Walking through Deals
and Pitching Investments
Speakers: Devlin Wong, Matthew Leslie, Janice Danier, Tommy Lau
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Discussing Deals - Walking through a Strategic M&A
General Structure of a Strategic M&A Discussion
Transaction Summary
• Basic information: buyer/seller, type of transaction, deal value,
purchase price, financial advisors
• Interesting facts: e.g. first large-scale acquisition by Company X
Company Overviews
Product/service offering, key financials, market position and share,
public or private company
• Focus on company you advised, more detail about recent
performance and business model
Deal Rationale
• Motivation for M&A: e.g. expand product portfolio, geographic
diversification, access new technologies, revenue/cost synergies
• Greater financial evidence to support reasons
Bid Process (Optional)
• Notable events (if any), key buyers/sellers in auction process
• Buy-side vs sell-side considerations, why particular buyer/seller
Financing
Form of consideration: cash vs debt vs equity
Result and Opinion
• Market reaction (if available), key figures of the new entity
• Why deal interested you, was valuation fair, future outlook, risks
• Good understanding of valuation, ‘house’ view on the deal
Potential Follow-Up Questions
•
Synergies: dive deeper into the potential cost and revenue synergies realized
•
Strategic alternatives: evaluate the other strategic alternatives the company could have
AB InBev’s $11bn Sale of Australian Unit to Asahi
• Transaction summary: 19/07/19 AB InBev, the largest global
brewing company, sells its Australian business (Carlton & United
Breweries) to Asahi for an all-cash consideration of $11.3bn
• Lazard advised AB InBev, while Rothschild advised Asahi
• Sale comes after failed IPO of AB InBev’s Asian business
• AB InBev rationale: running out of options to reduce high debt
• Asahi rationale: weak domestic demand, overseas expansion
• Financing: Asahi raised $2bn in equity and took out an additional
loan for an all-cash consideration
• Result: AB InBev’s shares rose 4% in response
• Deal made Asahi 3rd largest brewing company in the world
• Opinion: proves the importance of understanding deal risks
• Valuation seems high: implies EBITDA multiple of 14.9x – high for
the industry, and Asahi expected to have more negotiating power
Other Tips
pursued; justify why other buyers (if any) were eliminated from the bid process
•
Deeper fundamental analysis: if company is public, expect deeper dive into financials
•
Valuation: if you were the financial advisor, how would you go about valuing the firm?
Read through the investor
presentations for deal rationale
Context is key – know market
background and firm history
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Discussing Deals - Walking through LBOs
Key Differences with Discussing Strategic M&A Transactions:
Focus on why target is an ideal LBO Candidate:
PE firms aim to generate an attractive return rather
than realize synergies
Expect more rigorous follow-up questions on
company operations:
PE firms generally aim to “buy-and-build” the
target company
Thorough understanding of the financing
structure (if available)
PE firms utilize highly customized and sophisticated
financing structures
• Characteristics of an Attractive LBO Candidate: strong and predictable cash, low CAPEX, growth and
cost-cutting potential, heavy asset base, low debt
• Common characteristics for take-private targets: undervalued, high turnaround potential, portfolio
breakup of large conglomerates
• Take-private transaction: expect more rigorous questions on their financial statements
• Examples: key revenue and cost drivers, current margins and margin growth potential, evaluation of
CAPEX requirements, current capital structure
• Private takeover: not expected to answer these questions but need to have an educated guess
• Financing structure heavily affects the success of the transaction and buyer’s returns
• Understanding of bank debt (i.e. term loans and revolving credit facilities, bridge loans, syndicated
loans), HY bonds, and mezzanine financing would be helpful
If you have prior LBO modelling / PE fund valuation experience, you may be asked to dive deep into the financial models. In this case, thorough
understanding of LBO concepts are required: a) drivers of IRR, b) exit strategies, c) financing structure, d) LBO return attribution: EV expansion,
repayment of debt, multiple expansion
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Discussing Deals - Walking through an IPO
General Structure of an IPO Discussion
Budweiser $5B IPO Sample – Key Commentary
Transaction Summary
• Basic information: IPO date, deal proceeds, amount of shares
sold, offering price per share
• Interesting facts: e.g. largest deal in Y sector in HK
Company Overview
Product and/or service offering, key financials, end markets,
