World Is Getting Smaller
M&A In The Works

This will be a regular thing looking at M&A deals in the works. Not just any potential big deal, but ones which gradually shapes our world.

EMI Buying BMG Music
EMI, the world’s third largest music company, is seeking private equity backing to mount a US$1.5 billion - US$2 billion bid for Bertelsmann’s BMG Music Publishing. Venture capital backing would allow EMI to retain the resources to bid separately for Warner Music, though its initial US$4.2 billion offer (for Warner Music) was rebuffed last month. Although EMI is only the world’s No 3 recorded music business, it is the world leader in music publishing, the part of the industry that specialises in song copyrights. BMG is the No 3 publisher. This method of M&A by EMI is loosely based on Sony Corporation’s US$4.85 billion purchase of the MGM film studio last year. Sony put together a consortium to buy MGM. Sony runs MGM, but put up only US$300 million of equity. Yet EMI faces stiff competition. Last week BMG’s owner, Bertelsmann, of Germany, said that it had received 14 expressions of interest in its wholly owned music publishing arm, which it has put up for auction. BMG Music Publishing generated revenues of €372.4 million (£256 million) last year and generated an unspecified “double digit” return on sales. Music publishing has become sought after by venture capitalists as the costs of marketing are born by the recorded music side of the business. The rise and rise of big private equity funds means the deal will be carried out, and probably EMI will end up overpaying.

Fiat To Buyback Ferrari
Fiat, the Italian car maker that was languishing close to bankruptcy two years ago, is on the verge of buying back a prized stake in Ferrari. Fiat is expected to pay 800 million euros to 850 million euros (US$1 billion to US$1.07 billion) for 29 percent of Ferrari, leaving a 5 percent stake in the hands of Abu Dhabi’s state-controlled Mubadala Development Company . A clause in the original sale contract allows Fiat to pay a discounted price until September this year. The turnaround in Fiat's fortunes has been largely due to the success of the new Punto, over 200,000 of which were sold in the first three months of this year. Last year, Fiat declared a €1.4bn profit, after a €1.5bn loss in 2004. That was mainly thanks to a series of disposals and an agreement with several lending banks to swap €3bn of debt for equity. Fiat has €8.8bn of cash, which is mostly funded from bond issues. To be able to buy the stake in Ferrari without changing its debt position, Fiat has been concentrating on selling assets. Fiat has close to 30 percent of the Italian car market and is one of the country's largest companies. It also owns a large part of Juventus, which is about to stand trial for allegedly attempting to rig football matches in the Italian league.

Johnson & Johnson To Buy Consumer Unit Of Pfizer
Johnson & Johnson, the drug maker, will buy the consumer product unit of Pfizer, which includes household brands like Listerine and Sudafed, for US$16.6 billion. The deal would add Johnson & Johnson’s stable of brands — which includes Tylenol, and Neutrogena — with Pfizer’s lineup including Rolaids antacid, Benadryl allergy medicine, Rogaine baldness treatment, Zantac antacid, Bengay analgesic and Lubriderm skin lotion. Johnson & Johnson beat a whole host of predators for the unit, which was put up for sale in February. The other bidders had included GlaxoSmithKline, originally tipped to win the auction, and a British household cleaning products maker, Reckitt Benckiser. At US$16.6 billion, Johnson & Johnson would be paying a hefty price tag; when the auction had begun, most analysts had pegged the sale price at about US$14 billion. Pfizer said it wanted to sell or spin-off its consumer products unit as it tries to focus on prescription drugs, its most profitable business line. The consumer unit had US$3.9 billion in sales last year, a 10 percent increase from 2004, and an operating profit of US$670 million. That's a very rich 25x historical PE, but its still worth it as it is very difficult and costly to build a global brand name that is accepted.