By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Darling International Inc. (NYSE:DAR), a leading provider of rendering, recycling and recovery solutions to the food industry, announced in October 2013 that it will acquire Vion Ingredients, a division of Vion Holding N.V., for approximately 1.6 billion euros in cash, or $2.16 billion dollars. This is a significant transaction for Darling International, as its own market capitalization was $2.5 billion at the time of the transaction’s announcement. Vion Ingredients specializes in the development and production of specialty ingredients from animal origin for applications in pharmaceuticals, food, feed, pet food, fertilizer and bio-energy. Vion Ingredients employs approximately 5,700 people worldwide and for FY 2013, reported revenues of €1.6 billion with approximately €200 million of EBITDA.
History has not been kind to shareholders during mergers
The long-term return to acquiring company shareholders is a controversial issue in the M&A process. Differences in companies’ culture and values, overestimation of potential synergies, overpayment for targets during a hot M&A market are just some of the problematic aspects that characterize many mergers. Many academic studies point to frequent destruction of value in M&A. For example, a Bain & Co study of 790 deals greater than $250 million between 1995 and 2001 found that history has not been kind to shareholders of the acquiring companies. Only three in 10 have created meaningful value and slightly more than half actually destroyed value.
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Without accounting for the two latest acquisitions by Darling International Inc. (NYSE:DAR) (Rothsay and Vion), the company was trading at an EV/EBITDA multiple of about x8 (based on FY 2012 EBITDA). Based on a pro-forma consolidated financial information reported by company – after accounting for a recent equity capital raise and new debt taken to pay for these two acquisitions, and an exercise of option by underwriters to acquire an additional 6 million shares, the company is valued at approximately the same EV/EBITDA multiple of x8 (based on 2012 Pro-Forma EBITDA and recent stock price of $20.80 per share). This highlights that the company is disciplined in its M&A activities as fundamental valuation is conservative and the combined valuation ratio does not deteriorate as in more dilutive M&A transactions done at higher valuation multiples.
Darling International hopes to buck the trend
Bain & Co “Learning curve” study found that frequent buyers that buy through economic cycles and acquire companies a fraction of their size usually perform best over the long-term. Robert Bruner, dean of the Darden Business School and professor at the University of Virginia, discusses different aspects of failed and value-destroying M&A deals in his book Deals From Hell. He finds that strategic deals done in related fields are usually the ones that perform best while the worst deals are often associated with “hot” equity markets.
Vion’s acquisition is big for Darling International Inc. (NYSE:DAR) relative to its market capitalization. At the same time, it is a strategic deal, valuation is reasonable, and it is not “once in a while” acquisition. All of this make it an interesting transaction that is supposed to create long-term value for shareholders.