US HPC and Beverages:Will M&A Premiums Now Creep Into HPC?

Ripple effect? A forthcoming re-rating of HPC names is possible

    Given continued M&A newsflow that has begun to cross from Food into HPC, we seesignificant potential implications for the valuation of our HPC coverage universe (as isalready evident in early trading today). Most notably, since the M&A era began in Foodin early-2015, the relative valuation (on an EV/EBITDA basis) of the Packaged Foodsector went from a ~5% discount to consumer staples to a ~6% premium. To theextent that similarly structured M&A makes its way into HPC, we could see a similardirectional re-rating in HPC—both driven by consolidation premiums and marketexpectations that HPC companies will seek to more rapidly improve their ownfundamental prospects/cost structures to avoid being the subject of consolidation.

    Specifically, before the M&A era in Food began, the HPC sector traded at a historical20% premium to Food (again, on EV/EBITDA), whereas since the two sectors havetraded at relative parity. If an M&A/consolidation premium (similar to what we haveseen in Food) were applied to the HPC sector broadly (in effect restoring the historicalHPC vs. food spread), it could theoretically drive as much as ~2x turns of EV/EBITDAmultiple expansion (see Figures 1 and 2 enclosed).