Europe set to square up to US and Asia on com­pany takeovers

The US and Asia are set to lead global M&A ac­tiv­ity this year, with the UK and Europe look­ing to play catch-up as cor­po­rates jos­tle for ever greater scale,

The Sunday Telegraph - Money & Business - - Front page - writes Lucy Bur­ton

Boost­ing the in­dus­trial and eco­nomic power of Europe, French pres­i­dent Em­manuel Macron told a crowd of stu­dents last year, means con­sol­i­dat­ing a com­pet­i­tive Euro­pean in­dus­try on a “global scale”. In an im­pas­sioned speech, the for­mer Roth­schild banker said Europe is now “too weak, too slow and too in­ef­fi­cient” and must be bold, avoid pro­cras­ti­nat­ing and re­act to threats.

“Re­newed am­bi­tion is the only way of re­spond­ing,” the 39-year-old said at Paris’s Sor­bonne Univer­sity last Septem­ber. “Let’s not be afraid, let’s move for­ward.”

His call for a “re­foun­da­tion of Europe” co­in­cided with the news that French trans­port firm Al­stom had agreed to a deal with Ger­man engi­neer­ing gi­ant Siemens to create a new “Euro­pean cham­pion in the rail in­dus­try” that would pit it against China’s gi­gan­tic state-owned op­er­a­tor CRRC. A day later it emerged that France’s big­gest ship­yard STX, which Macron had tem­po­rar­ily na­tion­alised to avoid it go­ing into Ital­ian group Fin­cantieri’s hands ear­lier in the year, had struck a deal with Fin­cantieri after all. City bankers say this is just the start as board­rooms in Europe de­cide it’s bet­ter to be part of a Euro­pean be­he­moth than to be swal­lowed up by a much big­ger US or Asian preda­tor.

“Europe needs to re­spond to a more ag­gres­sive ex­pan­sion­ary agenda from Asian com­pa­nies and they need to re­spond to the US in­creas­ingly cre­at­ing their own na­tional cham­pi­ons,” says David Lomer, who runs M&A in Europe for JP Mor­gan. “This com­bi­na­tion will ac­cel­er­ate pan-euro­pean con­sol­i­da­tion as the con­ti­nent thinks about how it too can create its own Euro­pean cham­pi­ons.”

That de­sire to go big­ger is set to ac­cel­er­ate this year as busi­nesses scram­ble to get their houses in order be­fore Bri­tain leaves the EU and new US tax re­forms give Amer­i­can cor­po­rates a lift. While it is not quite a per­fect storm for the City – M&A ad­vis­ers say they will have to work much harder to get UK deals through this year – more dis­cus­sions are com­ing to the ta­ble as busi­nesses race to get big­ger or bet­ter by March 2019. If ac­tiv­ity picks up it could be the fifth year run­ning that global deal ac­tiv­ity ex­ceeds the $3 tril­lion (£2.2 tril­lion) mark, con­tin­u­ing the mo­men­tum of late last year when Broad­com un­veiled a $130bn bid for ri­val com­puter chip maker Qual­comm, Ru­pert Mur­doch an­nounced a $69bn deal to sell 21st Cen­tury Fox to the Walt Dis­ney Com­pany, and US drug chain gi­ant CVS Health agreed a $69bn ac­qui­si­tion of health­care in­surer Aetna. Bankers are hop­ing this is the year big deals will hap­pen in Europe.

“The un­usual cock­tail of pushes and pulls are cre­at­ing dif­fer­ent rea­sons for peo­ple to act [on deals],” says Cit­i­group’s head of UK in­vest­ment bank­ing Jan Skar­bek. Bri­tain-based chief ex­ec­u­tives are aware that their ri­vals in Europe will be look­ing to up their game in the months ahead, ei­ther by spin­ning off the slow-grow­ing parts of their busi­ness or by ty­ing up with Eu-based ri­vals so that they can com­pete with big­ger cham­pi­ons over­seas. Siemens and Al­stom have com­bined sales of €15.3bn (£10.1bn), bring­ing them closer to Chi­nese ri­val CRRC, which has an an­nual rev­enue of around €35bn. The boss of Siemens AG said when the deal was an­nounced that the Franco-ger­man “merger of equals” sent out “a strong sig­nal in many ways” – per­haps hint­ing at a stronger part­ner­ship be­tween the two EU coun­tries.

