(NYSE: AAPL) ($835bn) & (NYSE: DIS) ($157bn)
An AAPL Takeover of DIS – Possibility or Just Speculation? / The Tech Giant Requires a New Source of Revenue Growth / The House of Mouse Needs to Strengthen Its Distribution Channels / “Content Assets” the New Mantra in the Media/Tech/Telecom Space / The Edge Examines What a Combination Gains for AAPL and DIS
We at The Edge believe that Apple Inc. (AAPL), the big fish in the market, is rapidly becoming a $1tn company but needs to diversify its revenue stream (iPhone contributed ~64% to total revenue in 9MFY17) to achieve growth in the coming years. Despite APPL’s popularity with consumers, we believe its lack of revenue diversity is likely to remain a challenge to future growth.
The Walt Disney Company (DIS) is in the midst of two opposing forces, positive and negative, as the outlook of the various businesses in its portfolio differs. Read the below 1-page snapshot for our views on the potential gains to be made by the combination of these two iconic companies.
(NYSE: I) (Debt: $15bn)
One of the Leading Fixed Satellite Service Provider with a Market Share of 21% / New Generation HTS Satellites Will Partially Offset Weakness in the Network Services Segment / Ongoing Management Initiatives Move to Balance Sheet Improvement / Gradual Improvement in Leverage and Free Cash Flows Expected / Sizable Contracted Backlog of $8.9bn as of Sept. 2016
The troubles for Intelsat magnified after 2013, when the company started facing pressure on its top line as a result of the increased pricing pressures in network services and declines in the earnings from government customers on account of sequestration. While the decline in revenue from government customers stabilized in 2016, the network services continued to decline due to non-renewals and the renewal of due contracts at lower pricing.
However, The Edge believes that the current weakness in network services will stabilize going forward with the help of high throughput Epic Satellites (HTS), growing demand from aeronautical and marine broadband services and a stable outlook on media and cellular backhaul.
(DAX: MEO GY) (€10bn, $11bn)
Germany-Based Retail Group, METRO AG, to Create Two Separate Listed Entities / Split to End Spat Between German Billionaire (Mr. Kellerhals) and CEO Koch? / Break-Up Likely to Take Place Summer 2017
On March 30, 2016, METRO AG announced its plan for a Spinoff, which will create two pure play companies, listed as the separate entities of the Wholesale & Food Specialist group and the Consumer Electronics group. We expect the separation of the businesses to be a good fit, as they both are focused on two different sectors (Wholesale & Food vs Consumer Electronics), which have little operational overlap and low synergies.
(NYSE: DATA) ($3.2bn)
New CEO’s (Adam Selipsky) Achievements at Amazon Make Him a Good Fit for DATA / Strong Balance Sheet Flexibility, Zero Debt & Cash Comprising ~27% of DATA’s Market Cap / 3-Year Product Road Map Looks Promising / Potential M&A Play Over Longer-Term
In The Edge portfolio, we have companies like Hewlett Packard (HPE) and MetLife (MET), where the CEO’s have been quite effective in bringing changes in the company resulting in significant valuation upside for the investors. HPE and MET has already generated a huge return of 59.4% (vs. SPX return of 8.9%) and 28.8% (vs. SPX return of 10.9%) since its entry into our portfolio on Oct 30, 2015 and Apr 7, 2016, respectively. These companies strengthen our confidence on the management play, which we believe will be the case with DATA.
The Edge sees Tableau Software (DATA) as an undervalued stock with a new CEO (Adam Selipsky) in place, who has a strong track record of growing businesses from scratch (Mr. Selipsky helped AWS grow from a pre-revenue, 10-person startup to a $10bn first-mover in the cloud-computing space).
(LSE: RR/ LN) (£13bn, $18bn)
Company Reported Better-Than-Expected FY15 Results / Strong Company Performance Since Initial Report in February 2016
In our initial report of February 12, 2016, we recommended investors take a long position Rolls-Royce Holdings PLC (LSE: RR/) at the GBp530 levels to leverage on the longer-term value creation opportunities present. We entered the stock into our Model Portfolio on February 15, 2016 at the GBp609 level, and it has since given us a 20% return. The stock is now trading well above our Base Case target price of GBp631.
(Private Company) (Debt: $4bn)
Leading European Vending Operator has Attractive Senior Bonds / Strong Market Position, Diversified Client Base, and Improved Contract Retention Rate All Positives / Struggling EBITDA Margin to Improve Through Ongoing Strategic Initiatives
Bond prices of Selecta’s Senior Secured Notes due 2020 have been volatile over 2015-16 due to declining EBITDA margin and increasing leverage. The prices declined further in May and June 2016 after Selecta’s rating was downgraded by both Moody’s and S&P’s citing the high leverage and weak cash flows.
(TSE: EFN CN) (C$6bn)
EFN to Separate into a Fleet Management Business & Commercial Finance Business / Element Fleet a Leading Fleet Management Company / Strong Business Model With Stable Margins / EFN CEO Steve Hudson to Lead the Spinoff ECN / EFN Was Hudson’s Path Back into the Canadian Leasing Market / Uncertainty Surrounding ECN’s Business Model May Lead to Lower Valuation Post-Listing
With total assets of roughly $25bn, Element Financial Corp. (EFN) is one of North America’s leading fleet management and equipment finance companies. The Spinoff creates a structural separation between two diverse businesses and caters to different sets of investors.