KG today made public its $33 cash offer for ALO ( Alpharma ). Normally stock of the acquirer falls, but here KG stock has jumped. The reason for jump is KG representation that the deal will be accretive in the second year. We believe this premise to be false for four reasons:
1. ALO is an attractive target and other acquirers may jump in. In the end, even if KG is successful, the price may have to go up by as much as 20%. Such increase will not make the deal accretive in the second year as represented by the company.
2. There are antitrust concerns related to non animal health business of ALO. There may need to be divestitures of ALO non animal businesses and thus cost saving from synergies may be drastically reduced.
3. KG is not in the animal health business. Therefore if KG is successful, there are no synergies in the animal health business. It is a simple diversification move and does not deserve the jump in the stock. It may dilute management’s focus and in the long run may be a negative for KG.
4. KG is trying to buy ALO animal health business for less than 10x earnings. It simply is not going to happen. As KG management pursues this acquisition, it may end up not as focused on its existing business as it needs to at this juncture.
This CHANGE is not likely to work as the market anticipates.Consider starting shorting at $12.10 and adding to short positions as stock goes higher.
Consider buying ALO here in $34 range