Thursday, December 18, 2014

Merger mania: 'Who's next?' after USAir, Heinz, OfficeMax

Fear and cash flow provoke more deals and bigger corporate debt

Merger mania: 'Who's next?' after USAir, Heinz, OfficeMax

An animated neon Heinz Ketchup bottle that was once on the company´s North Side factory in Pittsburgh, now sits atop the Senator John Heinz History Center in Pittsburgh, Thursday, Feb. 14, 2013.  Billionaire investor Warren Buffettís Berkshire Hathaway and its partner on the deal, 3G Capital, is dipping into the ketchup business as part of a $23.3 billion deal to buy the Heinz ketchup company. (AP Photo/Gene J. Puskar)
An animated neon Heinz Ketchup bottle that was once on the company's North Side factory in Pittsburgh, now sits atop the Senator John Heinz History Center in Pittsburgh, Thursday, Feb. 14, 2013. Billionaire investor Warren Buffettís Berkshire Hathaway and its partner on the deal, 3G Capital, is dipping into the ketchup business as part of a $23.3 billion deal to buy the Heinz ketchup company. (AP Photo/Gene J. Puskar)

"Investors are being confronted with a string of mergers and acquisitions and leveraged buyouts," which means more companies are taking on big debts and pushing "aggressive financial policies," warns Peter N. Ribgy, analyst at Standard & Poor's Ratings Services, in a report to clients today.

Dealmakers on Wall Street and lawyers like Philadelphia-based Dechert LLP's D.C.-based M&A antitrust team are raking in fat fees on all these deals. The Dechert team headed by Paul T. Denis and ex-FTC lawyer James A. Fishkin are antitrust counsel to Office Max in its $2.3 billion merger with Office Depot, to US Airways in its $11 billion merger with American Airlines, and to Medco in last year's $29 billion merger with Express Scripts Inc.

For stock-watchers who gathered at the Consumer Analysts of Greater New York's yearly conclave, last week's planned $23 billion+ takeover of Pittsburgh condiment maker Heinz by Warren Buffett's Berkshire Hathaway raises the "inevitable question" of "Who's Next?" writes Jonathan Feeney, food company analyst at Janney Capital Markets in Philadelphia, in a report to clients today.

But "we think the specifics of the deal," which would push Heinz's fat cash flow into a big dividend hose to be piped into preferred shareholder pockets, "makes a statement about the value" of steady consumer-based cash flow and cheap U.S. financing rates, more than it tells about the growth and profit potential of the U.S. food business, Sweeney warned. 

As his colleague Mark Kalinowski has observed, the Social Security tax increase has forced middle-class consumers to "respond to the payroll shock by eating more meals at home" and not in restaurants.

Beyond Heinz, cash-rich foodmakers like ConAgra and Smucker may become similarly inviting financial targets "in a capital market that is yield-starved and newly worried about inflation," Feeney added. Indeed, since world grain costs are trending down, food looks like an inflation hedge at the moment, even if sales are sluggish. 

Buffett's Berkshire has made another big consumer bet, boosting its share in Wells Fargo & Co., the dominant bank in Philadelphia and many other cities and the nation's biggest mortgage lender, notes Jack Chen in an item for SNL Securities. By contrast, Berkshire has cut back on US Bancorp and Visa Inc.

Among small and midsized U.S. companies, acquisitions worth $10 million-$250 million jumped to 89 in the fourth quarter, up from just 57 in the same period in late 2011, and 30 in the third quarter of 2012, reports GF Data Resources, the West Conshohocken venture owned by Philly investment banker Andy Greenberg and B. Graeme Frazier IV, which surveys 200 mid-market investment banks every quarter.

Greenberg credits cheap debt and fear of higher taxes, especially by family-owned firms, for the late-year deal surge. Small and mid-market deals have slowed since Dec. 31, he added: "Our sense is the market will be taking a few months to reload."

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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