On May 4, 2015 a Wall Street Journal article discussed the Japanese company Suntory and its 2014 acquisition of Jim Beam. One of the most interesting comments was:
“To help pay back debt amassed in the deal-one of the biggest-ever overseas transactions by a Japanese company-Suntory is trying to double global spirits sales by 2020. Hitting that goal won’t be easy. Suntory will have to outpace industrywide growth in its two biggest markets, the U.S. and Japan, and expand into new markets.”
The acquirer wants to or has to double sales in five years, in a competitive market, and exceed industry trends (a trend where whiskey is on the upswing, and which could change at any time) to cover their debt. My first three thoughts are:
- They paid too much.
- They leveraged the deal too highly.
- Where was the common sense?
This takes me back to what must be about 10 years ago when Seattle supermarket chain and institution Larry’s Market went under. I speculated in this newsletter that the probable cause was that dad had his sons overpay for the business, making the deal over-leveraged, and forcing disaster. My theory was confirmed when a banker friend responded and told me he looked at the deal but couldn’t justify the price and debt.
Let’s step back from the large corporate acquisitions (the Beam deal was $13.6 billion) and even the Private Equity deals (where Mergers & Acquisitions magazine regularly reports groups paying up to 14 times EBITDA). I’d like to concentrate on the traps buyers (and sellers) face in these areas in the small to mid-size buy-sell market.
- As I’ve written a couple times in the last six months, it’s awfully easy for buyers to pay way too much when there’s a (perceived) shortage of companies for sale, easy money, and parties who only think about the dollars today. The bottom line is, if like Suntory, you have to significantly grow the company to cover your debt, well, you paid too much.
- So who lends on deals like this? Nobody in my market! Banks have ratios, guidelines, and regulators. This means it’s non-bank money and I’m sure the interest rates are a lot higher than the 5% +/- rates on deals on small businesses. Is the risk worth it? We’ll find out, won’t we? I was just reading how Al’s Soups needs more capital because they don’t have enough cash (the store made famous by Seinfeld’s “Soup Nazi” episode). Sears was in the headlines because they are running out of cash as their turnaround is failing. It doesn’t always work out as per the young analyst’s spreadsheet.
- The above two paragraphs make my point about where was the common sense. It’s easy to say greed overcame common sense, but these are not stupid people making these deals. So maybe it’s ego, career advancement (nobody ever thinks it will fail and their career is shot), or over-optimism in the desire to impress shareholders.
The above is just financial. As the WSJ points out:
“At the same time, another challenge looms: meshing two vastly different corporate cultures inside its new global liquor subsidiary.”
Time for another “Wow!” In my small business deals the change in culture is usually the employees saying the buyer is a “breath of fresh air.” They welcome the opportunity to be listened too, be creative, and see career advancement.
If the deal seems too good to be true it probably is. Having to double sales in five years to cover debt payments means it pretty risky. Of course, in the above case it’s not the decision-makers personal money, as it is in the small business world.