“What­ever pre­cise shape and form Brexit takes, if you’re France or Ger­many you have an in­cen­tive to see pan-euro­pean busi­nesses form,” says Skar­bek. “We may see more Euro­pean deals – par­tic­u­larly be­tween France and Ger­many – which have his­tor­i­cally been hard. We may see a rush.” Al­though the US and Asia are set to

‘Europe needs to re­spond to a more ag­gres­sive ex­pan­sion­ary agenda from Asia and the US’

re­main the most ac­tive re­gions for M&A ac­tiv­ity, data from Dealogic shows that the value of deals be­tween Euro­pean coun­tries last year rose 128pc to its high­est level since 2014, with Euro­pean firms in­volved in some of the world’s big­gest deals.

French lens maker Es­silor made a $26bn swoop on Ital­ian glasses gi­ant Lux­ot­tica, the brand be­hind Ray Ban’s sun­glasses, for ex­am­ple, while Span­ish toll-road op­er­a­tor Aber­tis re­ceived takeover bids worth as much as $42bn from firms in Italy and Spain in a bat­tle that’s still to play out. “There is re­vi­talised in­ter­est in Europe post the French elec­tions, which in it­self may en­cour­age more in­ter-euro­pean con­sol­i­da­tion of EU com­pa­nies as a de­fen­sive move,” says HSBC banker Philip Noblet, who adds he has no­ticed a clear change in at­ti­tude among some US chief ex­ec­u­tives ver­sus a year ago.

But it is not just Euro­pean firms try­ing to pair up with com­pa­nies closer to home. The value of do­mes­tic UK deals rock­eted 70pc last year to a seven-year high, ac­cord­ing to Dealogic, with ex­am­ples in­clud­ing Ham­mer­son’s £3.4bn move for ri­val shop­ping cen­tre group Intu Prop­er­ties and Lad­brokes Coral’s agree­ment to be taken over by on­line gam­bling firm GVC. “What we have seen is in­creas­ing ac­tiv­ity among UK com­pa­nies who are try­ing to get ready and be in the strong­est pos­si­ble po­si­tion in an­tic­i­pa­tion of the brave new world un­der Brexit,” says JP Mor­gan’s Lomer.

While big­ger UK busi­nesses are able to buy ri­vals or dis­pose of so-called “cor­po­rate or­phans” – banker talk for di­vi­sions no longer wanted – small busi­ness owners are con­cerned about the im­pact Brexit might have on their rev­enues. One Lon­don-based en­tre­pre­neur says it will “al­most cer­tainly have a neg­a­tive ef­fect” on his com­pany due to the “ris­ing cost of goods, lack of new labour en­ter­ing the mar­ket [and] po­ten­tially peo­ple with less money in their pock­ets fur­ther down the line”.

These same fears in big cor­po­rate board­rooms are driv­ing bosses to­wards deals that might pro­tect them from any dam­ag­ing ef­fects of Brexit. “Uk-fo­cused ser­vice com­pa­nies, es­pe­cially those that rely on UK govern­ment and lo­cal govern­ment con­tracts, will feel the need in a Brexit world to be big­ger in order to have the cost sav­ings,” HSBC’S Noblet notes.

Baker & Mcken­zie M&A part­ner Nick O’don­nell agrees that cor­po­rates with sig­nif­i­cant UK ex­po­sure will look at M&A “driven by a de­sire to achieve scale and to en­hance mar­ket po­si­tion”.

How­ever, last year’s boom of do­mes­tic UK deals will not nec­es­sar­ily con­tinue in the months ahead. To the con­trary, Lomer ex­pects the in­crease in UK deals to be turned on its head in 2018 as big Bri­tish firms able to af­ford over­seas ex­pan­sion look to di­ver­sify away from their home mar­ket.

“In 2018 we ex­pect more takeovers by large-cap Bri­tish firms abroad, es­pe­cially in the US. Ge­o­graphic di­ver­si­fi­ca­tion is be­com­ing es­sen­tial for UK busi­nesses to off­set the po­ten­tial slow­down in eco­nomic growth re­sult­ing from Brexit,” he says.

