Nobody Told Us This Was M&A Week

0:00It is Merger Mania this week. This is Motley Full Money. Welcome to Motley Full Money. I'm Tyler Crowe and today I'm joined by long-time full contributors Matt Freigel and Lou Whiteman with three of us being part of the Hidden Gens team here at Motley Full. As we said, there has been a lot of movement in the Merger and Acquisition field in the past couple of days and we're going to try to break down as many of those deals as we can. Also we're going to get to some listener questions but to start, let's go with a lot of the deals that's going on in the food industry because we had two doosies. There must have been like a lot of lawyers and investment bankers putting in extra hours this past weekend because first we got news on Monday that Cisco, the food distributor, not the networking hardware company, was acquiring private retailer Restaurant Depot for $26

1:04billion. We'll get into the details in a second here but I think that was going to be the headline deal we were going to talk about and then this morning we had an even bigger deal where McCormick basically said, hold my beer because they decided to merge with Unilever's food division in a $44 billion deal and what makes that kind of striking is that McCormick itself is a $14 billion company and Cisco as doing a $26 billion deal was a $30 billion company. So these are massive transformative changes in pretty sleepy consumer brand food distribution sort of businesses. Now personally, as I looked at the initial deals, I was a little dubious but it forced to choose. I would probably say the Cisco deal looks a little bit better but I wanted to turn to you guys and see what you guys thought of both of these. I'm going to start with you Matt. Are either of these deals making Cisco or McCormick more attractive? I'd agree that the Cisco deal is the more interesting of the two to me. So if you're not familiar, so Cisco is the largest food service distributor in the United

2:05States. I had a short career in the restaurant industry many years ago and I worked at a total of four restaurants across two states and Cisco is the primary food supplier for all of them and that's among the other 700,000 restaurants that serves worldwide. It is a massive distribution network. It gives it a major efficiency advantage over its competitors. On the other hand, restaurant depot, it's a network of in person wholesale restaurants supply warehouses. Think of it as like a Costco or a Sam's Club but specifically for restaurants. It's carved out a very nice niche among restaurant owners who value flexibility in pricing over the convenience of the national distributor, Cisco. Yeah. Now, as Matt says, these restaurant depots are much different business, arguably a better business, better margins, decent cash flow, and it better be because it, you know, Cisco is paying a price that's higher than Cisco's multiples. So they are hoping to see their business improve because of restaurant depot. No question for me is this can they get this done?

3:06Last time Cisco tried something like this with US foods, antitrust got in the way. It's a decade later and as I said, they are different businesses, but, you know, we'll see how it plays out. Tyler, I do have to say though, you said interesting. And to me, when I back when I was in deal making world, there was nothing more interesting than a reverse-mores trust, McCormick gets it just for interest, just for that because they are doing this, they're using this kind of cool thing where they are merging with part of Unilever and Unilever gets the spin it off tax-free. I'm real curious about this because it used to be deals like this made sense. Shelf-space mattered, jamming more things into a truck that's heading to the store, that gives you scale, that gives you synergies, that was supposed to matter. Recent history, including craft hines and some other deals we can get to, has kind of, it's less settled science now whether that works, maybe this is an opportunity to find out how much of what went wrong in other deals was the management execution compared to just the strategy. The strategy could make sense from McCormick and paper, I think, is better managed, so

4:10I am at least curious to see how this plays out. To lose point in thinking about jamming stuff into trucks, it certainly, there is some sort of logic to what's going on here, but I feel like M&A activity, specifically in like consumer brands, has been like that joke from the TV show Arrested Development. It became like an internet meme or it's like, well, did it work out for them? And then they go, no, they dilute themselves into thinking it will work, but, you know, destroys value, but it could work for us. And every single time I've been running through like the mental rolodex of consumer goods deals over like the past decade where you can say it was definitively a win for its investors. We mentioned craft hines. I was kind of a blunder. The AB in Bev buying SAP Miller to, you know, at the beer world, that was not so great. Curring Dr. Pepper merger hasn't turned out too well either. I mean, the jury is still out on this recent one with Kimberly Clark and Ken Pugh, but

5:11I can't think of a major consumer brand deal where we're like, yep, really good stuff. Now consumer brands is historically a defensive sector, so the goal for some investors maybe just, you know, collect a dividend call it a day. It's fine. That's what a lot of investors want. But aside from that, this track record of value destruction at these major brands has to be like a red flag going into these sort of deals. Don't you think? My theory here is it's not the deals, it's the companies. The value of brands have been diminished over the course of the last 20 years or so. I kind of blame the internet, better flow of information, but who knows? But consumer goods to me today is a barbell. Those consumers will pay up for certain specific items, whether it's, you know, on holding shoes in any given moment or one just kind of splurge. But otherwise, consumers are happy to buy generic. That's a nightmare for these mid-tier brands, and that's most of what we're talking about with Kimberly Clark, Ken view, Kraft and Heinz. If that's the case, this is a bad move for McCormick. And honestly, I believe in enough that I personally try not to invest in brands in the middle.

