THL’s Grant Webster on why his big merger is one of the good ones

Mergers and acquisitions are a fundamental part of the investing landscape, key ingredients to some great investment successes but also to some of the most devastating shareholder wealth destruction we’ve ever seen.

In the latest episode of Stocks Neat, Gareth and I talk all things M&A. We discuss the best and worst deals we have seen, as well as what to look out for when assessing whether a merger or acquisition will have long-term success.

As a first for Stocks Neat, we have a guest interview. Grant Webster, CEO of Tourism Holdings New Zealand, is in the middle of a merger right now, with Australia’s Apollo Tourism and Leisure. Grant gives some fantastic insights from the deal, plus shares what his favourite whiskey is… that Gareth and I decide not to taste. Instead we go for “Monkey Shoulder”, which is a blend from Speyside, Scotland.

Transcript

Disclaimer:
Just a quick reminder, this podcast may contain general advice, but it doesn’t take into account your personal circumstances, needs, or objectives. The scenarios and stocks mentioned in this podcast are for illustrative purposes only, and do not constitute a recommendation to buy, hold, or sell any financial products. Read the relevant PDS, assess whether that information is appropriate for you, and consider speaking to a financial advisor before making investment decisions. Past performance is no indicator of future performance.

Steve Johnson:

Mergers and acquisitions, they’re a fundamental part of the investing landscape. Key ingredients to some great investment successes and some of the most devastating shareholder wealth destruction we’ve seen. Today, we’re going to draw on all of our experience to give you a guide to work out which ones are good, which ones are bad. And to help us, we’ll be bringing in a special guest working on a merger of his own at the moment.

All of that to come. Welcome to episode 12 of Stocks Neat, and as per usual, I’m joined by portfolio manager of the Forager International Shares Fund, Gareth Brown. Welcome, Gareth. I turned up to this podcast needing a whiskey, as some people will know, we sent out an email. I’ve taken on both the CEO and CIO roles at Forager, back to what I was doing six or seven years ago, and I’ve just had my 360-degree feedback come back from a leadership coach that we’ve employed to help me, and that deserved a whiskey at the end of all of that. And then it’s just taken us a half hour to get this podcast going, so I’m guessing you need one too.

Gareth Brown:

Yeah. Definitely. Hi Steve. Hi everyone. Thanks for having us.

Steve Johnson:

Welcome. You are about to tell us what we’re drinking. I just wanted to quickly pronounce something from our last podcast. We were picked up on the pronunciation of what we were calling Oban, pronounced O-Ben we’re both led to understand. So everyone remember that if you want to sound sophisticated. What have we got today, Gareth?

Gareth Brown:

And by the way, I’ve been thinking about that whiskey quite a bit since I really think that gets the balance right between peatiness and smoothness and I’m looking forward to buying a bottle myself. Today, we’re drinking a Monkey Shoulder, which is a blended whiskey. So what we have mostly been drinking is single malt. This is a whiskey that’s come from multiple distilleries all in the Speyside region. So it’s actually made by William Grant & Sons, which is the largest independent distillery in the world, and the third largest maker of whiskey after Diageo and Pernod Ricard, isn’t it? And I’m expecting this to be very smooth. It’s Speyside, which screams smooth, and it’s a blend as well, so it’s 40% alcohol. Yeah, should be good. Easy drinking, I think.

Steve Johnson:

I’ve already started, but I’ll save my feedback for later. Look, we’re going to really dig into some details today. We’ve had four takeover offers from companies for portfolio holdings in our fund. And we might do a future podcast on how to think about it when you get an offer from someone else. But this is about when you’re invested in a company that goes and does an acquisition or a merger of its own. We’ve had some successes and more than our fair share of problems from this space. But let’s start on the good side, Gareth. What’s one of the best corporate deals you’ve seen in your life?

Gareth Brown:

This is very niche and very local. Might even sting a bit for you. Do you remember the Timber Corp bankruptcy back in 2008, round about then?