The US mar­ket is a tough one to crack, let alone take over. Al­ready the most ac­tive re­gion for M&A ac­tiv­ity by a long shot, Pres­i­dent Don­ald Trump’s sweep­ing tax over­haul – which slashes the cor­po­rate tax rate from 35pc to 21pc – is set to trig­ger a new era of deal ac­tiv­ity as money pours back in from over­seas. “If you look ahead, given the US Tax Cuts and Jobs Act go­ing through, Wall Street is likely to get even stronger,” EY’S bank­ing ex­pert Omar Ali has warned. “The tax on cash that US multi­na­tion­als have over­seas is go­ing to get treated in a way that could stim­u­late eco­nomic growth [and could create] a big M&A boom. For me, 2018 will just heighten the dif­fer­en­tials.” With more cash in their pock­ets to go after ri­val for­eign firms, US bosses are likely to be more ag­gres­sive and more gen­er­ous when go­ing after what they want in the years ahead, dent­ing UK firms’ chances of be­com­ing the preda­tors out­side of Europe.

“The back­drop of the Brexit ne­go­ti­a­tions is likely to keep a lid on the re­lease of animal spirits in UK board­rooms, com­pared to what we are start­ing to see in the US,” says O’don­nell. “It shouldn’t be an im­ped­i­ment to trans­ac­tions where there is a good strate­gic story, but no one should be sur­prised to see UK bid­ders walk­ing away from deals that re­quire leaps of faith.”

But, as with con­ti­nen­tal Europe, the UK Govern­ment will be un­der ex­tra pres­sure to pro­tect its own cham­pi­ons from for­eign takeovers after Brexit.

Weeks after re­ject­ing a £115bn bid for Unilever by Amer­i­can gi­ant Kraft Heinz last year, Paul Pol­man, the head of the An­glo-dutch gi­ant, called for the UK’S “na­tional cham­pi­ons” to be bet­ter pro­tected from for­eign takeovers. His com­ments sparked a mixed re­sponse, with one se­nior M&A banker point­ing out that “share­hold­ers are the owners of the com­pany” and so it is up to them to press the green light on a deal.

In­deed, share­hold­ers are get­ting in­creas­ingly in­volved in M&A de­ci­sions, a theme bankers ex­pect to see heighten in 2018, and spread out of the US and into Europe, Ja­pan and Aus­tralia. “My big­gest re­gret of the year is that the Moni­tise takeover was ever al­lowed to go through,” says Paul Mum­ford of Cavendish As­set Man­age­ment, talk­ing about Moni­tise’s sale to US com­pany Fis­erv for just £70m. His com­ments point to a U-turn in at­ti­tude among some of the UK’S share­holder com­mu­nity – be­fore the deal closed he said he would not look to scup­per it. “We’re be­ing sold down the river, but that’s life I’m afraid,” he said at the time.

While bankers are pre­par­ing for a busy year, they ad­mit it is not go­ing to be an easy one. “The themes will be: EU has rea­sons to be stronger, Asia slower, US the en­gine room, UK a sur­pris­ing source of ac­tiv­ity,” says Skar­bek. “An­other hard-work year to pro­duce a rea­son­able amount of ac­tiv­ity rather than a blowout.”

‘We have seen ris­ing ac­tiv­ity among UK com­pa­nies who are try­ing to ready for the brave new world of Brexit’

Broad­com buy­ing Qual­comm Dis­ney buy­ing Twenty-first Cen­tury Fox CVS Health buy­ing Aetna De­cem­ber 14 $69bn Top 10 global deals 2017 Aber­tis ap­proached by Hochtief Jan­uary 26 $31.4bn Aber­tis ap­proached by At­lantia John­son & Johns bought Acte­lion Ltd

Novem­ber 17 June 15 Septem­ber 4 $27.8bn $26.7bn $30.1bn Brook­field Prop­erty Ex­ist­ing Share­hold­ers nited Tech­nolo­gies Es­silor In­ter­na­tional buy­ing bid for buy­ing bought Rock­well Collins GGP Es­sity Lux­ot­tica Group To­tal $3.7tn Jan­uary 16 $25.6bn

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.