May 2013
The month of July continued to raise concerns of a slower and more cautious economic recovery due in large part to disappointing economic data and a troubling report from Standard & Poor’s, which estimated that the U.S. had a one-in-five chance of returning to a recessionary state.
 
In late July, the Commerce Department stated that the U.S. economy grew at an annualized rate of 1.5% in Q2 2012, down from a revised estimate of 2% in Q1 2012, as it continued into the slowest post-recession recovery since 1980-1981. Economic growth slowed down as Americans cut back on spending due in part to continued inflation, which outpaced income growth, and a jobs situation that has failed to significantly improve. Joseph Trevisani, Chief Market Strategist at Worldwide Markets, stated that “annualized GDP growth at 1.5 percent cannot begin to mend the unemployment picture.”
 
In support of Trevisani’s statement, the unemployment rate rose to 8.3% in July, up from 8.2% in the previous month. This increase occurred despite the economy adding 163,000 new jobs in July, beating forecasts of 100,000 new jobs. The monthly increase of 163,000 still fell short of the 225,000 monthly average achieved during Q1 2012. Additionally, the Labor Department reported in late July that initial jobless claims fell by 35,000 to 353,000 in the week ending July 21st. Economists surveyed by Thomson Reuters had originally projected that initial jobless claims would fall to 380,000. John Canally, an economist for LPL Financial, states that “based on the initial jobless claims data and some of the consumer sentiment data that we’ve already had for July, it doesn’t seem like there was substantial improvement in the labor market in July, so I think this just pushes the Fed one step closer to doing more quantitative easing.”
 
Furthermore, the Commerce Department released a report at the end of July stating that inflation-adjusted consumer spending levels fell in June by 0.1%, dropping for the first time in nearly a year. Consumer spending, which accounts for approximately 70% of the economy, was initially forecasted to rise by 0.1%. Meanwhile, personal income levels rose by 0.5% in June, beating the forecast of 0.4%. However, a struggling job market caused many Americans to save their hard-earned cash, increasing the personal savings rate to 4.4%, the highest in a year.
 
In late June, Standard & Poor’s also released a statement in which it estimated that the United States faces a 20% chance of returning into a recession, even though a slow recovery remains as the baseline forecast. The threat of years of stagnation, as Japan has seen, is also a possibility for the world’s largest economy. Beth Ann Bovino, a senior S&P economist, states that “there are differences between Japan’s situation and the current one in the U.S., but the problems are similar.”
 
However, some slightly positive economic reports offered a silver lining in the midst of other disappointing economic data. For example, the S&P/Case Shiller Composite Index of 20 metropolitan areas (which is published with a two month lag) gained 2.2% in May, marking the second consecutive month of gains. Chris Low, chief economist at FTN Financial states that “the housing recovery in this cycle has been painfully slow to develop, but it is unmistakably here.” However, while this trend is certainly positive, David Blitzer, chairman of the index committee at S&P Dow Jones Indices, warns that “we need to remember that spring and early summer are seasonally strong buying months so this trend must continue throughout the summer and into the fall.” The Conference Board also released a report in July on the U.S. Consumer Confidence Index, which jumped to 65.9, up from 62.7 in the previous month. The index still remains below 90 – a level that indicates a strong and healthy economy – but nevertheless stands well above the 25.3 level seen in February 2009, when the recession officially ended. However, Lynn Franco, director of The Conference Board Consumer Research Center, also warns that “while consumers expressed greater optimism about short-term business and employment prospects, they have grown more pessimistic about their earnings. Given the current economic environment – in particular the weak labor market – consumer confidence is not likely to gain any significant momentum in the coming months.”
 
The Dow Jones Industrial Average (DJIA) and S&P 500 Index (S&P 500), while well above their 52-week lows of 10,404.49 and 1,074.77, respectively, remained highly volatile during the month of July. Initial declines in early July were eventually counteracted during the middle of the month, due in part to reports of strong economic growth in China. However, a succession of poor corporate earnings reports, weak economic data, and continued fears over the crisis in Europe (particularly regarding Spain and Greece) caused another downward slide in late-July. This trend was again reversed as news that the European Central Bank would keep the euro intact resulted in the DJIA and S&P 500 jumping above 13,000 and 1,380, respectively, levels that have not been seen since early May 2012.
 
As of July 31st, the DJIA closed at 13,008.75 as it recovered from its more recent June 4th low of 12,101.46. However, the index still remains off from its 52-week high of 13,338.66 (May 1st, 2012), its highest point since May 2008. The S&P 500 closed at 1,379.32 as of July 31st, up from its recent June 1st low of 1,278.04, but still remained off from its 52-week high of 1,422.38 (April 2nd, 2012), also its highest point since May 2008.  
 
 
M&A transaction volumes have been fairly flat throughout the first half of the year. However, according to Thomson Reuters, overall transaction values for U.S. targeted mergers and acquisitions in the first half of 2012 fell to $299 billion, down 44% from year-to-date 2011, marking the slowest first half in the U.S. since 2003. This decline is the result of fewer transactions, combined with fewer large transactions. Joseph Frumkin, managing partner of Sullivan & Cromwell’s mergers and acquisitions group states that “the problem with the U.S. M&A [market] is [that] people […] don’t feel sufficiently confident about the future global economic direction to have a high desire to do deals.”
 