6:18The bottom line is I don't think people still find value in buying, say, Tylenol versus Kroger brand Tylenol. And that's a problem for anyone selling these kind of Y distribution, but a little bit extra because it's a brand name sort of sort of products. There have been a few decent examples of deals like this that have worked. Performance food group getting back to the Cisco situation is one that looks really interesting. Baker symbol is PFGC and between 2019 and 2023, it acquired three of its major competitors, including Cheney Brothers, which is a big Cisco competitor, and a major reason was to add new consumer segments, which is one of the reasons Cisco's acquiring restaurant warehouse. So the stock is up 160% since the start of 2019. And so I'd call that a pretty solid example and a pretty close parallel, but I completely see your point. There is a lot that can go wrong with these types of acquisitions, especially when a company like Cisco is taking on 21 billion dollars of new debt to make it happen.

7:19Yeah. And just for keeping score, too, the deal between Unilever and McCormick is also going to be taking on a rather considerable portion of debt as well. And whatever happens with the question for the next couple of years is how quickly can we get these debt levels back down to kind of pay off and make these things worth their while? So we will be watching that. And then after the break, we're going to look at another M&A deal, but completely unrelated industry. The Civil War and Reconstruction was a pivotal era in American history. When a war was fought to save the Union and to free the slaves. And when the work to rebuild the nation after that war was over, turned into a struggle to guarantee liberty and justice for all Americans. I'm Tracy and I'm Rich. And we want to invite you to join us as we take an in-depth look at this pivotal era in American history. Look for the Civil War and Reconstruction wherever you find your podcasts.

8:20Okay. So we're going to shift gears in the industries we're talking about. We're going to stick with M&A. Yesterday, Eli Lilly announced it was acquiring centessa pharmaceuticals as the case with most biotech deals. It is contingent on centessa meeting some milestones. But assuming a centessa hits them, the deal is worth approximately $7.8 billion. Now, I'm going to leave it to you, Matt, to kind of get into the details of what it does. But centessa is a clinical stage development company that's looking to treat narcolepsy. But why is Eli Lilly willing to fork over $7 billion for a company that doesn't believe and have a commercial treatment yet? Yeah. That's a really good question. So as you mentioned, they're a clinical stage pharmaceutical. They develop treatments for rare diseases. It's not just narcolepsy. They have some other things in the pipeline, but that's their most promising candidate. They have a product that's in later stage trials. It just passed a phase two trial that was very promising. And the main product, it looks like it's going to become the first to market treatment

9:23and the most effective for several forms of narcolepsy. And this is estimated to be a $5 billion market. It has several other treatments, like I mentioned in earlier trials, but that drug is why Lilly's buying it. So the idea is that Lilly's capabilities can help it accelerate its time to market. And if it's successful in obtaining FDA approval, which is those milestones you mentioned in order to get that full $7.8 billion, it would have to get FDA approval for all these forms of narcolepsy. And if that happens, the treatment could be worth several times what Lilly's paying for it. It's a big if, but that's the goal. Okay, that's why Lilly's paying up for a company doesn't have a commercial product yet. This is just a big part of how R&D works in the industry. I mean, look, I've seen the estimates, it's almost $2 billion that Big Pharma spends to get just one drug into production through clearance. You can do kind of closer to a sure thing for a $7 or $8 billion, suddenly it doesn't

10:25look too bad. In Lilly's case, too, this is a proactive move to make sure that this does not become a one-hit wonder or one product company. Right now about 60% of Lilly's revenue comes from GLP ones. And if anything, given the all of the trials they have for different, you know, different treatments trying to get other GLP treatments on label, that's likely to only go up from here. The nature of farmers, all good things come to an end. You're constantly racing to stay ahead of a patent expiration cliff, investing in a prominent therapy outside of GLP ones. That makes a lot of sense, assuming their scientists think that there is a there here, and I'm going to leave it to their scientists, not me, to say whether or not what they're buying really makes sense, apparently they think so. To that point, too, I'm not going to claim to be somebody who can read clinical trial data very well and say whether it's good or bad in the direction they're going. But as somebody who has invested in the space from time to time, there are some like hard

11:26numbers that investors should think about when looking at clinical stage pharmaceutical companies. And it's something around like 20 to 30% of drug candidates that start a phase two clinical trial end up actually getting all the way through trials and FDA approval. So you want to think of it as almost like companies with lots of shots on goal in their pipe development pipeline because there's no farger in conclusion that any of these in particular ones are going to make it through. And as we mentioned, there are some kind of contingencies built into the deal that says, hey, you have to meet these milestones for us to actually pay out the number that we're saying. I want to shift gears a little bit because talking about healthcare in general, I want to get your guys his thoughts, but this don't want to drift too far here. One thing it's hard to shake when looking at the industry right now is FDA approvals. The rules and process of forgetting approvals look pretty different in this current administration and in prior ones. And I think we mentioned it on a prior show earlier this year, Moderna CEO, Stefan Bounce

