The dueling announcements Thursday of Heinz’s buyout and US Airways’s merger with American Airlines has a put some big companies that have been historically associated with Pittsburgh back on the cover of the Wall Street Journal.
The US Airways merger continues, and perhaps caps, the long consolidation of the U.S. airline industry as operators have tried to figure out how to make money while managing volatile fuel costs, labor contracts and unwieldy, redundant route networks. Its significance for the broader M&A market is likely not great. Airline deals, particularly among those operating out of bankruptcy protection, are driven mostly by conditions in the airline industry, which is (putting it kindly) unique and peculiar.
On the other hand, the Heinz deal appears to be a signal of more big deal making to come. The underlying market conditions that facilitated the deal may unlock more public companies for buyouts and mergers:
- Gains in the stock market allows CEOs who are looking for buyers to sell high. The S&P 500 is trading near its peak in 2007. The selling price for Heinz is close to 20% above the stock’s all-time high. These are conditions that bring sellers to the market.
- There is ample capital available from banks and investors for deals. Equity investors like Berkshire Hathaway and 3G, Berkshire’s partner in the Heinz deal, have been largely starved of deal flow since the economic crisis. Similarly, banks and other lenders have been increasingly aggressive in recent months and have been eager to support proven winners like Buffett.
Heinz is a classic Buffett investment: recognizable brands generating huge cash flow with well-regarded management. For Pittsburgh, Heinz’s deal provides a soft landing for a company that has been viewed as a potential buyout candidate for years. Berkshire Hathaway’s companies need autonomous management teams and headquarters. Had Heinz merged with one of its global competitors, it’s likely that Pittsburgh’s headquarters role position with Heinz would have been radically diminished. Instead, Heinz’s management extracted a promise from the buyers to keep Pittsburgh as the headquarters.
Schneider Downs Corporate Finance, LP is a registered broker/dealer. Member FINRA/SIPC.
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