It’s Merger Time!

What happens when you have companies sitting on tons of cash and stock prices are depressed? The answer is mergers—lots of them. This morning, Wall Street is busy digesting a few more large-scale mergers.

First, Alberto-Culver (ACV) is up around 20% today on the news that it agreed to be bought out by Unilever (UN) for $3.7 billion. The deal price is $37.50 per share. On Friday, Alberto-Culver closed at $31.48.

According to Bloomberg’s numbers, Unilever is offering 14.75 times Alberto Culver’s earnings before interest, taxes, depreciation and amortization. That’s not cheap but it’s clear that Unilever wants in the U.S. market. Unilever is based in the Netherlands while nearly two-thirds of Alberto-Culver’s sales come from the United States.

The purchase makes Unilever the biggest maker of hair conditioning products in the world, the second-largest in shampoo and the No. 3 in styling, the company said.

Unilever entered the professional hair-product market in 2009 with the purchase of the TIGI salon brands from the creators of Toni & Guy for $411.5 million. The Alberto Culver acquisition includes Simple, a skin-care company it bought in 2009 for about 240 million pounds ($379 million).

Personal care now represents 30 percent of Unilever’s sales compared with 20 percent a decade ago, Polman said. The unit had underlying sales growth of 7.8 percent in the second quarter, Unilever said in August, more than twice the pace of the group.

Alberto-Culver has been a spectacular stock over the years. According to Yahoo Finance (whose numbers I don’t fully trust), the dividend adjusted return since 1984 is close to 14,000% which is over 20% per year.

The other major merger is Southwest Airlines (LUV) deciding to buy out AirTran Holdings (AAI) for $1.4 billion. AirTran has been formed mostly from the remnants of what had been ValuJet. A few years ago, AirTran lost a bidding war for Midwest Air to TPG, the private equity outfit.

The definitive agreement marks the first combination between major U.S. low-cost carriers and is only the second large acquisition by Southwest after it failed to capture Frontier out of bankruptcy protection last year.

Kelly said Southwest would retain its distinct existing brand, avoiding bag fees and offering a single-class service. “This fits in beautifully with the strategy we’ve laid out, probably for the next decade,” he said.

Southwest executives said it would take two years to integrate the airlines, though they have to navigate meshing contracts from both carriers’ unionized workforces. Southwest has yet to take the plan to employees–80% of its staff is unionized, compared with 50% at AirTran. The deal also needs to be approved by shareholders and competition authorities.

Kelly said there was little overlap between the two networks, allowing Southwest to expand after halting its rapid growth during the recession. Atlanta–a key business market where AirTran competes with Delta Air Lines Inc. (DAL)–is one priority, as are smaller cities where it could use its target’s Boeing 717s. Southwest plans to keep the 717s and utilize AirTran’s orders for Boeing 737-700s, which mirror its own core fleet. Southwest is also looking at larger 737-800s that would be aimed at more congested airports.

Posted by on September 27th, 2010 at 10:55 am


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