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Oligopoly Watch
The latest maneuvers of the new oligopolies and what they mean
The deal of the century?
No, not that one. We'll get to the Bank of America Merrill Lynch deal when the dust has settled.
The one that has us going is Best Buy's acquisition of Napster. Why did the #1 US electronics retailer see a need for buying the (now legalized) file-sharing company. Once plagued with law suits from music companies and rescued from bankruptcy, Napster now arranges for legal downloads and subscriptions to digital music and downloads to AT&T cellphones.
For Best Buy, it's partly a reaction to the steady decline in CD sales. While the big money at BestBuy comes from computers, flatscreen TVs and audio equipment, but sales of CDs, DVDS, games, and software have been an important part of the business. As online delivery becomes important in all those areas, BestBuy needs to hang on to its position, even expand it. Best Buy is finding itself more and more in competition with Wal-Mart on the one hand and Amazon on the other. Both companies are expanding their MP3 delivery services, and Best Buy feels pressure to get on board.
The price wasn't too bad either, at $120 million. BestBuy already uses a Rhapsody, a major Napster competitor, for downloading MP3 files. Presumably they think the Napster subscriber list (claimed to be700,000) and software is a better deal for them.
The problem as we see with this vertical move that it puts Best Buy in competition with Apple iTunes. That's a big deal since Best Buy is the only licensed outside vendor of Apple's iPhone and is a major iPod reseller as well. In this way, two companies that had a clear relationship in the food chain (vendor and dealer) now will have afar more confused relationship.
De-verticalization in the energy industry
A recent New York Times Dealbook article ("A Big Year for Small Energy Deals", 9/5/08) notes that "it appears that while the total volume of energy deals is down so far this year, the number of energy-related deals is up significantly." In other words, the money value of the acquisitions is lower than year ago, but the actual amount of deals has risen by 20 percent.
One reason for this is that petroleum deals have always had problems getting loans from banks, due to the high volatility of the industry. But with cash flow high, oil companies are readier than ever to consolidate. It's just that the big multibillion dollar deals have slowed.
In the past few months, among many other deals: - BP bought some properties from the US's Chesapeake Energy ($1.9 billion)
- Italy's Eni bought Canada's First Calgary Petroleum ($866 million).
- GDF Suez bought oil and gas assets from Dutch oil company NAM ($1.56 billion).
- Royal Dutch Shell acquired Duvernay Oil, a Canadian -based natural gas producer ($5.9 billion)
- ConocoPhillips acquired a 50 percent interest in a joint venture with Origin Energy of Australia, which produces coal-bed methane ($8 billion)
- India's ONGC bought UK-based Imperial Energy for $2.6 billion
Here are some of the trends I see. The big Western oil companies, Shell, ExxonMobil, Bp, were once involved in a vertical command of the industry, from exploration to exploiting and maintaining oil fields to delivery to refinery to retail. Over the years they have move away from that stance, trying to get out of less profitable layers of the business. That means that Big Oil is getting out of retailing (ConocoPhillips, the latest. just sold its 600 US service stations to a privately held firm for $600 million). They are getting out of risky exploration and exploitation projects in Russia, Africa, and Central Asia. (Note that Chinese and Indian companies are taking on those risks). The bigs are buying developed fields in Western countries (US, Australia, Canada, North Sea). That leaves the field open for smaller companies and especially non-Western companies to take up the slack.
The point is that the big energy companies will make money however perilous retail or exploration may be and however bad things get in Nigeria or Russia. They will still be in the middle, as long as there is no big move to build more refineries.
Altria goes smokeless
No, the maker of Marlboros and the #1 world cigarette maker has not stopped selling tobacco. Rather, it has acquired the #1 US smokeless tobacco company UST (US Tobacco). UST is the maker of Skoal and Copenhagen smokeless tobacco (snuff). The deal is estimated at $11/3 billion, including assumed debt.
Snuff is the fastest growing sector of the US tobacco business. Interestingly, Altria itself makes smokeless tobacco under the Marlboro name, though it has not been a big seller in the US. In 2006, Altria's biggest competitor, Reynolds American (formerly R.J. Reynolds, the maker of Camel cigarettes) bought Conwood, the #2 US maker of smokeless tobacco for $3.5 billion.
UST, by the way, also owns Michelle Wine Estates, a maker of premium wines in the US. No decision has been made on whether Altria will keep it or sell it off. The deal follows Altria's big move into cigars in 2007, buying John Middleton.
While many deals claim synergy, the Altria-UST deal is a slam dunk. The distribution and sales channel is the same for these products, and Marlboro, Skol, and Copenhagen are all market leaders. That means a lot of sales leverage and convenience in distribution. The company has the expertise to deal with the same international tax and health issues. And in yet another area, Reynolds American is left at #2.
Pharma: Another Japanese buyer, another US seller
Japanese pharmaceuticals company Shionogi announced that it has agreed to buy US-based drug company Sciele Pharma. The deal is for $1.4 billion in cash.
Shionogi, whose biggest drug Crestor, a cholesterol-lowering drug, was looking to get a better sales and marketing position in the US. It is currently selling Crestor in the US through rival AstraZeneca. It also has drugs for HIV, skin conditions, and obesity in the pipeline.
Sciele primarily sells drugs for cardiovascular disease. It's new a hypertension medicine, Addrenex, is due out soon.
According to Bloomberg News ("Shionogi to Buy Sciele Pharma to Get U.S. Sales Staff", 9/1/08):"The offer adds to $156 billion in acquisitions in the global drug and biotechnology industries in 2008, the biggest year on record."
Other big deals this year involving Japanese drug companies include: - Takeda Pharmaceutical (#1 in Japan) bought U.S.-based Millennium Pharmaceuticals Inc. for $8.9 billion
- Daichi Sankyo (#3 in Japan) bought Indian generic drug maker Ranbaxy Laboratories for $4.5 billion.
There have been 11 other deals by Japanese companies for foreign firms, worth over $4 billion more.
The empire strikes back
Quite remarkable in the last week were the announced takeover of two UK firms by two Indian firms. It's all part of a growing trend of Indian companies to buy pieces of the British economy, once India's imperisl master.
First, Indian IT consulting giant Infosys announced it would buy Axon Group for $752 million. Axon is a London-based computer consulting company, which specializes in supporting software systems from Germany's SAP. Infosys currently has a large presence in outsourcing from the US, while Axon is strong in Europe. The deal is Infosys's largest ever.
Also last week, India's state-owned oil producer, ONGC, announced it would buy the UK's Imperial Energy. The deal is for $2.6 billion.
While Imperial is based in London, most of its assets are in Siberia, where it has a number of active wells. Aside from wells in India, ONGC has wells in Vietnam, Sudan, Columbia, and 14 other countries.
It's telling that India, like China, is buying up energy assets anywhere it can find them. In fact, there was some expectation that Chinese state oil company Sinopec might try to outbid ONGC, but Sinopec has apparently withdrawn.
It's telling that as Western companies are backing away from Russian investments, thanks in part to tensions between the US and Russia as well as arbitrary Russian resources policy, that India is eagerly jumping in.
Copier deal: Ricoh to buy
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