market position and share
Financing Rationale
Use of proceeds – e.g. pay down debt, acquisition financing
• IPO Rationale: begin deal-making in Asia, pay down parent’s $100B
debt load
Market Timing
Macroeconomic health, equity capital market sentiment, industry
sentiment – always tie back to investor appetite
• Poor equity market sentiment: HK protests + US-China tensions
• Industry premiumization: high Chinese beer valuations
Share Allocation,
Execution, Valuation
• Cornerstone and other notable investors, greenshoe option
• Investor targeting and share allocation; marketing and bookbuilding dynamics
• Greater understanding of valuation (mainly trading Comps)
• Greenshoe option exercised: additional $750M raised
• GIC participated as a cornerstone investor
• Valuation: 18x forward 2020 EV/EBITDA based on $45B EV – slight
discount compared to Chinese market leaders
Result and Opinion
• Was IPO successful – capital raised, oversubscription, aftermarket performance
• Why the IPO interested you, future company outlook, risks
• IPO success: $5B raised, 2.6x oversubscription, up 1.5% at opening
• Business outlook: focus on premium brands, expand into other
Asian economies
Potential Follow-Up Questions:
•
• On 9/30/2019, Budweiser underwent a $5B IPO to list on the
HKSE. 1.67B shares representing 15% of shares outstanding were
sold at HK$27/share. MS and JPM were lead sponsors.
• Largest 2019 IPO in HK, 2nd largest IPO globally at that time
• First attempt to go public failed due to various reasons
Other Tips
Qualitative business questions: company’s growth potential and strategy, key
competitors, industry landscape and trends
•
Markets: market conditions during time of IPO, key geopolitical / economic events
•
Alternative financing methods: evaluation of equity, debt, and loan financing tradeoffs
•
Valuation: key comps and their respective valuation multiples
Read through the Prospectus for
more detailed insights
Holistic thinking is required to
address follow-up questions
Discussing Deals – Finishing Remarks
General Tips
Rule of thumb:
• Prepare 2 deals in detail (preferably one advised by the bank you are interviewing for)
• Prepare 2 other deals on a high-level
Prepare a couple ‘potential deals’– follow the suggested structures to justify why the M&A / IPO makes sense
How to find deals: MergerLinks, MergerSight, Warwick M&A Group reports, Bloomberg/WSJ/FT/Thomson Reuters Deal Section
Understand the current M&A / Capital Markets landscape: to be an expert in a deal, you need to understand the high-level and sector-specific
trends which shape the dynamics of the deal
Think critically from a banker’s perspective: How would you advise your client? What key factors would you take into consideration?
Common Mistakes made by Candidates
1
Disorganized structure
2
Focusing on the wrong aspects
3
Information/statistics overload
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Pitching Investments – Stock Pitch
General Structure of a Stock Pitch
Buy recommendation on Johnson & Johnson (JNJ)
Investment Theses
• One sentence recommendation: buy/ sell, company name,
current price, target price, investment horizon
• Long investment opportunity on Johnson & Johnson (JNJ), at its
current price of 140, targeting a 5% upside over 6-12 months
Company and Industry
Overview
• Company: product/ service offering, geographical coverage,
revenue drivers, market positioning, long-term initiatives
• Industry: secular trends in the industry, competitive landscape
Catalysts
• Industry vs. stock specific catalysts: having both are desirable,
but stock specific catalysts are a must
• Soft vs hard: hard catalysts are ideal but not common
• JNJ: big player in the healthcare sector covering 3 segments:
pharma, medical devices and consumer (~$388B market cap)
• Healthcare: high growth given demographic shifts in the US and
increasing incidents of chronic diseases
Risks
• Upcoming events or trends that might dampen growth (for buy
recommendations) or spur growth (for short recommendations)
• The company’s risk management strategy (if any)
• Hedging alternatives (optional)
Valuation
• Comparison against comparables using appropriate multiples
Conclusion
• Reiterate investment theses and projected upside (in %)
Potential Follow-Up Questions
•
• Integration of AI and big data applications in the healthcare sector
• JNJ’s ongoing clinical trials set to be completed in 6 months
• Expected synergistic benefits from recent acquisition of a
European pharma company
• Risks of clinical trial failures, difficulty in integrating technology
changes to current operation systems
• Valuation seems cheap: EV/ Sales ratio of 4.95x for JNJ is much
lower compared to the peer group’s 5.35x
Other Tips
Company & industry: company’s business model, advantages over competitors, debt
and leverage levels, industry positioning, etc.