 
 
Cross-border transactions rebounded slightly in June, increasing nearly 8.3% from the previous month. According to a recent report by the S&P Capital IQ Global Markets Intelligence group, foreign buyers’ appetite for U.S. businesses rose in Q2 2012 compared to Q2 2011, driven in part by increased demand for targets within the technology and consumer discretionary (segment of the consumer products sector) sectors. Furthermore, the typical cross-border deal involving a U.S. target was priced at approximately 13.5x EBITDA.
 
 
Leveraged buyouts also decreased in June, down over 20% from the prior month. Additionally, according to data compiled by Standard & Poor’s Capital IQ Leveraged Commentary & Data, LBO multiples fell below 2010 levels, as U.S. buyout firms paid an average of 8.2x EBITDA, compared to 8.5x EBITDA back in 2010. However, the large amount of dry powder in many private equity funds has resulted in significant competition for good deals, leading to a larger number of firms moving downstream to sub-$5 million EBITDA target companies, where there is less competition for the deal.
 
 
Industry Spotlight – Consumer Products
 
Global Licenses and Certain Assets for Ed Hardy, True Religion, and BCBGMAXAZRIA acquired by Elizabeth Arden, Inc. (NYSE: RDEN)
 
Elizabeth Arden, Inc. (NasdaqGS: RDEN) acquired global licenses and certain related assets for Ed Hardy, True Religion, and BCBGMAXAZRIA from New Wave Fragrances, LLC on May 31, 2012. Elizabeth Arden, Inc. expects the transaction to be accretive to earnings in fiscal year 2013 and a minimal impact to its fiscal year 2012 financial results ending June 30, 2012. The financial terms of this transaction were not disclosed.
 
The Miramar, Florida-based Elizabeth Arden, Inc. engages in the manufacture, distribution, marketing, and sale of fragrances, skin care, and cosmetic products to retailers and other outlets worldwide. The transaction is expected to add to Elizabeth Arden’s extensive portfolio of prestige beauty brands, which includes: Elizabeth Arden skincare, color, and fragrance products; Prevage anti-aging formulas; celebrity fragrance brands of Britney Spears, Elizabeth Taylor, Mariah Carey, Taylor Swift, and Usher; and designer fragrance brands of Juicy Couture, Alfred Sung, Kate Spade, Lucky Brand, Geoffrey Beene, Halston, John Varvatos, and Rocawear.
 
Pfizer Nutrition acquired by Nestle S.A. (SWX: NESN)
 
Nestle S.A. (SWX: NESN) agreed to acquire Pfizer Nutrition from Pfizer, Inc. (NYSE: PFE) for $11.9 billion in cash on April 23, 2012. Pfizer Nutrition had revenues of approximately $2.1 billion and EBITDA of $500 million in 2011. The transaction will be accretive to the Nestle model both for growth and margins, as well as earnings per share in the first full year. The transaction value was approximately 5.6x revenue and 23.7x EBITDA.
 
Pfizer Nutrition, Inc. manufactures and supplies nutritional products for infants and young children, and pregnant and lactating mothers in the United States and internationally. The company also manufactures special and hospital-based formulas for the special nutritional needs market. Pfizer Nutrition, Inc. operates as a subsidiary of Pfizer, Inc. The Swiss-based Nestle S.A. provides nutrition, health, and wellness products worldwide. The company offers baby foods, bottled water, cereals, chocolate and confectionary products, coffees, beverages, culinary, chilled, and frozen foods, and a variety of other products. Kurt Schmidt, President and CEO of Nestle Nutrition, believes that this acquisition will position Nestle to benefit from the growing baby food business in China. New Chinese mothers purchased $6 billion in baby food in 2011, a number that is expected to double by 2016 due to an increasing number of births and a greater demand for higher quality baby foods, according to Citigroup analysts.    
 
Solo Cup Co. acquired by Dart Container Corporation
 
Dart Container Corporation signed a definitive agreement to acquire Solo Cup Co. on March 21, 2012. Dart Container will pay $315 million and will assume $700 million in debt. The deal is not subject to any financing conditions and is expected to close by the third quarter of 2012. The transaction value was approximately 0.6x revenue and 9.0x EBITDA.
 
Solo Cup Co. produces and markets single-use products used to serve food and beverages in homes, quick-service restaurants, and other foodservice settings in the United States and internationally. The company offers its products under the Solo, Jack Frost, Trophy, Bare by Solo, and Creative Carryouts brand names. Solo Cup Co. was founded in 1911 and is based in Lake Forest, Illinois. Dart Container Corporation manufactures and sells single-use products for the foodservice, retail/consumer, and food packaging industries. The Mason, Michigan-based company offers foam cups, plates, clam shell trays, and school lunch trays. Robert Dart, CEO of Dart Container Corporation, states that “our acquisition of Solo will allow us to provide even greater value to our customers in the future. It will enable customers to purchase a wider range of products, made from a greater variety of materials with varying functional and environmental attributes – all from a single vendor.”
 
 
Founded in 1987, Mirus Capital Advisors is a middle-market investment bank that specializes in merger advisory, capital-raising services, fairness opinions and valuations to entrepreneurs, corporations and professional investors. By combining a proven process, industry and transactional expertise, and personalized service, Mirus has completed hundreds of transactions for both public and private companies.
 
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Sources: CapitalIQ, Bloomberg, Reuters, CNN, The New York Times, The Wall Street Journal, Bureau of Labor Statistics, and Mirus analysis. Copyright 2012, Mirus Capital Advisors, Inc. All rights reserved. Mirus Capital Advisors does not assume any liability for errors or omissions.
 
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