12:27said that it is scaling back clinical trials for its mRNA vaccines because it would be, as his quote said, difficult to see return on investment. That was specifically tied to mRNA vaccines and we know that the current administration's position of vaccines is very different than what we've had in the past. And I know that both of you have some ties to the healthcare industry, the three families and stuff like that. But as you look at this space as investors, have the recent changes in FDA approvals maybe change the way you think about investing in clinical stage companies, at least in the time being. I generally avoid the pharmaceutical industry for the reasons that you mentioned because only 20 to 30% of the drugs that pass phase two trials actually come to market. So for me, it hasn't really changed the way I invest personally, but it's definitely something that healthcare investors should take into account. Yes, so I am due to family. For most of my career, I've been restricted by conflict ventures that can't.

13:27So that's an easy answer for me, but I will say this. These are long term projects. It takes upwards of a decade to get some drugs through clearance. I don't think these companies have to worry about any one regime because usually things have changed over the course of it. So I don't think, I mean, I think it's something for investors to be aware of, but I wouldn't lean into political wins, changes kind of coming from the agency with cycle to cycle. I think that, you know, if the science is good, there's a ways to get it done. And so you focus on trying to figure out the science. After the break, we're going to dip into the mail back. If you love Microsoft and Windows, you will love Windows weekly with Paul Therott and Richard Campbell. Hi, this is Leo LePort inviting you to join us this week as we talk about Microsoft's plan to revamp Windows. They're sorry. They want to make it better. I think we can all agree. That's a good idea. We'll also talk about how you can get Paul's books for free and a whole lot more Windows

14:31weekly every Wednesday. You'll find it at twit.tv slash WW or wherever you get your podcasts. Quick reminder, we want to make you part of the conversation. So if you have a stock or investing question for Matt, Lou, myself or anyone else on the Motelful Money Show, you can now email us at podcasts at full.com. We'd love to have your mailbag segments whenever possible. So send in your questions and just remember to keep them foolish. That email again is podcasts at full.com, podcasts at full.com. And I'm going to read this listener question that we got a little while ago. It comes from Vijay Kant. I apologize if I mispronounce any names. It's a guarantee it's going to happen whenever you do these mailbag sections. His question was, I want to get your perspective on the long term investment thesis of Whirlpool. The ticker is WHR. I'm drawn to the generous dividend, but also question the sustainability of the dividend given its high debt load on the balance sheet. I also want in your opinion on the long term narrative of the company, given the international competitive environment in the large appliance sector. Thanks for the comments. Cheers.

15:32Matt, I want to start with you, Whirlpool. What is your take? I mean, my short answer is the market doesn't seem too convinced on the long term thesis for Whirlpool either. The stock is down more than 50% from its high. It's still a profitable business. It has a 6.9% dividend yield as we're recording this. It's well covered by its earnings, and it trades for about 9.3 times trailing 12-month earnings and less than 9 times forward earnings. It has about $6.5 billion of debt. I don't view that as an unreasonable debt load, especially because it's steadily declined for the past three years. Now, management has made some questionable decisions recently. I will say that. They did a dilute of capital rates about a month ago. It caused the stock to drop 15%, that was a good portion of that decline image. It's a solid business, a nice dividend stock to own, but it's not worth to buy and forget. I think I'm with the market on this one. The bouquets is a recovering housing market, plus continued tariffs, boost sales. I think we're quite early in the recovery of housing, and I'm not sure what to think

16:36on tariffs. Dividend does look okay for now, but remember, they already cut it in half last year, so they are willing to make the hard decisions. They did just raise capital in February. That makes things look better, but that speaks to a business that is not firing all cylinders. There's probably a trade to be done here, guys, because you met the right, the business isn't going away, and there is probably a bottom to bounce off of, especially with active involved. But for me, I don't see this as an attractive long-term investment, too many, the debt is stacked against them. As a company that we can say is sensitive to the economic headwinds or tailwinds of the housing industry, whether that be new construction or refurbishment or anything like that, it's going to take a while for something like whirlpool to really turn around. All you have to do is look at mortgage originations or refinancing originations to see that the housing market isn't a very, very slow space, and as long as that is crawling along, it's

17:37hard to see whirlpool making a really strong recovery. I think we're all kind of in consensus here. There's probably a long-term narrative somewhere, but with a headwinds that the company's facing, maybe just sit on the sidelines for a while. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements or sponsored content provide the informational purposes on them. To see our full advertising disclosure, please check out our showments. Thanks for producing a Dan Boyd, the rest of the Motley Fool team, for Matt Lewin myself. Thanks for listening, and we'll chat again soon.