Steve Johnson:

Never heard of it. Don’t know what you’re talking about.

Gareth Brown:

So Timber Corp used to sell agricultural managed investment schemes. This is a chance for investors to invest money and get a bigger upfront tax deduction. It’s a uniquely Australian product. Timber Corp used to sell various schemes including timber, almonds, olives, and I think even maybe some horticultural fruits at one stage. But anyhow, this is about the olives part of the story. So there’s a company, it was called Boundary Bend. It has since been relabeled Cobram Estates. You may recognize the label from olive oil purchases. That company was the contract farmer for these two giant olive groves in Victoria. One in Central Victoria, one in Northwest Victoria. And they were managing them on behalf of Timber Corp. These groves had cost about $250 million to develop, so that includes the land and the equipment and the very expensive job of planting the estate out. And Boundary Bend was actually the company that did all that and they got paid to do that.

Anyhow, fast forward a few years, Timber Corp stretched itself in too many areas, went into bankruptcy, and these assets went up for sale. Now, Boundary Bend, the assets I said about $250 million, about another 50 million bucks worth of water rights, so $300 million of assets. Boundary Bend was the only logical bidder for it because it knew the assets. It was very hard for someone else to come in and actually run them. They bid $55 million, they got them, and at the same day, they sold the water rights for $50 million. So they bought $250 million worth of non-water assets and it cost them about $5 million. I may be slightly wrong on some of the numbers there, but it was basically 2 cents on the dollar for some really world class agricultural assets. That’s my kind of acquisition.

Steve Johnson:

Yeah, that’s a common theme, Gareth, amongst great deals that you get a lot of cash back in a hurry. We’ve seen some pretty crazy ones here in Australia, but my favorite of the past few years is the sale by BHP and Anglo-American of their Colombian coal asset. It’s a Cerrejón coal mine. According to the newspaper, the total purchase price of that asset was $588 million. By the time the deal had closed, which was a year later because it had a whole heap of regulatory approvals that were required, there was already $300 million of cash in the bank. And over the subsequent 12 months, this asset generated $4 billion of cash flow on what was a net something like $200 million purchase price, largely due to these companies trying to rid themselves of what they thought were-

Gareth Brown:

ESG problems.

Steve Johnson:

… non-ESG assets in these coal mining assets. So they’re a couple of sensational deals.

Gareth Brown:

If we’ve got time, we’ve both cheated there and gone for asset sales per se, rather than, I guess, mergers of companies because they were so cheap. I think two that really stand out to mind of actual, I guess, acquisitions of companies is Google’s purchase of YouTube back in 2006 for $1.6 billion and Facebook’s purchase of Instagram in 2012 for $1 billion. Now I think an important lesson from this is that those assets went on to become a lot more valuable under the new owners than they would’ve been under the old owners. So there was a revenue synergy or however you want to call it. It’s an important thing, but that they were both deals that killed off potential competitors and brought in significant new revenue streams to their existing business.

Steve Johnson:

Yeah. Well let’s jump into a bit of theory about something that you’ve talked about there, which is revenue synergies, taking out competition. But let’s explain the M&A landscape here. What is it and why do companies do it? We’ve talked about a couple of assets, you’ve talked about buying other companies. It runs the gamut from big mergers where you put two roughly equivalent size companies and we’re going to talk to someone who’s going through one of those, not perfectly equal but fairly big, a scale bolt on where you’re adding smaller businesses to a larger company where you get usually fairly significant cost synergies out of that. So you take a decent size mom and dad operation, you plug it into a larger corporate and it’s far more profitable in that. You’ve talked about revenue there. What are some other angles on the revenue front that companies would buy another company for?

