M&A

Billion-dollar Mergers on Tap

As the long-weekend comes to a close, four big merger deals are announced—but which ones will succeed?
Marie LeoneFebruary 20, 2007

Investment bankers were busy over the long weekend as several large mergers were announced, the most notable being a union between radio network rivals XM Satellite Radio Holdings and Sirius Satellite Radio. Other companies talking about tying the knot in multi-billion-dollar deals include competing music recording companies EMI Group plc and Warner Music Group, British pharmaceutical company Shire plc and U.S. drug maker New River Pharmaceuticals, and construction suppliers Vulcan Materials Co. and Florida Rock Industries Inc.

In what the companies are calling a “merger of equals,” XM and Sirius entered into a $13-billion tax-free, all-stock merger on February 19. The combined company will also retain $1.6 billion of debt. Under the deal terms, XM shareholders will receive 4.6 shares of Sirius common stock for each share of XM they hold. In the end, XM and Sirius shareholders will each own about 50 percent of the combined company.

The deal, which is subject to regulatory and shareholder approval, also names Sirius CEO Mel Karmazin the chief executive of the combined company, while XM Chairman Gary Parsons will become chairman of the new entity. Based on analysts consensus estimates, the companies generated an aggregate $1.5 billion in 2006, noted XM officials in a press statement.

The deal faces sizable barriers, reports the Associated Press, which points out that Federal Communications Commission rules forbid the combination unless the merger is in the public’s best interest. That means that the combined company would have to demonstrate, among other things, that consumers would receive more choice at lower prices because of the deal.

Also on February 19, UK-based Shire agreed to acquire Philadelphia-based New River Pharmaceuticals in a $2.6-billion, all-cash deal. The transaction will be funded by $2.3 billion in new debt facilities and $800 million in equity financing. Shire is paying New River stockholders $64 per share in the deal, which was unanimously recommended by the boards of both companies.

However, the acquisition is subject to the approval of Shire shareholders, as well as other traditional regulatory approvals. Shire officials expect the deal to close in April. They have the support of R.J. Kirk, New River’s CEO who owns 50.2 percent of the total outstanding shares of the company.

In January 2005, Shire and New River entered into a collaborative agreement to develop a drug for the treatment of attention deficit and hyperactivity disorder. By December of 2006, New River received regulatory approval for the drug. Shire announced that it is ready to launch a pediatric version of the drug, and hopes to file for permission to launch an adult version during the second quarter of 2007.

Another February 19 announcement came from Vulcan Materials Co., which said it would acquire Florida Rock Industries in a $4.6-billion cash and stock deal. The companies produce construction aggregates, including cement and concrete. The transaction has been unanimously approved by the boards of both companies.

Under the terms of the deal—which is a tax-free reverse merger agreement—Vulcan shareholders will receive one share of common stock in a new holding company whose subsidiaries will be Vulcan and Florida Rock. To retain the tax-free treatment, Florida Rock shareholders must convert at least 30 percent of their shares into shares of the new company. The remaining Florida Rock holdings can be converted into cash at the rate of $67 per share. Florida Rock shareholders received a 45 percent premium for the deal.

When the transaction is completed, Vulcan will have about $3.7 billion in debt, and a debt-to-capital ratio of 50 percent. The company expects a rise in operating cash flow will allow it to reduce that ratio to at least 40 percent. Florida Rock President and CEO John Baker will join the board of Vulcan Materials, and Tom Baker, who is currently a Florida Rock vice president, will become president of Vulcan’s new Florida Rock division. Vulcan Materials Chairman and CEO Don James will retain his positions at the new company.

Back on the entertainment front, EMI confirmed on February 20, that it was approached by Warner Music Group about a potential takeover bid. EMI noted in a press statement that there is currently no proposal on the table for the board to consider, and that company executives are not certain that this new round of talks will lead to a offer. EMI shares rose 7.2 percent in early trading in London.

EMI and Warner have hinted at a merger in the past, but analysts don’t think the record-label union is likely, according to the AP. European courts have already scuttled a merger between units of recording industry giants Sony Corp. and Bertelsmann AG, and European regulators are currently contemplating a deal between Universal Music and BMG Music Publishing, reported the wire service. A combination of EMI and Warner would control about 25 percent of the recorded music market, added the AP report

Last week, EMI announced that revenues for its recorded music division will decline 15 percent for the period ending March 31, as compared to the same period in 2006. Earlier this month, Warner reported a 74 percent fall in first-quarter profits.