The Great Debate UK
Barclays’ hasty deal to sell iShares in April served its purpose. The $4.4 billion price-tag boosted the bank’s capital, thereby allowing it to dodge the government’s insurance scheme. Barclays should now seek better terms on the deal.
A month is a long time in the markets. Barclays sensibly agreed with the purchaser, the private equity firm CVC Capital Partners, a “go shop” clause, allowing it to seek higher bids before June 18.
Several other parties have now entered the fray. With the markets storming higher, it should be possible for Barclays to improve on the CVC deal.
One way to do this would be to get a higher price, and this should be possible. But Barclays should also negotiate better financing terms. The current terms hark back to the “cov-lite” days of private equity, where banks extended credit without strict covenants.
LONDON, April 23 (Reuters) – Volumes may be down, but there are green shoots appearing in the M&A market after the frozen winter of financial distress.
This doesn’t mean a return to the boom years of a few years ago. It could take years for deal values to reach the dizzy heights of the second quarter of 2007, given falls in asset prices. But the number of deals is recovering fast. This fell off a cliff in Q1 of 2009 and at just over 8,000 deals was the lowest global tally since Q3 2004.
The week starting March 29 was the busiest of the year in terms of deals announced, with 821 transactions, and the 5th busiest since Sept. 2008, according to Thomson Reuters data.
There are still some complications (the disappearance of loan-funding, equity market volatility to name just two), but investors seem to be back on the hunt for bargains.
M&A deals may tend to be pretty hit and miss (indeed the failure rate is high) but historically the best returns from deals have been achieved on those struck during economic downturns, when activity is low.
True, M&A has been fuelled so far this year by a spate of large deals in the pharmaceuticals sector, an area that has been least affected by the crunch, with healthcare accounting for 27 percent of the total of $472 billion of announced deals during Q1. Pfizer’s <PFE.N> $68 billion acquisition of Wyeth <WYE.N> and Merck’s <MRK.N> $41 billion takeover of Schering-Plough <SGP.N> were the blockbusters.
But this was only just ahead of the distressed financials sector at 25 percent. And it is this area of activity which will grab a significant share of deals (by volume if not by value) as banks, insurers and fund management companies rejig their portfolios and vulture investors pick off the walking wounded.
The restructurings resulting from the meltdown in financial services are just getting underway. Look at the businesses UBS <UBSN.VX> is selling, Barclays’ <BARC.L> disposal of iShares, or indeed the auctions of Citigroup <C.N> and Royal Bank of Scotland <RBS.L> units in Asia.
Banking groups are under pressure to offload non-core businesses to strengthen weakened balance sheets and therefore are less sensitive to value. Add the assets which governments will have to repackage or offload once they have feel confident they have stabilised the sector and the deal pipeline starts to look positively healthy.
No wonder some investment bankers — especially those in boutiques and which thus have no conflicts with mainstream financial businesses — are rubbing their hands.
The main constraint on buyers (other than those lucky or sensible enough to still be sitting on cash) is obtaining financing. It is possible for companies to raise money for deals that seem to investors to make strategic sense. Roche <ROG.VX> of Switzerland, for instance, tapped the bond markets for a whopping $39 billion to fund its Genentech buy-out.
But stock market investors aren’t flush with cash and are wary of giving companies a free hand. UK’s Pearson <PSON.L> recently had to pull a small share issue that was designed to give it a cash pile from which to make opportunistic acquisitions. Meanwhile, it is still difficult to obtain loan finance from banks, and the bond markets are only really available to larger companies.
Even so, with debt-strapped companies being forced to sell off assets to meet covenants and prices relatively low, there should be plenty of action this year.
– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.
(Edited by David Evans)