Gareth Brown:

There’s various ways of acquiring revenue. You might be buying a customer list. You might be buying new geographies where you are not present. You might be buying new products to sell that you can tuck into what you are already selling. You might be buying some specific piece of knowhow or intellectual property. So the revenue side there, you put those all under that revenue piece. There’s a lot of different areas. Another area is that vertical acquisition. So I’m buying a supplier, a supplier to me because I want them to be part of the whole enterprise or I’m buying a distributor. I sell my product in Europe via a distributor. I’m buying them and bringing them into the fold. I would call that a vertical acquisition.

Steve Johnson:

Now they’re all reasons for doing mergers and acquisitions that you are going to read in the company’s PR explanation of why they’re doing what they’re doing, but I’ve got two more on the list that I think are equally important that we will come to later when we talk about things that go wrong. But a lot of the time consciously or subconsciously, there’s ego at play. People like running bigger businesses and there’s executive pay package and prestige. You run a billion dollar company, you feel more important and you generally get paid more than running a 400 million or 500 million company. So lots of those factors come into play and some people’s skillset is, I’ve been to management school, I’ve done an MBA and what they teach me is how to do M&A. And I think sometimes it’s clear that that is the person’s skillset that’s running the business and not necessarily a good or a bad reason for doing deals, but you know that you’re going to get them with some of those people. It can be any combination of those factors above really is the reason we see a lot of it in listed land. So let’s bring in a guest for today. Grant Webster from Tourism Holdings. Grant’s going through his own real world example and one that we as shareholders in his business certainly hope is a success.

Our special guest today is Grant Webster from Tourism Holdings. Grant went to university in Wellington, New Zealand and I do need to separate that because I grew up in Wellington, New South Wales and they always think I’m a Kiwi when they hear me talking overseas. Following that, roles with Woolworths in New Zealand and casino operator Sky City. But he’s been with campervan operator Tourism Holdings for the 17 years now and CEO of that business for the past 14 of those. He’s done quite a bit of M&A over that period and spent the past 12 months working on a big merger with Australia’s Apollo Tourism and Leisure. Hi and welcome, Grant. Thanks for joining us.

Grant Webster:

Yeah, no good to be here. Good to be here.

Steve Johnson:

You’ve recently upgraded your company’s profit expectations for the current year. Apollo’s done the same in a similar space and there’s probably more visibility in your business the most due to people booking their trips well in advance. How are you seeing the travel recovery in the various jurisdictions that your business operates in?

Grant Webster:

Yeah, well so with everything going on in the world, compared to the last nearly three years, it’s actually quite good to be in tourism right at the moment. So I mean, we were on the floor, right? We were an international tourism business with international borders closed. So relative to the last couple of years, obviously things are looking really good, but everyone wants to know how things are compared to pre-COVID. So basically it is slightly different by country. The US opened early or first really, so that’s recovered quicker. And then Australia and then New Zealand. And New Zealand’s definitely been the laggard without a doubt. In general, what we would say across the industry of tourism but also within our RV industry, is things are sitting around 60% of pre-COVID is generally the number. You’d look at airline capacity around the world, that’s expected this summer to be around 70% international of pre-COVID levels. Revenue’s slightly higher than that because of the way prices are going, but that’s roughly where things are sitting.

Steve Johnson:

And I mean, just anecdotally, price and capacity is a big problem at the moment for the airlines and for you as well. The business shrank quite a bit in terms of fleet through those very difficult years, and I’m hearing people talking about price being an issue in terms of them booking holidays. Does that cause you some concern as you look into 2023 that you’re potentially losing customers here that would love to take a holiday in a campervan?

Grant Webster:

Look, we look at 2023, especially the 23/24 summer season, cautiously in terms of price and what people may do. But right at the moment, there actually is an equal case to be optimistic. And the reason for that is you see three groups at the bottom end. There are definitely those that because of the price and because of the cost of living pressures are just out of the market and they’re not doing long haul travel. But above that, right at the top is those that fall into those cliches now of revenge travelers that pent up demand, that really they want to get out and about regardless of price. And then the next lot down are those that are going, “I’m not sure that I want to be traveling at those prices. I’ll wait to see if they come down.”

