American Airlines/US Airways Merger and Heinz US$28bn Sale Accelerate M&A Trend

The US$28bn takeover of Heinz by Warren Buffett and the US$11bn merger of American Airlines and US Airways have raised expectations that the US will witness a boom in merger and acquisition (M&A) activity in 2013.

According to data from Dealogic, the year has been marked by the strongest start for M&A volumes since 2000. The first few weeks of 2013 has seen total US merger volumes of US$219bn, against US$85bn for the same period a year ago.

The Heinz and American Airlines/US Airways deals this week were preceded by
Michael Dell’s US$24.4bn bid
for the IT hardware group that he originally founded, Comcast’s US$16.7bn purchase from GE of its 49% stake in NBC Universal and Liberty Global’s US$23.3bn bid for Virgin Media.

The Heinz cash takeover deal, approved by the food group’s board, is the fourth-largest food and beverage acquisition on record and brought together Warren Buffett’s Berkshire Hathaway conglomerate with 3G Capital, a private equity firm backed by Brazilian Jorge Paulo Lemann, which led the leveraged buyout of Burger King in 2010.

The offer was based on a price of US$23bn, 20% higher than Heinz’s latest stock market value, plus US$5bn of debt taken on by the buyers. Berkshire Hathaway, which has a total cash pile of around US$48bn, is putting US$13bn into the purchase.

Buffett, whose last major acquisition was the US$26.5bn purchase of the Burlington Northern Santa Fe rail company in 2010, subsequently told shareholders: “We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”

Forecasts that further M&A deals will follow in the US are based on several factors including loose monetary policy, which has created a demand for yield among investors and made it easy for corporates to raise debt, as well as healthy corporate balance sheets after several years of cautious policy in the wake of the 2008 financial crisis.

Analysts predicting an M&A boom include Susan Schmidt, head of US equities at Mesirow Financial, who was quoted as commenting: “We had a slowdown in 2012, but really this is a trend that we saw begin in 2010-2011. Companies have a lot of cash right now, they are in great capital positions by and large, and they are looking for ways to strategically improve their businesses. A lot of times that means mergers.”

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