to be expected for 2018.
What’s coming up this week?
Key things we want you to know about (all times are GMT)
US Key Indicators:
12:30pm Tuesday 13th March: CPI (Feb)
12:30pm Wednesday 14th March: Retail Sales (Feb)
The US Consumer Price Index (CPI) figure is the measure of changing prices within a basket of goods and services and is the markets key indicator for inflation. Given 2018’s focus on inflation, interest rate rises and the implications on equity markets, we expect a lot of attention on this data point. Retail sales help gauge consumer spending and confidence which is an important factor when accessing the overall health and confidence in the economy.
Ex-Dividend dates this week (yield as % of Friday's close):
Thursday 15th March
Tritax Big Box REIT – fourth interim dividend 1.6p (yield c.1.1%)
Domino’s Pizza – final dividend 5.25p (yield c.1.6%)
Follow the links below to CJ Exposure’s most recent research articles!