(Adds Guggenheim Securities analyst comments.)
NEW YORK (TheStreet) -- Warren Buffett of Berkshire Hathaway (BRK.A) has been reluctant to invest in the common shares of top Wall Street players like JPMorgan (JPM) and Goldman Sachs (GS). Still, by way of Berkshire's prolific M&A activity, Buffett is helping to turn his top bank holding, Wells Fargo (WFC), into a formidable presence in the world of mergers and acquisitions.
Berkshire Hathaway, the investing conglomerate run by Buffett, on Thursday announced a $28 billion acquisition of ketchup maker Heinz (HNZ) for $72.50 a share, in what amounts to the Oracle of Omaha's second-largest deal ever.
For the Heinz acquisition and the 2009 purchase of railroad Burlington Northern Santa Fe -- Berkshire's biggest -- San Francisco-based Wells Fargo has won a key mandate to help provide financing for the mega-acquisitions.While it may be surprising that Wall Street heavyweights including Goldman Sachs aren't involved in Berkshire's elephant-sized acquisitions, the investment conglomerate's 8%-plus stake in Wells Fargo may go a long way in explaining why Buffett has repeatedly called on the nation's top mortgage lender to finance his biggest deals. Financial details on how Berkshire will pay for Heinz haven't been fully released. However, a press release notes that JPMorgan and Wells Fargo will provide Berkshire and co-investor 3G Capital with acquisition financing. Both banks are advising Berkshire and 3G Capital. Morningstar analyst Greggory Warren calculates Berkshire and 3G will own $4 billion of Heinz's equity, while Berkshire will also hold preferred shares worth $8 billion that carry a dividend of 9%. In Berkshire's 2009 deal for Burlington Northern, JPMorgan and Wells Fargo provided an $8 billion one-year loan to help finance the mega-acquisition, which valued the railroad in excess of $30 billion when counting debt. To fund the Burlington Northern acquisition, Berkshire also had to create a new class of shares. Wells Fargo's financing mandate on Berkshire's recent deals provides anecdotal evidence of the benefits of having Buffett as a top shareholder. However, it also underscores the growth that the lender is having in profitable Wall Street-related businesses like M&A financing. "The size that Wells Fargo has become with the capital markets product capabilities they've gotten through the acquisition of Wachovia puts them in a position to do these types of deals," Marty Mosby, a bank analyst at Guggenheim Securities, said of the Heinz acquisition. "It's a part of what Wells Fargo has developed into." Mosby notes that full-service banks like Wells Fargo and JPMorgan have seen an increase in Wall Street business, as mega deals move their way and not just to broker-dealers like Goldman Sachs and Morgan Stanley. "More than anything else, [this deal] is a highlight of what is happening in the financial-services arena," Mosby said. As other investment banks have scaled back operations and struggled to increase revenue since the financial crisis, Wells Fargo has consistently been able to grow its investment banking unit, which is part of a larger wholesale banking operation that also includes businesses ranging from corporate banking to insurance. In 2012, Wells Fargo cracked the top 10 on Wall Street in underwriting high-yield bonds, according to data provider Dealogic. It's also the 10th leading player in providing financing to financial institutions. In those parts of Wall Street, Wells Fargo competed with big, but beleaguered, titans like Morgan Stanley (MS) and UBS (UBS). In the U.S., Wells Fargo's underwriting prowess often beat European conglomerates as large as Deutsche Bank (DB) and Credit Suisse (UBS). In the white-glove work of providing advice to corporations and financial institutions on mergers, Wells Fargo falls farther down the list, running only in competition with boutique advisory firms.
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