Twilight of the M&A giants

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In today’s newsletter:

Unwinding an era of bad M&A

Mega mergers were once the hot thing on Wall Street, as an era of cheap debt drove investors such as Warren Buffett and corporate giants like AT&T to bet big money could be made in dealmaking. 

This year, prominent combinations of the free money era are being rethought with two poster children of the 2010s merger mania now unwinding.

On Friday it emerged that Kraft Heinz was studying a break-up to address its underperformance, in a deal that would unravel the merger of Heinz with Kraft Foods, once pegged at $80bn. 

Today the debt-laden company carries a $33bn market value and is considering separating its grocery portfolio with its condiments brands including Heinz ketchup.

Kraft Heinz’s creation in 2015 was a reflection of the dealmaking zeitgeist of the post-crisis period. 

Buffett’s Berkshire Hathaway had partnered with 3G Capital, the architect of the AB InBev empire, to buy HJ Heinz in 2013.

As the Unhedged newsletter notes, they initially looked like geniuses after then merging the business with Kraft Foods, reaping billions of dollars in paper profits.

But many were sceptical about the sustainability of the endeavour, especially as consumer tastes shifted and margins eroded.

Billions of dollars in writedowns soon followed, causing Buffett to admit the deals were an overpay. Next comes the break-up.

The pain extends beyond the grocery aisle. 

Last month, Warner Bros Discovery said it would split into two publicly traded companies.

It unwinds a merger consummated just three years ago that itself was aimed at extricating AT&T from an acquisition binge that drew the ire of shareholder Elliott Management.

AT&T engineered a merger of Warner Brothers with Discovery in 2021 as a way of exiting its $85bn takeover of Time Warner in 2018.

Alas the merged company, WBD, sank like a stone, leading to last month’s split, first revealed by the FT.

Break-ups are very much the solution du jour, but it’s unclear whether they’ll win over shareholders.

On Monday, Kenvue, the consumer health group spun out of Johnson & Johnson in 2021, announced a “strategic review” of its conglomeration of brands. The Tylenol and Neutrogena maker added that its chief executive had left the company. 

At Nestlé, new CEO Laurent Freixe criticised his predecessor’s acquisition spree and told the FT in May that he was open to selling the group’s water business. Rival Unilever is in the process of hiving off its ice cream business.

Finding homes for these assets could be painful. Just ask AT&T. 

During the M&A mania, it acquired satellite TV operator DirecTV for $67bn. AT&T this month finally rid itself of the operation, exiting to US private equity group TPG in a deal that will require just a few billion dollars of equity from the PE giant’s own funds. 

DD expects many underwhelming exits are in store. 

France’s battle of the billionaires

On the subject of bad M&A, the FT on Monday offered the latest in the epic melodrama that is Patrick Drahi’s highly levered telecoms empire. 

In France, telecom groups Orange, Bouygues and the Iliad-owned Free Mobile are eyeing a carve-up of Drahi’s local business SFR.

The deal would cut the number of French telecom operators from four to three, a consolidation billionaire moguls have long dreamt of — though it could face challenges from France’s political establishment.

It comes as Drahi sells off assets to appease holders of some $60bn in debt owed by Altice, the business empire he built in the aforementioned 2010s cheap-money era.

Rising interest rates have forced Altice to restructure its debts and sell assets, raising the prospect of a sale of SFR.

Among the suitors are the billionaire telecom moguls Martin Bouygues and Iliad-owner Xavier Niel. Orange is also hoping for a slice of the pie, but France’s largest telecom would face significant regulatory scrutiny. 

Meanwhile, investment groups Blackstone, KKR and Ardian are sounding out the potential buyers to help with financing.

The SFR sale has become more likely since Altice agreed a haircut on its debt in February. Since then, Orange, Bouygues and Iliad have been weighing up how they would divide SFR’s assets. 

Past attempts at consolidating France’s telecoms market have fallen through. Regulators were previously reluctant to permit mergers over concerns that tie-ups would result in higher prices for consumers.

Over the past year, however, policymakers across the continent have become less hostile as concerns grow that the EU’s businesses are falling behind global peers.

France’s remaining telecom operators have also come around to the idea that they’ll have to split SFR between them.

“For a long time, [the companies] were each in the mindset of saying, ‘I want to eat the whole cake’ or ‘I don’t want the other guy to eat the cake,’” said one person involved in the talks over SFR. “Now they’re saying ‘We have to share the cake or no one gets cake.’”

Looming on the horizon is the 2027 French presidential election.

France’s pro-business president, Emmanuel Macron, is trailing in the polls and the alternatives are likely to be far less amenable to a deal.

That leaves a two-year window for a carve-up to be agreed. The clock is ticking.

Job moves

• Kenvue CEO Thibaut Mongon has left the company and director Kirk Perry will take over as interim CEO. The Johnson & Johnson spin-off has come under pressure from activist investors and a strategic review is under way.

• Blackstone has hired Monica Issar as head of total portfolio management. She joins from JPMorgan Global Private Bank, where she was global head of multi-asset and portfolio solutions.

• Paul Hastings has hired Corey Wright and Lisa Collier as partners in its banking and finance practice in New York. They were previously at Latham & Watkins.

Smart reads

Money magnet The US government’s partnership with a rare earths business is its strangest intervention in corporate America yet, Lex writes.

Unruly neighbour When Meta moved in with a $750mn data centre, the Morris family’s water taps ran dry, the New York Times reports.

Big data How large are the world’s financial assets? Alphaville’s got its hands on a data set that breaks it all down.

News round-up

UniCredit attacks Italian government’s ‘illegitimate’ use of power over BPM bid (FT)

China approves $35bn Synopsys chip software deal after US eases export curbs (FT)

Saudi Arabia to boost renewable energy with $8bn investment (FT)

Bitcoin hits $120,000 milestone as US Congress readies for ‘crypto week’ (FT)

Grayscale files for IPO as Trump administration emboldens crypto groups (FT)

Calpers pushes further into private equity after best results in four years (FT)

Volvo Cars to book $1.2bn charge on tariffs and launch delays (FT)

LVMH’s Loro Piana placed under court administration over worker exploitation (FT)

Lockheed Martin in talks to develop seabed mines (FT)

Starbucks to require corporate staff work from office four days a week (FT)