•
Target price: how did you arrive at this target price?
•
Valuation: why is this multiple appropriate? Is the potential upside priced in?
•
Risks: what’s the downside in the worst case scenario? Any hedging alternatives?
Start by choosing an industry of
interest / familiarity, then pick a
few names to look into
Structure and relevancy is
perhaps more important than
the actual stock
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Pitching Investments – FICC (Credit/Macro) Trade Ideas
Overview + General Structure
Trades
• Either a pairs/carry trade, derivative strategies or outright
long/short
Thesis & Overview
• Quick Walkthrough: name, trade structure, price, target, stoploss (if any) etc. (Bonus: Sizing, Leverage, Target Clients etc.)
Catalysts
• Highlight mispricing and why the subject will trend towards fair
value (and why now?)
• Macro: macro events or economic data release
• Credit: company-specific events, industry wide events
• Relative Value
Risks
• Maximum downside
• Hedging exposure(s)
• Angle: Risks exist, but effect immaterial/ view is that company
can mitigate such risks due to x reasons) or that risk is “priced
in”
Conclusion
• Reiterate ideas and open for questions
Potential Follow-Up Questions
•
Ronshine China (RONXIN) Fundamental Long Trade
• Attractive deleveraging story: -28.3% YoY net gearing ratio
change (3rd largest decrease among all China property HY
names); ~80% is well below industry average of 103%
• Solid debt servicing capabilities: Debt/EBITDA 11.16x -> 6.08x
YoY, Current ratio 1.4x
• Changes reflected in uptick in credit rating: Moody’s upgraded
from B2 to B1 positive YoY
• Higher coupon range (6.95% - 10.5%) relative to single-B peers
coupled with a safer credit profile
• Industry risks due to tightening regulatory oversight: NDRC/PBoC
directive of “Housing for living, not speculating”, but this favors
RONXIN since industry credit profiles will diverge yet RONXIN falls
on the safer side of credit
• In summary: Commitment to deleveraging, robust debt servicing,
improving credit profile & high coupon -> RONXIN looks attractive
Other Tips
Trade logic: How are you certain this catalyst will materialize? What happens to the
trade if X event does not happen?
•
Timing: Why do this trade now? Why not after X event happens?
•
Technicals: What is [metric] and why is it important?
•
Execution: What’s your target? Stop-gain/Stop-loss?
Don’t just reel off numbers, look
for “organic” catalysts and
structure your view accordingly
Can start off by reading
“Opinions”, subscribe to
newsletters, websites
Pitching Investments – Finishing Remarks
Common Mistakes made by Candidates
1
Taking too long throughout the overall pitch ( >3 mins)
2
Not stating the investment thesis clearly
3
Blurting out all the information
General Tips
Rule of thumb:
• Prepare 3 stock pitches at the very minimum, across at
least 2 sectors
• Combination of buys and sells
Be smart about what you pitch: avoid big names, pitch Asian
stocks if you’re interviewing for Asia, UK/EU stocks for
London, etc.
Stick with the basics: Don’t pitch overly complicated
derivative products if you can’t handle the follow up
questions
Be reasonable with your recommendation: don’t say that
you’re expecting a 100% upside, you’ll get challenged
Practice your delivery: choose your words wisely, don’t
memorize a script word by word