They’re not coming down at the moment. If you look at the forwards right through calendar ’23, and this is in the industry, hotels, airlines, broader accommodation, transport, and they’re going, “Well, I don’t want to wait any longer so I’ll travel as well.” So there’s probably actually more cause for optimism. What we also see historically post-GFC, SARS events and so forth, is when pricing does move like this, people tend to have a particular budget. “I’ve got 5,000 pounds, I’ve got 6,000 euros,” whatever it is that you’ve got. And they adjust the travel accordingly so that we are traveling for 21 days, they’ll travel for 18, they were going to a five star XYZ, they’ll go to a three and a half star. So people still want to travel and they’ll make those tradeoffs when the pricing’s out of whack like that. So overall, I think we can be reasonably optimistic but have to have that level of caution.

Steve Johnson:

Yeah, it is great to see the business performing well after what’s been a few very difficult years and I think you’ve done an outstanding job of managing it through those difficult times. But I think especially so, the past 12 months, you announced a merger with Apollo Tourism and Leisure, I think that was December last year. There’ve been issues with the NZ Competition Commission, with the Australian Competition Commission. I’m sure that’s been a pretty big distraction. How did you keep the business on track through all of that going on in the background?

Grant Webster:

It’s funny, eh? Because executives are generally pretty ambitious. They’re generally pretty smart people and they love a shiny new thing. So they definitely hear about the merger and know about the merger and they want to know more. So look, we learned some time ago in this business that we need to be really honest with people about that and just say, “I know you like the shiny new thing, but you’re going to have to just focus on BAU, business as usual in terms of what their responsibilities are and what our goals are.” So that’s the key thing right at the outset, making that clear. So partly because of some of those competition rules that you were talking about, we kept the deal team really small. So there was really only three up to four people that were really doing the hard yakka through the last 12 months.

So we managed to keep that as part of our day, part of our evening and most of our weekend job, while we could continue to focus on the business. And we’ve got a really good executive team, C-level team if you want to call it that, that really have stepped up as well. So they’ve filled into the gaps. More broadly, probably what I’d say is these situations do force you to focus on what’s really important and some of that’s at the detail level of knowing what your R&M spend is, what your labour costs are, what’s happening with yields. And some of it’s at that macro level, but there are some, I guess, what I call swirl in the middle of the business where you’ve got particular obligations, reporting requirements and so forth that you really just let the business run and focus on that while you’re doing these bigger things. But I’m pretty pleased to be honest with how the business has achieved an awful lot over and above the merger work in the last 12 months.

Steve Johnson:

And if I look at the scheme documents, a lot of the benefits of the deal here are around cost efficiencies from putting these two businesses together. Has there been much internal concern about the impact on people’s jobs? And I guess how do you manage that element of it, especially given this one has been quite prolonged in terms of dragging it out?

Grant Webster:

Yeah, so it’s probably a bit of a trap that CEOs can fall into and go, “No, we’ve got it all under control, it’s fine.” I think you’ve got to be wary if you’re thinking that. The reality is that people are going to be nervous regardless of what you say and regardless of what you actually are doing at the outset. So acknowledging that, there are a couple of things that we’ve done. We’ve reinforced the fact that the labour costs are only one of several buckets of synergies. And whilst dollars can be meaningful, the percentage of people across the organisation is really, really small. It’s low single digit to achieve those numbers. And so what it actually means is that we’ve used the words, and really believe in this and we’ve got a board that supported this, that we’re saying there are opportunities and options.

And when you look at the degree of general change that exists in all businesses at the moment and people coming and going, there will be new opportunities for people that might have been a direct role synergy, but they’ll have something else that they can look at. So that’s the approach we’re taking at the outset. And indeed because of that approach, a vast number of the synergy roles or synergies have already been achieved before we’ve even completed the transaction. So that’s really the approach, being really upfront with people about that, being very clear about it and obviously just supporting and keeping the channels of communication open.

