July 10, 2020

Breakingviews: Volatile markets make case for stock deals

by Breakingviews.

Jumpy asset prices are the enemy of cash deals. Buyers such as Simon Property and Cineworld who used cash to lunge after strategic targets are having to walk away. So long as volatility and the risk of another liquidity crunch hangs over them, using shares will give buyers a better chance of closing.

U.S. mall operator Simon Property dumped its all-cash $3.6 billion deal to buy Taubman Centers earlier this month, arguing that the coronavirus pandemic disproportionately hurt the target. British Cineworld’s $2.1 billion deal to buy Canadian Cineplex came unstuck when lockdowns pummelled both companies. The jury is still out on LVMH’s deal to buy Tiffany & Co after LVMH tried but failed to renegotiate: the jewellery purveyor’s shareholders have lost $1.5 billion since the start of the year, because of fears the deal wouldn’t close at the agreed price.

And yet all the pairings make sense, as stock prices show. Since the deals fell apart, shareholders in Cineworld, Cineplex, Simon and Taubman combined have lost $7 billion.

The trouble for cash buyers is that they often use debt to fund deals. Indeed, in the case of Cineworld, the two companies would have been unsustainably over-levered. And debt inks a deal’s value – creditors expect the lump sum to be repaid whether or not the price of the asset has fallen. And so volatile markets can make soon-to-be buyers skittish.

Stock deals mean both parties share the risk – and the spoils if things go well. Had these acquisitions been hashed out at least partially with stock, the outcomes may well be different. Eldorado Resorts tweaked the stock portion of its of $8.5 billion cash-and-share acquisition of casino operator Caesars Entertainment. While Caesars shareholders are forgoing a little bit of their overall stake of the company, at least the deal has stayed intact. In this market, that’s a win.

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