Portfolio Magazine: The New Deal

The New Deal
by Kent Bernhard, Jr. Sep 01 2009

The Disney deal with Marvel and the Baker Hughes takeout of B.J. Services raise hopes for better times in M&A.

Merger Mondays may be back.

After an abysmal summer—an abysmal year really—Monday brought hope for a more active mergers-and-acquisitions market in the near future, with two high-profile multibillion-dollar buyouts ranging from the glamorous world of entertainment to the gritty but valuable energy sector.

Walt Disney is buying Marvel Entertainment, and oilfield-services player Baker Hughes is buying B.J. Services Co. Together, the deals announced Monday were worth almost as much as all the other U.S. mergers-and-acquisitions deals announced in August put together.

The deals announced Monday were worth about $8.9 billion. In all of August previous to Monday, there had only been $13 billion in deals done, the lowest number since February 1992. "You are starting to see more action in the M&A market," said Jay Sherwood, head of media, entertainment, and banking at McGladrey Capital Markets, an investment bank based in Costa Mesa, California.

Unlike in the heyday of the private equity deal, Monday’s mergers weren’t leveraged buyouts. Both were strategic acquisitions, with companies buying up competitors in cash and stock deals meant to strengthen their own competitive positions. "These are strategic acquisitions of value. Private equity still is not necessarily back in this market because financing and outside money are tight. Until you see private equity back, you won’t see a big push behind M&A,” says Roger Aguinaldo, CEO of The M&A Advisor, a firm that connects M&A professionals. With fewer potential buyers on the scene, M&A valuations are off of their peaks. “It is a good time to buy. These companies have been bought at a lower relative value than in the past," Aguinaldo said.

In the higher-profile but less valuable deal, Walt Disney announced it was buying Marvel Entertainment for $4 billion, a deal representing a 30 percent premium over Marvel’s valuation, and one that gives Disney access to some 5,000 Marvel characters for future movies, television shows, theme-park rides, and videogames." Are Marvel franchises fully exploited? No. There is more opportunity to develop them across platforms, in movies, and in live entertainment," Sherwood said. And Marvel, which has been itching to make more movies, can tap the resources of its huge new parent, Sherwood said.

Marvel characters such as Spider-Man, the Incredible Hulk, Iron Man, and the X-Men have already been made into successful movie franchises. And with a library of characters like Thor, Captain America, and the Silver Surfer, the possibility for more comic-themed entertainment from the Marvel division is rich.

And it should help Disney reach a key demographic. "This helps give Disney more important exposure to the young male demographic that they have sort of lost some ground with in recent years," David Joyce, an analyst with Miller Tabak & Co., told Reuters.

And Disney says it doesn’t want to mess with the formula. Marvel’s management, led by Ike Perlmutter, will continue to run the division.

"The goal here is not to rebrand Marvel as Disney," Disney CEO Robert Iger said. He called the deal, “a great opportunity at the right time.”

Marvel shareholders will get $30 cash and 0.745 shares of Disney stock for every Marvel share. That amount should make Marvel CEO Isaac Perlmutter a very happy man. He’ll be staying on to run the Marvel brand, and he’ll be $881 million in cash richer. He’ll also own about 21.878 million shares of Disney stock, which based on Friday's closing price of $26.84, would be worth some $587.2 million.

Perlmutter acquired Marvel’s predecessor company in 1990, and was actively involved in the company after that, serving on its board of directors since 1993. He was vice chairman in January 2005 when he was named CEO. He was also already Marvel’s largest shareholder at that time.

Perlmutter’s company, Toy Biz, which had a royalty deal with Marvel, then headed by Carl Icahn, swooped in and picked up the company after it went through bankruptcy.

Stan Lee, the creator of most of Marvel’s most recognizable characters, doesn’t appear on the list of Marvel’s biggest shareholders in its proxy statement.

In the grittier, cash-intensive world of the oil patch, Baker Hughes, looking to strengthen its ability to draw oil and natural gas from shale and offer one-stop shopping for oil and gas companies, announced it was buying B.J. Services Co. for $4.9 billion in cash and stock. The $4.9 billion valuation reflected a drop in Baker Hughes share prices Monday.

B.J. Services shareholders will receive 0.40035 of a share of Baker Hughes stock, and $2.69 cash for each of their common shares. The price represents a 16 percent premium over the $15.43 a share B.J. Services was trading at August 28.

The deal allows Baker Hughes, the nation’s No. 4 oilfield-services company, to better compete with Halliburton Co. and Schlumberger Ltd. on projects that require multiple services. Most importantly, it adds B.J.’s No. 3 market share in the pressure-pumping market. In pressure pumping, gas or liquid is pumped into wells to increase their production.

Pressure pumping is a key to extraction of tight gas and shale gas, both expected to become major sources of natural gas in the U.S. in coming years.

"The business logic is one where both companies felt that all the major international oil and gas players want to rely increasingly on a one-stop approach where they can bundle services," John Olson, a fund manager at Houston Energy Partners, told Reuters.