Steve Johnson:

I guess the combined business, we talked about the cycle earlier as well, but the industry is recovering so quickly that there probably is, within the savings, demand for staff here as the business scales back up as well.

Grant Webster:

Look, on a frontline basis, there are no synergies on a frontline basis. We need more people. So yeah, absolutely right. Absolutely right. The frontline crews have got nothing to be concerned about. We need every single person we have on a collected basis and more.

Steve Johnson:

Now this particular transaction is set to close in the very near future, and then I guess the real work begins. I’ve seen a lot of transactions in my lifetime and they all look good in the PowerPoint presentation and they all look good in an Excel spreadsheet, and more often than not, they don’t deliver the benefits or something goes wrong down the track. What are the keys to success here after this deal is closed in, I think it’s the 1st of December, is it?

Grant Webster:

Yeah, you’ve got timing bang on. So look, I think there’s one fundamental that’s in those PowerPoints and excels and that is it’s important that you don’t over promise and to get the deal across if it’s looking marginal in any way or even with the synergies that we’re talking about. We haven’t created any synergy that’s been like, “Oh, there’s a bigger entity, we’ll be able to put more pressure on suppliers and get a better price than we already do today. Surely that’ll come.” Our synergies are, “Hey look, if there’s a tyer price of X and tyer price of Y, one’s different, right. Well, that’s a synergy.” So very much what’s deliverable, what’s within your area of control. So I think that’s important. From there, it really is don’t overcomplicate things, be aware of what needs to stay for the businesses that you’re acquiring. That’s really important.

And don’t get arrogant thinking that you know everything. It’s really interesting, I think we’ve got a pretty open and positive culture in THL, and we’ve talked about this as a merger, but it’s easy for people to fall into the trap of going, “Ah, look, we’ll need to bring them over onto our way of thinking, onto our system. They’ll need to be taught how to do X.” Well, the reality is this is just such an awesome opportunity to actually get the best of both and to really challenge what we’re doing in both companies. So I think that’s key. You can’t go into it in any arrogant way. One thing from history that I would say as well is being clear with the likes of the board about what it is that you’re buying.

If I go back to one particular acquisition that we bought that had been two founding partners, they had run the business very, very much themselves in a very low cost effective way and did a number of they met all their legal obligations, but they were really tight and lean, were really clear with the board when we bought that business that if we layered on the corporateness that comes from a public listed company too quickly, too fast, we would kill that business. And we got really good acknowledgement about what that plan was to transition over time. So being clear about that, not going too fast with those things, I think, is really critical.

Steve Johnson:

And if you take a step back from this particular transaction and look at M&A is a concept in general, what you’ve done yourself in this business and what you’ve seen other companies do, what are the biggest mistakes you see people and companies make when they’re doing this type of transaction or even contemplating it before doing it?

Grant Webster:

Yeah. Look, I probably covered one of the biggest ones that you see and that’s just the egging up the expectations in order to meet an internal hurdle, in order to impress shareholders or whatever the rationale is. But doing something for emotional reasons or driving the numbers to a degree because you get enthusiastic, that’s, I think, issue number one. Issue number two that we’ve seen in other industries and we’ve tried to learn from very, very explicitly is when you’re going overseas, when you’re a global company and entering new jurisdictions. So when we first entered the US, we actually commissioned a piece of work by an investment bank to look at all the New Zealand transactions that had gone into both Australia and the US over the preceding 15 years. Note the ones that had succeeded, the ones that failed, and actually tried to identify the key reasons for that. And we explicitly did two or three things quite differently, like what I was saying about not overloading costs and so forth, to mitigate those issues.

Steve Johnson:

All the Australian companies say Australia’s 25 million and America’s 300 million and therefore we can do 10 times the business in America that we do in Australia. So I’m sure New Zealand companies can multiply that by another factor of 3.

