Observations and signals from M&A season

Christopher Dixon

Cooper Investors

Despite the slow pace of vaccine roll-out in Australia, much of the Western world is beginning to look forward to a ‘post-COVID normal’ with herd immunity appearing close to achievable in the US and the UK. Accordingly, as animal spirits return and cheap capital remains plentiful markets are seeing an explosion in M&A with US$1.5 trillion of deals announced in Q2. Several have implications for holdings in the CI Global Equities portfolio.

For example, gaming is an area that was already growing in global importance before the pandemic but whose development has only accelerated, with the size of the US videogame industry eclipsing movies and music combined in 2020. The portfolio has exposure to this area through investments in Sony (Sony Interactive, producer of PlayStation consoles and games) and Activision Blizzard (content studios of IPs like the Call of Duty and World of Warcraft series). 

The first half of 2021 has seen deal activity reaching record levels, around US$60 billion combining both M&A and public offerings. While some giant ecosystem owners like Microsoft have made large bets (e.g. the March US$7.5 billion deal for Zenimax) we prefer the cautious approach of Sony taking several smaller but more strategic investments. Examples include the additional US$200 million participation in Epic Games (creator of the Unreal Engine and Fortnite) in March of this year, or the recent purchase of Finland’s oldest gaming studio, Housemarque. The latter case represents a good example of Sony being both a ‘safe haven’ and a source of scale and support for small but proven studios to retain their culture and grow into potential triple-A game developers over time. 

Real assets in the spotlight

Physical infrastructure is another sector uniquely impacted by the pandemic. Two recent deals close to home have relevance for portfolio holdings and give an indication of growing global interest in listed infrastructure, particularly from private markets.

Transport-linked real assets (for example, toll roads and airports) in listed structures are seeing share prices still languishing 20-30% below their pre-pandemic levels, with public markets tending to price near-term traffic volumes rather than longer-term recovery potential. The portfolio has exposure to such assets through Ferrovial (owns 25% of Heathrow airport) and Brookfield Asset Management (owns a diverse range of assets including several toll roads in Latin America). The recent A$22 billion consortium bid for Sydney Airport (ASX: SYD) offers an indication of where private markets are thinking post-pandemic air travel might recover to, and with global commercial flight numbers back to 70-80% of 2019 levels (per Flightradar24) there is emerging evidence this recovery is well underway. 

We also saw a consortium of local superannuation funds bid almost A$3 billion for half of Telstra’s (ASX: TLS) towers portfolio. The Fund has exposure to digital infrastructure through recent participation in the float of Vantage Towers, a German-listed entity that controls over 80,000 towers in Europe. The 28-times EV/EBITDAaL multiple (enterprise value over earnings before interest, taxation, depreciation, amortisation and ground lease costs) paid by the consortium for a non-controlling 49% stake in the Telstra portfolio implies Vantage looks very cheap at around 20-times. We would argue Vantage has superior growth optionality too with higher levels of operator competition and co-tenancy potential in European markets.

Pole position in the gene therapy innovation wave

During the quarter the Fund’s largest holding Danaher made a notable acquisition, spending US$9 billion (~5% of its market cap) to buy privately held Aldevron, a leading player in the fast-growing field of genomic medicine. Over the years Danaher has built up a unique portfolio of life science and diagnostic assets. Their key life sciences businesses involve providing the tools and services to research, develop and manufacture biotech drugs. For example, they are a key provider to over 400 COVID vaccine and therapeutic projects globally. 

Aldevron expands Danaher’s capability into gene therapy. Aldevron is a supplier of key ingredients for the next generation of therapies, namely cell and gene therapy and mRNA vaccines. Aldevron is the leader in these fields and this deal puts Danaher in pole position to participate in the wave of innovation occurring in this space.

The acquisition multiple is high - Danaher is paying US$9 billion for what today is a US$500 million revenue business but growing 30% a year with 40% operating margins, in our view justifying the high price. Importantly, management can see an investment return in line with recent acquisitions. As a reminder Danaher’s history and skillset are acquiring businesses, it is how the company has been successfully built over 35 years. The shares were up 4% on the news and have gained nearly 20% for the quarter. Most companies would be sold down off the back of an announcement like this but Danaher has a long multi-decade track record of successful acquisitions and this fits a similar enough pattern. 

The opportunity is to grow Aldevron into a multibillion-dollar business given the growth in genomics and RNA innovation that’s occurring and as more of these types of therapeutics become approved. Overall as a key supplier with deep global networks across life sciences and medical research Danaher is very well placed to continue growing with the innovation in biotech and diagnostic markets. It remains an incredibly well-run company and a high conviction investment in the Fund.

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Christopher Dixon
Portfolio Manager - Global Equities Funds
Cooper Investors

Chris has been co-PM of the CI Global Equities Fund since November 2011, focussing on European and Japanese companies. He has travelled extensively, living in four countries and investing across multiple asset classes over his 15 year career.

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