Companies Bolting Joint Ventures
NEW YORK (
) - A wave of joint venture deals that came to a head last week reveals that companies taking control of partnerships are getting in at the bottom, which could translate to a big upside for their shareholders.
Last week, the
Dow Jones Industrial Average
rose above 12,000 for the first time since early August as government debt fears and bank solvency gripped markets. This week, fears re-emerged when
MF Global's
( MF) bankruptcy and a Greek bailout referendum jilted markets.
Emblematic of seesawing fear and greed in markets, joint venture partnership buyouts are being negotiated between sellers and interested buyers.
In October,
Sony
(SNE) - Get Report
bought its mobile handset venture with Sweden's
Ericsson
(ERIC) - Get Report
,
United Technologies
took control of a jet engine making duo with
Rolls Royce
,
Peabody Energy
(BTU) - Get Report
got control of its coal to steel partnership with Indian steel giant
Arcelor Mittal
(MT) - Get Report
to buy Australian
Macarthur Coal
,
Teva Pharmaceuticals
(TEVA) - Get Report
took on a Japanese J.V. and a
Johnson Controls
(JCI) - Get Report
acquired its French battery-making venture.
For those like Peabody, Sony and Teva taking control of partnerships, the timing may be impeccable if last week's rally is a better economic signal than this week's fear. It's also a sign that quick-strike deals may be more opportunistic than company takeovers.
In October,
United Technologies'
jet engine division
Pratt & Whitney
bought out a $1.5 billion joint venture with
Rolls-Royce
, ending a partnership to build V2500 jet engines. The deal may be a signal of opportunistic partnership buyouts.
"I think the larger companies can potentially take advantage of these situations and opportunistically buyout their partnership. Clearly it was part of the mandate of United Technologies in buying out the partnership of Rolls Royce," said Russell Solomon an analyst with
Moody's
(MCO) - Get Report
.
Solomon says that both firms entered the partnership to pool funds and expertise to develop engine designs without taking on too much financial risk. He added, "At a certain point invariably someone wants to take a controlling stake" once designs are successfully developed. Signaling confidence in future orders, the aircraft engine giants also announced a multi-decade joint venture to make mid-sized 120-230 passenger plane engines.
"In this market, if you are sitting on a lot of cash, there are a lot of opportunities out there. What makes joint ventures interesting is that the degree of due diligence you need to do is substantially less than a merger and acquisition," said Peter Bible a partner at advisory firm
EisnerAmper
in a phone interview. For companies like Sony, Teva or Johnson Controls taking control of a previous venture, buyouts might be a quickly executable bet on growth or a market opportunity.
Sony bought Ericsson's 50% stake in their Sony Ericsson mobile phone venture for $1.5 billion on Thursday in cash, ends a partnership started in 2001 that created the world's sixth largest mobile phone maker. The deal allows Sony to integrate smartphones into its line-up of network-connected consumer electronics devices and is also a signal of where the company sees opportunity - principally competing against
Apple
(AAPL) - Get Report
and Samsung in smartphone and tablet sales. Of his strategy in the deal, Sony chief executive Sir Howard Stringer said, "We can more rapidly and more widely offer consumers smartphones, laptops, tablets and televisions that seamlessly connect with one another and open up new worlds of online entertainment."
About joint venture buyouts, Bible of EisnerAmper added that because deals can get done quickly, they may be a leading indicator for larger mergers and acquisitions, which are recovering with deals like
Kinder Morgan's
(KMI) - Get Report
$21.3 billion purchase of
El Paso
( EP). "My personal view, I think were probably a good year away from some level of confidence for both producers and consumers in the economy that will lead us to more normal times," said Bible.
Clued in company watchers found last Monday's announcement that Peabody Energy would assume 100% of a previously shared $4.7 billion partnership to buy coal miner Macarthur with ArcelorMittal as a stunning reversal from days earlier when the venture looked complete. "I was definitely surprised. I didn't see that Arcelor would drop out," said Meredith Bandy an analyst at
BMO Capital Markets
(BMO) - Get Report
. Bandy added about the deal, "at current rates of production it's a very full price that they are paying. Long term at Macarthur you are looking at 9 million tons of
annual coal extraction or more, so if you are able to achieve that growth then they are not overpaying." The idea is that the Macarthur coal takeover is sensitive to the amount of coal the company can extract and its selling price. Expected extraction tonnage and selling prices are contingent on global economic demand and a stem in the tide of economic and market deterioration in recent months.
Mittal said in its walk away that the price of the partnership "exceeds what is appropriate to allocate to a business that ArcelorMittal does not fully control." It's a signal that though Mittal absented a 50-50 bet on coal production and prices, putting a partner in all hands on the deck, they too might jump into deals.
For ventures suffering from falling commodity prices, today's still confidence lacking market may be a deterrent. For instance, natural gas prices are still well below levels earlier in the year. "In general I would say that many gassy
exploration & production companies have JV's that they might not be interesting in selling a remaining interest in given depressed
natural gas prices," said David Deckelbaum and analyst at
KeyBanc Capital Markets
in an email. Deckelbaum added however, "there might be a chance, particularly in the Bakken Shale to consolidate minority interests." Earlier this year, in the Eagle Ford shale,
KKR
(KKR) - Get Report
sold its shale joint venture with Hilcorp Energy for $3.5 billion to
Marathon Oil
(MRO) - Get Report
, and a year earlier, the company sold a J.V. called East Resources to
Royal Dutch Shell
( RDS) for $4.7 billion. Signaling that recent mergers like Statoil $4.4 billion purchase of shale driller
Brigham Exploration
( BEXP) might also reflect partnership buyouts.
Companies who have a bright outlook on the economy still have an array of venutre opportunity left to consider buying.
General Electric
(GE) - Get Report
still owns a near 50% stake in a $29 billion partnership with
Comcast
(CMCSA) - Get Report
on its NBCUniversal venture. Additionally there is
American Tower's
(AMT) - Get Report
$428 million joint venture with South African tower operator
MTN
to manage mobile phone towers in Ghana, and
Hasbro's
(HAS) - Get Report
$300 million T.V. partnership with
Discovery Communications
(DISCA) - Get Report
among many others.
Depending on your view of what the Dow's surge to 12,000 last week and this week's MF Global bankruptcy means for the economy, there may be more partnerships to be bought in coming quarters, especially in businesses more resilient to short term market swings.
-- Written by Antoine Gara in New York