Grant Webster:

Yeah, yeah, exactly. Exactly. And just being really aware of that, and those cultural differences are huge. They really are. And understanding in certain cultures around the world, the basic one that we know in business, but being really clear about it, that sometimes when somebody says yes, it means yes the way it does in New Zealand, sometimes it means yes, but it’s actually a half a yes as it is in some other countries, and in some countries, yes actually means no. And really understanding those cultural differences. When we first went into the US, those vendors that I was talking about, they were actually Swiss Germans. They were Swiss Germans that had a business that only had one American in it. So you’ve got a New Zealand company dealing with Swiss Germans in the US, you’ve got quite a dynamic to try and understand and I’m picking that as key. The other small thing that I’d add to that actually, and this is a bit embarrassing, but most of the rest of the world think because we’re so small that we’re stupid. So they will try and take advantage of a New Zealand company and do things that you just go, “Really?” But that tends to be what happens more often than not.

Steve Johnson:

That can be an advantage if they underestimate you with some of these things.

Grant Webster:

Yeah.

Steve Johnson:

Okay. So the most important question of our podcast, this is a whiskey and investing podcast. So do you enjoy a whiskey? And if so, what’s your favorite?

Grant Webster:

Yeah. I’ve been trying to be a bit healthy, so I haven’t had a whiskey for a while, but I’ve got a collection that’s ended up in the office from different whiskeys that people have given me. So I’ve got an English whiskey here that’s the Founders Private Cellar. I’m looking forward to having that at some point somewhere special. But to be honest, the one that’s really attracted me over the last few years is the Oamaruvian from the New Zealand Whiskey Company. And I’ve got a couple of mates in the US that are big whiskey connoisseurs and they really, really rate it as something unique and different. So that double barrel with the second barrel being in the French red wine barrels is something really quite different, so I really like that. I don’t know if you’ve tried that one.

Steve Johnson:

We have not, but it sounds like something that would go very well on our podcast. And we may even try and source a bottle before we record the rest of this and put it all together. So we might make it our whiskey of the month if we can. If not, we’ll put it on the list for a future episode. But that sounds fantastic.

Grant Webster:

Brilliant, brilliant.

Steve Johnson:

Okay, great. Grant, that’s been really, really helpful. We appreciate your time and best of luck with things over the next couple of months. Maybe you can enjoy a whiskey on the 1st of December as celebration of putting this deal together and then I guess the hard work begins.

Grant Webster:

Yeah, 100%. Good stuff. Thank you for your time.

Steve Johnson:

As we’ve just heard, it’s not easy, Gareth. We’ve talked about the best deal you have seen. What’s been the worst of your investing career?

Gareth Brown:

I’ve seen a lot of terrible deals. I’m going to go with one that was a little bit personal for me, which is Roc Oil. It was a explorer and producer of oil in Australia in the early 2000s. Their acquisition of Anzon Australia. Anzon owned some producing assets in the Bass Strait. And I was fairly close to the situation and it was a shocker and it was one that we identified in advance of the actual deal being signed that it was going to be a bad deal. It had all the hallmarks of a panic acquisition. This was a board that had made the decision that they needed more near term production and less jam tomorrow, if that makes sense. And they ended up issuing, I think it was roughly 50% of the company, they doubled the shares on issue for some producing assets that I think it was three or four years later that were written down to 0.00. They just gave away the farm because they were concerned about their production profile.

Steve Johnson:

Look, that’s a really, really common red flag for me. We’re going to come to a few of the red flags later, but when the rationale is not because we think this is a great deal, but because we’ve got a problem in our core business, I think it’s a huge issue. You’re seeing it at the moment in the oil and gas space. You’ve got quite a difference between Exxon, a US company, and what you’re seeing from BP and Shell in Europe where they are actively going out and buying green energy assets at quite extraordinary prices with the cash flow that’s coming from their fossil fuel businesses.

Gareth Brown:

They’re doing it valuation blind almost.

