May 6, 2022
Best investments are just like good stories or movies: with three-part story structure (complication, development, resolution), important turning points, intrigue, drama, and surprises.
Strictly analytical approach to investment management does not provide us with tools for dealing with uncertainty.
The closed and fixed form of analytics leaves no place for imagination.
And without imagination, we are just not capable of fathoming uncertainty, fathoming the future.
For example, George Soros, in his book “Alchemy of Finance” describes how he analyzed certain investment situations.
In order to see the big picture and analyze the case he uses terms borrowed from the world of literature, movies, and theatre. He calls the overall cycle “scenario” and different stages of the cycle “act one”, “act two”, “act three”, “act four”, and puts an emphasis on main “actors”: the shareholders.
I think that the use of such terms is not a coincidence: it serves well the purpose of looking at how the situation develops over time.
Some M&A transactions present opportunity to develop a good investment thesis.
Large merger is an important, transformative corporate event.
It can change investment thesis and story of a company.
It just takes time for company’s story structure to develop and for share prices to reflect fundamental changes and developments.
As a result of this, shares can decline or trade sideways despite the fact that transaction has great fundamental logic and benefits for shareholders.
All of this creates opportunities for investors. After certain period of time, it is easier to take a step back and look at company’s story and story structure.
Berry Global Group
We wrote about Berry Global Group back in October 2020: “Berry Global Group: Story Structure In M&A Situations”, about a year after company completed the acquisition of RPC Group plc. Shares were trading at about $47 per shares.
Since then, the share price reached a high of $73.93 on at the end of December 2021 and then declined to a current $55.
We believe that company provides an attractive investment option for long-term, value investors. In addition, investors can take advantage of company’s event-driven story that developed over past three years since RPC Group plc acquisition.
BERY currently trades at an EV/EBITDA of x8.37 based on annualized H1 FY 2022 results (operating EBITDA). Free cash flow guidance for FY 2022 is $950 million providing a Free Cash Flow Yield of 12% percent.
Assuming 5% EBITDA growth and x9.5 EV/EBITDA valuation multiple, in three years Berry Global Group shares could be valued at $117.5 per share, providing potential upside of more than 100% percent