Just Intime for Macy’s and United Health

Even though it is early in 2017 there were two significant transactions in capital markets yesterday. Significant for our portfolio at least. United Health, (UNH) which we own, has acquired Surgical Health Care Affiliates (SCAI) for about US$2.3bn which is actually a small acquisition for a company the size of UNH. To put things into perspective UNH had revenues of over US$180bn last year. SCAI will be integrated into the urgent care unit of UNH. This continues the transition of UNH toward a diversified health company from its origins as a medical insurance provider. UNH is a stock we have owned for a while and it has outperformed handily particularly the healthcare sector. We had been pondering whether it was “all in the price” for UNH but this looks a good transaction and the news flow is often supportive of additional share price strength. We will hang on for a bit longer.

The other transaction is one which occurred in Asia and in the retail sector. Alibaba, the Chinese equivalent of Amazon, is going to privatise a department store operator called Intime. This transaction will take Intime private at a premium of over 40% to the preceding price. It is significant because it represents an e-commerce company acquiring ‘bricks and mortar’. We own a ‘bricks and mortar’ retailer and it hasn’t gone our way so far but we think the market is wrong and is focussing on the wrong variables. We purchased Macy’s a USA retailer toward the end of 2016 because we believed that the asset value was very attractive; that the management understood they needed to shrink and change the business to maintain retail relevance and profitability; and more aggressive shareholders were circling. It is mooted that Amazon too needs to acquire real estate and so an asset like Macy’s with strategic real estate assets in wealthy areas, represents a good each way bet. The management improves the retail performance with its new strategy or the company is on the radar screen of e-commerce players. We think Alibaba have made a smart move. Macy’s is cheap and misunderstood.

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