Steve Johnson:

Yeah. And I don’t think there’s a lot of overlap in terms of the skill sets that you need to build a complex oil producing asset versus a wind farm or a solar farm. And there’s absolutely nothing wrong with them saying, “This asset is going to be worthless in 20 years’ time, but it’s our job to optimise the value of that, return the cash to shareholders, and you as shareholders can decide what you’re going to do with the money.” So we see that a lot. We’ve got a problem here, we need to fix it by going and buying something.

Gareth Brown:

Yeah. I mean, arguably, the absolute poster child for worst deal ever is AOL Time Warner. And I would argue that that was from a similar position of fear on the part of Time Warner. They saw the future getting away from them and they wanted a piece of it.

Steve Johnson:

Yeah, some fear of not being cool, I think, as much as your actual business being redundant in that case, although there was some fear of that. So I think that’s one. And for me, the other one that I’m a massive skeptic of is the roll up model when it’s at a rate of speed that makes you think price is not that important to them. We’ve actually had a number of issues in our international fund over the past 18 months where the business would actually have been fine if they hadn’t done an acquisition and they’ve gone out and bought other things and claimed all of these benefits that have caused some problems. Whole Earth is one in our portfolio. What is now Enero, which is the old Photon Group, is probably one of the biggest examples on the ASX. Fortunately, some of the businesses that they have bought have worked out to be worth something there and we’ve made a lot of money out of that stock over the past five or six years. But 2008 through 2010, that was a, “We’re going to buy every marketing agency that we can find.” They were doing five to 10 acquisitions a year and paying substantial amounts of money for these businesses. And the rationale is often, “Well, we’re trading at a multiple of X and they’re buying these companies at a multiple of Y, and therefore, we are creating all of this value.” And particularly in people businesses, you see that the value of what you bought can pretty quickly evaporate. And often it’s really hard to see from the outside because they’re doing the acquisitions faster and faster and bigger and bigger. It’s really hard to see what’s going on with the old assets that they bought.

Gareth Brown:

This may be for the second masterclass, but it seems to me that the missing piece there is the acquisition is not making the whole stronger and better, if that makes sense. So when you’re buying network, I don’t know, think of maybe something like something like a Reece, it doesn’t actually work this way in Australia, but the equivalents overseas are often buying mom and pop places. They’re buying them cheaply, but each piece plugs in and actually makes the whole network stronger. And I don’t see that with the Enero example.

Steve Johnson:

Yeah, I think that’s absolutely true. But we’re going to come back and wrap this conversation up with some key lessons that investors can take out of this for analyzing what’s happening at a company that you are a shareholder in when they’re doing acquisitions. But let’s talk about whiskey. Gareth, I recorded that interview with Grant a week or so ago and thought about buying the whiskey that he recommended until I looked up how much it costs. $300 for a 500 ml bottle of whiskey. I think we will save that for a bull market. The Monkey Shoulder, far more accessible. I think we just paid $67 for a normal size bottle of whiskey there. What do you make of it?

Gareth Brown:

Very drinkable. I don’t have a lot to say. This is a nice whiskey to sit down with your dad or to drink on an airplane, I think. It’s not particularly flavorful, not particularly strong. Very easy drinking. I think if you don’t like some of the harsher flavors, this is a nice blend.

Steve Johnson:

I went to a distillery when I was in Scotland a few years ago visiting some family and the guy there was probably talking his own book because they were selling some blend whiskeys, but he did say that they’ve got a bad reputation blends because people used to mix a good quality whiskey with rubbish whiskey and be able to brand it the good quality whiskey and sell it, and that’s how it got a bad name. But you put two decent whiskeys together or three different whiskeys together and you can end up with something very nice and palatable from a drinking perspective. Yeah, I’d put this in the Chivas Regal bucket, nice easy drinking whiskey.

Gareth Brown:

Johnnie Walker Black.

