On Friday, the S&P 500 was up 0.3% and Toronto was up 0.15%.
TFI International (formerly Transforce) was up another 3.8% after releasing earnings.
Toll Brothers bounced up 3.3%.
American Express was down 3.6%. It releases earnings on Friday. Its card spending was down. That is not surprising since it seems likely that it gets more of its spending from travel than does VISA and MasterCard.
Futures markets as of 6:20 pm eastern time on Sunday evening are suggesting a modestly negative opening for stock trading tomorrow. That does not seem surprising as we get closer to a U.S. election where the outcome may not be known for some days after the election (due to mail-in ballots and a record turn out). And where President Trump seems unlikely to accept a defeat unless it is a very clear one. And the potential for a defeated Donald Trump (if he is defeated) remaining in office until January 20, 2021 certainly seems like a scary scenario to me. I’m not sure what the market would think of it.
The big news today is that Cenovus has a deal to buy Husky Energy Inc. in an all-stock deal valued at $3.8 billion.
I know almost nothing about either company but I have a few thoughts on the deal.
Cenovus has a market cap of $4.56 billion. This will be described as a takeover. And for management it is. The Cenovus CEO takes over management of the combined larger entity. Because Cenovus will pay in stock and not cash, Warren Buffett would describe it this way in terms of what is happening to share owners: Existing Cenovus shareholders will own about 55% of the combined company and existing Husky shareholders will own about 45%. The existing Cenovus shareholders are therefore effectively trading 45% of the existing Cenovus in return for 55% of Husky. And the existing Husky owners are trading 55% of Husky for 45% of the existing Cenovus. Well, that’s how Warren Buffett views these things but I am almost positive you will not hear the deal described this way in the financial media.
The companies are estimating that there will be $1.2 billion in annual synergies. About half of that in expense reductions and half in capital spending reductions. The expense reductions will presumably require a huge reduction in head count. Layoffs are coming and this should be in addition to any recent staff reductions made or announced. This needs to be new cost reductions and therefore new lay offs due to the deal. The $600 million in capex reductions being described as a synergy is a puzzle to me. I doubt that it means they will share assets that would otherwise be under used. If they invest $600 million less, that is $600 million less in assets. Not sure how that is a synergy. Other than administrative positions it is also a puzzle to me how there can be such large synergies in two companies with different physical assets in the ground.
I expect that this will be touted as an investment in the Canadian oil sector and as a vote of confidence. It’s not. There is not even a dollar of new investment here. In fact they are saying it is a $600 million annual reduction in investment. This is more like Husky management throwing in the towel and recognizing that its shares are not worth much more than what they were recently trading at. The future was not bright. Cost reductions were needed.
If the market believes the synergies are real then I suppose Cenovus shares will rise on the deal. If the market believes there are no real synergies then the Cenovus shares should fall. My guess, and it is a guess, is the Cenovus shares won’t rise much if at all.
I had briefly owned a Husky rate reset preferred share issued at $25. It now trades at just $11.45. Presumably due to a low yield (low reset spread over the 5 year Canada combined with the low 5 year Canada) but also probably not a stellar credit rating. I will be interested to see if it moves up on the deal. It might if it is viewed as improving the credit strength.
I suppose any price reaction could also be muted by the fact that this deal will take about four months before it closes and it is not a done deal until it closes.