My kids are trapped in quarantine, and they are passing the time in part by suggesting some investment column ideas for me. Hopefully the world returns to normal soon and you won’t be subject to the (not so bad, actually) investment thoughts of two teenage boys.
This week, instead, we are going to put on our dealmaker hats and propose some ideas for bored investment bankers to consider. Times are tough all over, but there is nothing like hefty broker fees to get Bay and Wall Street’s blood racing. Here are some deal propositions that could work:
Netflix should buy Spotify
Netflix (NFLX on Nasdaq) is facing lots of competition in the streaming business. Sure, COVID-19 has helped recent growth, with everyone stuck at home, but this won’t last forever. What better way to tie up your customers than to offer viewing options and music. Spotify (SPOT on Nasdaq) has done very well this year, but it remains about one-fifth the size of Netflix. Offering a combination monthly subscription fee for music and movies would tightly lock up their customers, with plenty of cross-sell and promotional tie-up possibilities. Artists exclusive to Spotify could shoot concert footage exclusive to Netflix. Netflix stock has slightly outperformed Spotify this year, and its valuation is about twice that of Spotify, on a price/sales basis. This valuation gap makes a deal more palatable.
LuluLemon should buy Under Armor
Hard to believe, but LuluLemon Athletica (LULU on Nasdaq) is now nine times larger than Under Armor (UAA on NYSE). Under Armor has a decent balance sheet, and US$4 billion in annual sales. With a deal, Lulu could double its sales base, expand its product line and geography, and clean up the very troubled Under Armor, which is at risk of losing its brand cache. Lulu trades at nine times’ sales, Under Armor at one times. With that massive valuation difference, it is a very easy swallow for Lulu if it wanted to buy Under Armor with stock. Lulu also has more than US$1 billion in cash if it doesn’t want to issue shares and use cash and debt for a deal instead.
Enbridge should buy Keyera
There is nothing like a valuation gap to make a deal go smoothly, even if your stock is down. Enbridge (ENB on TSX) shares are down 14 per cent this year. But Keyera (KEY on TSX) shares are down 35 per cent. ENB has a higher valuation, and is 16 times as large as KEY, so this deal would be only a small bite for the company. With many pipeline projects in jeopardy, Enbridge might find it easier to buy energy infrastructure assets rather than try to build them and get through the near-impossible regulatory approval process. Keyera would be about a $10 billion deal, including debt and some premium.
Adobe should buy Docusign
Adobe (ADBE on Nasdaq) has been a huge success story. Part of its growth has come from acquisitions, with close to 20 deals done in the last five years. Docusign (DOCU on Nasdaq), which provides electronic signature solutions, has also been a huge winner, up 70 per cent this year alone, with sales growth expected in the 50 per cent range. Adobe has its own competing signature solution, but Docusign is winning this war handily, so far. As Docusign’s solution gets adopted worldwide by more and more companies, including lawyers, it is actually becoming a verb: “Just docusign it and send back to me.” Verb stocks don’t come around often. Remember the early days of “just Google it?” That was a pretty clear sign to buy Alphabet stock. Docusign should have US$2 billion in sales next year. Adobe, as the world leader in forms and managing documents, really should be the leader in electronic signatures. A Docusign purchase would clearly establish that.
Brookfield should keep doing spinouts
This is hardly a stretch for those investment bankers, but investors clearly love the Brookfield group of companies and their related spinouts. Brookfield Infrastructure (BIPC on TSX) is up close to 20 per cent since its spinoff about three months ago. Brookfield has a long and profitable history of doing spinouts, and has created much shareholder value with them. Brookfield Renewable Power has already announced a similar spinout to create a Canadian corporation replacing its current limited partnership structure, and we expect more spinouts will be on the way. If one owned the Hees-Edper group of companies (the predecessor to Brookfield) you have made a ton of money over the past few decades, and have many new successful public companies in your portfolio as well.
Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals.