Ravi Madhavan's A&D Blog

Warren Buffett's media move

Interesting deal - in its second transaction in the media space within six months, Buffett's Berkshire Group bought a portfolio of 60+ newspaper properties from Media General. NYT story here. From what we know about Buffett, it's unlikely he's betting on creating value via a technology upgrade (e.g., by evolving the local newspapers into the world of "new media.") Berkshire Hathaway's acquisition criteria are listed here. Is this a "last iceman" strategy? Or merely a reflection of a personal bias? Excerpt from the same NYT story.

The billionaire has often reminisced about being a paperboy in his youth — a newspaper tossing competition featuring Mr. Buffett and his friend Bill Gates was one of the highlights of the investor meeting — and waxes nostalgic about the decline of newsprint.

 

Watson/ Actavis

Another consolidation deal in the generics pharma space yesterday, with US-based Watson Pharma buying the Swiss Actavis: summary facts, NYT DealBook story, analyst presentation. The messaging stresses the scale/ consolidation rationale, as illustrated by the following slide, as well as the management team's track record in integrating past deals. (For background on consolidation in generics, see this Goldman Sachs report - dated by now, but lays out the drivers of consolidation.)

USAir/ American Airlines?

The possibility of a USAir bid for American Airlines appears to have strengthened - stories from Washinghton Post and Forbes, respectively, on how USAir has won pre-approval from American Airlines unions.

On a related note, interesting stories from Washington Monthly and WaPo, respectively, about cities abandoned by airlines (including Cincinnati and Pittsburgh) which then also lose businesses because business travel becomes difficult. When airlines were regulated, the premise was that air service was essentially a "utility," and the Civil Aeronautics Board would set routes and fares. Now that airlines are free to set routes and fares, many mid-tier and small cities are experiencing dwindling air connections. 

Shell > Cove Energy

Shell has made an offer valued at over GBP 1B for Cove Energy, a Mozambique-based producer. The news caught my eye because one doesn't often see large deals for targets in Africa. The Guardian says this may lead to more deals in the sector. 

Samsung LCD spinoff

WSJ report here on Samsung's decision to spin off its LCD business, apparently a signals that OLED investments are the future. Excerpt:

"(Shifting to OLED) is an inevitable trend now. There's no reason for Samsung to pour in more investment into its LCD business, and it would rather focus on raising its OLED technology," said HI Investment & Securities analyst Song Myung-sub[.]

The continuing resource "wars."

Interesting WSJ story here about Afghanistan awarding iron ore mining rights in Hajigak - described as the jewel of that country's mining sector, which overall has been valued at $1T, to a consortium of Indian firms. In 2007, China secured rights to large copper deposits in another region.

US to be a net fuel exporter in 2011

This WSJ report reveals a curious 180 degree shift: the US is on track to be a net fuel exporter in 2011. For the first time in 62 years, the US will export more petroleum products than it imports. Excerpt:

A combination of booming demand from emerging markets and faltering domestic activity means the U.S. is exporting more fuel than it imports, upending the historical norm.

U.S. exports of gasoline, diesel and other oil-based fuels are soaring, putting the nation on track to be a net exporter of petroleum products in 2011 for the first time in 62 years, Liam Pleven reports on Markets Hub.

According to data released by the U.S. Energy Information Administration on Tuesday, the U.S. sent abroad 753.4 million barrels of everything from gasoline to jet fuel in the first nine months of this year, while it imported 689.4 million barrels.

That the U.S. is shipping out more fuel than it brings in is significant because the nation has for decades been a voracious energy consumer. It took in huge quantities of not only crude oil from the Middle East but also refined fuels from Europe, Latin America and elsewhere to help run its factories and cars.

As recently as 2005, the U.S. imported nearly 900 million barrels more of petroleum products than it exported. Since then the deficit has been steadily shrinking until finally disappearing last fall, and analysts say the country will not lose its "net exporter" tag anytime soon.

"It looks like a trend that could stay in place for the rest of the decade," said Dave Ernsberger, global director of oil at Platts, which tracks energy markets. "The conventional wisdom is that U.S. is this giant black hole sucking in energy from around the world. This changes that dynamic."

I am beginning to see related views pointing in the same direction. See Amy Jaffe's Foreign Policy article, which argues that the center of gravity of the world energy industry is shifting away from the Middle East to the Americas. This scenario helps place the current shale gas debate (see The Economist's opinion here about the tradeoffs) in some perspective.

The evolution of India's IT industry

The Economist surveys the current state of the Indian IT industry. A companion piece describes the new Tata Consultancy Services facility in Ohio that is designed to seat 1000 American employees.

Kinder Morgan/ El Paso

More analyses of the pipeline deal are rolling in: this one from NYT DealBook describes the need (for pipeline infrastructure) that drove the deal, as well as producer fears that pipeline companies will have too much power. 

Oil patch deals

Two significant deals announced in the last two days: Kinder Morgan's $38B acquisition of El Paso, and Norwegian oil company Statoil's $4.4B acquisition of Brigham Exploration. Kinder Morgan's announcement call is still not posted as of this afternoon, but should show up here. Statoil analyst call here. NYT background, with a profile of Richard Kinder, here.

WSJ's Heard on the Street summarizes the deal drivers as follows:

In buying El Paso, Kinder not only creates a unified network with wider reach. El Paso's great strength is its set of interstate pipelines. Their regulated cash flows will cut Kinder's exposure to more volatile commodity price movements. This, along with increased scale, should reduce Kinder's risk, making it easier to raise capital for investment.

The deal is of a piece with the general trend toward scale in North American energy. This past decade has been the era of smaller exploration and production companies discovering vast new resources. But it takes big balance sheets to develop those reserves and ride out sometimes punishing energy-price cycles, such as today's depressed natural-gas prices. Exxon bought XTO Energy two years ago. Brigham Exploration's decision to sell to Statoil, announced Monday, follows Petrohawk Energy's recent embrace of BHP Billiton, as well as reports that family-held producer Samson Investment might also sell. All illustrate the industry's challenge and one way of dealing with it.

NYT DealBook also has an analysis of what's behind the $149B so far this year in North American energy deals. Excerpt: 

“Companies spent the first half of the year pocketing a lot of cash from high prices,” said Justin Jacobs, an oil and gas analyst at the research firm Business Monitor International. “Now, they’re taking advantage of the downturn to hunt for bargains”

The industry stalwarts are targeting North America. Amid a glut in production, natural gas prices have dropped by almost 50 percent since 2009. With energy prices depressed, independent players are struggling to find financing for their projects, prompting larger competitors with deep pockets to make a move.