Steve Johnson:

Yeah, one for every day of the week rather than a special occasion. All right, Gareth, let’s wrap this conversation up with some key investing messages out of the mergers and acquisition space. Baseline for me, they’re more likely to go wrong than right. I think I’d start with that. Assume the worst whenever you see one, but what would you say that’s a bit more nuanced than that?

Gareth Brown:

Are you asking me to distinguish between the good and the bad, I guess?

Steve Johnson:

Well, yeah, the key things to look out for. Is it going to be good or bad? What are you looking for?

Gareth Brown:

This is far from an exhaustive list, but smaller bolt on acquisitions are far less risky than company transforming acquisitions. And I think that’s especially true if you have a company that has a long history of making successful bolt on acquisitions and integrating the operations and getting value out of it. I don’t think it’s anything like these company transforming acquisitions that change the picture. They are a much different skill set and a much less risky thing. Like you pointed out before, be aware of them scaling them up. So people trying to use their stock as currency and constantly making bigger and bigger acquisitions each year, keep them small, keep them successful and keep bolting on where they add value. Be very cautious around the large acquisitions. I’d say that skin in the game is very, very important. Again, especially for bigger acquisitions, when a management and a board don’t have sufficient equity ownership and then they announce a large acquisition, you should be questioning their incentives and their rationale very, very closely.

You’ve touched on it, but I had it on my list. Be very, very careful when companies are trying to buy their way out of a problem. That rarely, rarely works. And I just think as a general idea, and this should apply to all your investing analysis, but extraordinary claims require extraordinary evidence. When they come and tell you that this acquisition will boost revenue by X percent, that’s probably a fairly trustworthy thing. As they move to profit forecast, they become less trustworthy. As they start talking about post deal synergies, whether revenue or cost base ones, you need to be more and more skeptical. And again, the bigger the acquisition, the more and more skeptical you need to be.

Steve Johnson:

Yeah, I’ll just add a couple to that. I think on the positive side of the ledger, look out for a dramatic change in the competitive landscape. Apollo and Tourism Holdings have put a pretty big deal together here, and that’s why the ACCC and the NZ Competition Commission had problems with it. You will not see any reference to any revenue synergies in their presentation for fairly obvious reasons around those competition commission concerns. But I do think you end up with some pricing power here and they need to be very careful how they exercise it. But when that competitive landscape changes from four competitive players down to two or you end up with 70 or 80% market share, that can be a real positive. And perhaps the most important thing for me is that the when is more important than the what. And that is a really important thing to think about is what environment is this M and A taking place in?

Most of the best deals happen the same and as an investor gets to buy a cheap stock, they happen because someone needs to sell because the market is distressed because the environment is a way that is causing other businesses problems that they need to sell and they need to come to you. And if you’re going to buy something that’s a crazy deal, it’s only going to happen in a distress type of environment. So really focus on the environment outside the deal that’s happening and ask yourself, “Well, is this likely to be a great deal in the environment that we’re in?” Touched on some of those problems we’ve had over the past 18 months. They were deals done in a rampantly optimistic bull market where businesses were being bought for crazy prices. And I think no matter how much management tells you about how good a particular deal is in that environment, you should be very skeptical. And vice versa, if something is happening in March of 2020 when COVID’s at its peak or in the three or four months after that or in the financial crisis, you should probably look pretty favorable on the likelihood of something that’s happening in that environment working out well.

Gareth Brown:

Good points.

Steve Johnson:

Hopefully we look back and say something similar about the THL and Apollo merger happening at the moment, struck at the lows of the travel market into Australia and New Zealand when we’re all in lockdown. We think there’s some pretty big benefits to come there. Thanks very much to Grant for tuning in today. Please, please, please give us some feedback. I’ve given us a June 2023 deadline here to get some traction around this podcast. We’ve put a lot of time and effort into it. We want to know from you what we can do to make it better, and please rate us on your favorite podcast listening app. Thanks again for tuning in. That’s the end of episode 12 and we’ll be back with 13 before Christmas. Thanks a lot.