Summertime Flurries in the M&A Forecast

Between T-Mobile and Kraft Heinz, M&A may get unseasonably busy.

After a slow start to the year, it could be a surprisingly lively summer for U.S. dealmaking.

Global mergers and acquisitions recently crossed the $1 trillion milestone, with U.S. target companies claiming a $463 billion share. That may sound impressive, but at this rate, both the global and U.S. figures are still headed for the lowest annual tallies since 2013.

It's not that the M&A environment isn't healthy; even amid the volatile geopolitical backdrop there remains a desire to grow by acquisition, especially with borrowing rates still low. What's absent is the thrill of the $40 billion-plus size transactions -- and nevermind the $100 billion ones -- that punctuated each of the last three years.

That's coming, though.

We're entering the season when things would typically slow down. What's different this year is we're potentially on the verge of at least two major mergers, which will likely set in motion other deals in their respective industries. One is Sprint Corp. and T-Mobile US Inc., and the other is whatever Kraft Heinz Co. and its backers 3G Capital and Berkshire Hathaway Inc. are lining up next following their failed run at Unilever in February. Plus, CEO confidence is still high:

Wireless carriers Sprint and T-Mobile, which have a combined market value of about $90 billion, are already in early-stage discussions to combine and are considering an all-stock transaction, according to a Bloomberg News report this week. There's a very good chance that they either reach a deal or one of them gets bought by another party. SoftBank Group Corp., the Japanese company that controls Sprint, has become a motivated seller. In 2013 it paid $16.6 billion for a controlling stake and injected another $5 billion into Sprint's business, which had still been reeling from the ill-fated Nextel merger from years earlier. Since SoftBank took over, Sprint has continued to run into cash problems that forced it to put up spectrum and other assets as collateral. T-Mobile also vaulted past Sprint in subscribers. 

The industry is competing heavily on two ends: price cuts around unlimited data plans (sparked by T-Mobile) and investing in the next generation of wireless networks, or 5G, which recently propelled an intense bidding war between AT&T Inc. and Verizon Communications Inc. for spectrum licenses. This is all driving an evolving trend toward conglomerate-building, beginning last year when AT&T agreed to acquire TV-entertainment giant Time Warner Inc. for $109 billion. Verizon has been talking up its deal game lately, throwing out Comcast Corp. and Walt Disney Co. as names of possible merger partners. Should T-Mobile and Sprint strike a deal, this will only intensify. (But it also assumes that the government won't stand in the way of this consolidation of power, which isn't a given.)

While wireless carriers dial up the deals, Kraft Heinz is foraging the food industry and beyond for another takeover that will give it the chance to further juice margins. It already lost out on Unilever, a $170 billion European consumer-products company. But it can't be long before another target emerges -- because Kraft Heinz's strategy depends on it. The outlook for sales growth at Kraft Heinz this year: 0 percent. Probability of a deal: 99.9 percent, or may as well be. One candidate is Colgate-Palmolive Co., which is valued at $68 billion. And anything Kraft Heinz does is going to increase the pressure on its peers to act, too. 

On a related note, Warren Buffett's Berkshire Hathaway is due for another large acquisition. I've written about the forces conspiring against him in his search, but given the company's ever-expanding coffers and Buffett's aversion to paying a dividend, it's more likely than not that Berkshire does something big this year. And even though it's expected to partially bankroll Kraft Heinz's next transaction, that doesn't preclude Berkshire from making a purchase of its own. As of March it had nearly $100 billion of cash, and counting. (You can see which megasized companies fit Buffett's takeover criteria here.)

For once, the summer might just feature deal flurries.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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