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,
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