From Acquisitions Monthly

Pfizer, the world’s largest pharmaceuticals company, is lining up Turkey’s largest drugs company, Abdi Ibrahim, for a deal, according to an M&A banking source.

There are no talks so far, and what form a potential tie-up would take is not yet known.

Only last month the president of Pfizer’s emerging markets business unit revealed that the drugs company was considering new acquisitions.

“We see opportunities coming from the financial crisis… opportunities to build partnerships in emerging markets,”

Jean-Michel Haldon told Reuters in June. He did not give further details at the time, but under the stewardship of chairman and chief executive Jeff Kindler, Pfizer wants to add $3 billion in annual revenue by 2012 from emerging markets, which include China, Brazil and Turkey.

Family-owned Abdi Ibrahim – which is run by its president Nezih Barut and has annual sales of around $850 million – would certainly provide Pfizer with that additional source of income.
Turkey’s pharma market also remains hugely fragmented and is ripe for consolidation.  Abdi Ibrahim may be Turkey’s market leader, but it only has 7 percent of the country’s estimated $11 billion pharmaceutical market.  Hot on its heels are the likes of Novartis and Sanofi-Aventis.

The big multi-nationals are increasingly looking to the developing markets for growth as they face stiffer competition from generic drug makers, patent expiries, and a pressing need to reinvigorate their drug pipelines – all reasons why Pfizer bought Wyeth in January for $68 billion.  Pfizer’s best-selling anti-cholesterol drug Lipitor indeed expires in 2011. While a source close to Pfizer would neither confirm nor deny the company’s bid interest, Pfizer’s chief spokesperson Ray Kerins predictably would not comment on what he described as rumor. As for Abdi Ibrahim, all of its 2829 employees seem to have gone off on holiday.   “Welcome to Abdi Ibrahim,” said a corporate voice mail.  “Abdi Ibrahim’s headquarters will be closed from 6 to 20 July due to corporate summer vacation.”

A federal judge has agreed to delay the UBS tax-evasion trial as the U.S. and the Swiss seek a resolution. UBS shares gained strongly on the presumption that a delay was near.

A source familiar with the situation told Reuters the talks, now led by the U.S. and Swiss governments, were aimed at finding a way to allow the bank to transfer client data without breaching Swiss law. No doubt the discussions, and perhaps even the nature of a settlement, will be murky.

That a settlement is being sought may be a short-sighted reason to buy UBS stock. Without its precious secrecy to define it, Swiss banking would lose the standing that has made it the wealth-management center of the world. The fact that the two sides are talking may indicate Washington is willing to accept less than unconditional surrender. But make no mistake: Settlement means less secrecy, not more. While a settlement would help the bank with this particular mess, it could have an added sting in the form of a payment from UBS to the U.S. government.

Longer term, tax lawyers say European governments, which are also trying to recoup unpaid tax money from offshore banks, could also put pressure on Switzerland as a global fight against tax cheats gathers pace.

Neelie Kroes’ campaign to ensure the European Commission’s rules over state aid are respected has remained in a high gear over the last few weeks. Three times the Competition Commissioner has spoken publicly about how restructuring plans for shaky banks bailed out last Autumn should be agreed with the governments of those countries.

This Tuesday she told the British Banker’s Association the truth. Royal Bank of Scotland made the largest ever corporate loss last year and yet was still saved by the government with a massive £20 billion plus rescue injection. One might ask how such an institution, so fundamentally important for the economy, could not be?

Kroes does not dispute that. What she does insist on is that such aid cannot be effectively propping up the bank indefinitely, allowing the balance sheet, and hence the bank’s business, to remain bigger than it should be, if it were not for that aid.

EC rules state that a restructuring plan to set out how this should be rectified must be made within six months of the aid being administered. After a while there is a danger that smaller banks, without aid, will be disadvantaged by their larger protected brethren.

Kroes is clearly losing her patience with the UK Government. The two camps have yet to resolve how Northern Rock will be restored to independence over 15 months after a draft restructuring plan for the UK’s fifth largest mortgage lender was submitted.

It seems as if a similar delay could happen with RBS. However, that could be disastrous for Kroes as the UK government turns its attention to the forthcoming election. RBS is such a significant bank that there is a danger Kroes’ authority will be damaged irreparably if no agreement can be reached on possible divestments.

With Germany she acted decisively agreeing a dramatic restructuring of Commerzbank and WestLB within the EC timetable.

So the next month, before RBS updates on its internal restructuring plans with interim results in early August, will be critical. An announcement on the sale of various RBS Asian businesses, possibly to Standard Chartered and ANZ, is expected imminently.

However, that is unlikely to be sufficient to satisfy Kroes, who wants to see RBS’s dominant domestic position in UK corporate and smaller business banking broken up. Perhaps we will yet see NatWest and the Royal Bank separated. Bringing those brands together was disgraced former chief executive Sir Fred Goodwin’s key deal.

After that Kroes will aim her sights at Ireland and her homeland of the Netherlands. Both states are propping up key lenders there. Kroes is due to visit Ireland for two days on July 16.

Roche’s megabucks Genentech buy is looking more like a reverse takeover — in some ways, at least.

The Swiss drugmaker splashed out $47 billion to buy out its biotech partner to secure access to Genentech’s impressive new drugs. But Roche’s U.S. operations are to operate under the Genentech name and research, development and commercial operations are all being based at the U.S. group’s South San Francisco headquarters.

Now Roche doesn’t even consider itself Big Pharma. It says it will leave the industry group Pharmaceuticals Research and Manufacturers of America (PhRMA) but will retain Genentech’s membership of the Biotechnology Industry Organization (BIO).

“As part of the world’s largest biotechnology company, Genentech and Roche believe that BIO’s purpose is closely aligned with the direction of the new company and, therefore, can represent the company’s interests in Washington, among policymakers, legislators and the general public,” Roche said in a statement.

PHOTO CREDIT: People are reflected in a window (R) as they walk past the headquarters of Swiss pharmaceutical company Roche in Basel February 4, 2009. REUTERS/Christian Hartmann

FirstGroup, the Aberdeen-based transport group led by its chairman Martin Gilbert, confirmed on Monday that it made an approach for smaller, embattled National Express on June 19.

But, National Express’s newly appointed chairman, John Devaney, and his chief executive, Richard Bowker, believe they can go it alone and have firmly rebuffed First Group. They are hoping, instead, to launch a £400 million rights issue.

This is not the first time the two companies have been linked as merger partners: there was talk three years ago of doing a £3 billion, nil-premium merger.

This time, however, FirstGroup made its opportunistic all-share merger proposal to National Express, after talks broke down between the British government and National Express over a bail-out of its London-to-Edinburgh East Coast Mainline franchise.

“No bail-outs in rail” is the government’s stance on the matter. No surprise there, then, when the coffers over at Treasury are empty.

“National Express now faces the choice of either racking up huge losses at East Coast or defaulting on the franchise, which would mean exiting UK rail altogether,” believes UK broker Collins Stewart.

National Express has been particularly hit hard from the cost of the East Coast line. To pay the government £138 million per year, it needs annual passenger revenue growth of at least 9 percent. It has only managed 0.3 percent in the first quarter.

That doesn’t put National Express in a very good position, when it has around £1.2 billion of net debt on its balance sheet. Indeed, its shares have more or less collapsed over the course of the year by around 70 percent, despite being confident that it will meet its renegotiated debt covenant tests tomorrow.

Advised by JPMorgan Cazenove, FirstGroup is clearly exploiting the situation, given that up until this point its strategy had always been focussed on cash generation and organic growth while it lumbered under a £2.5 billion debt pile.

“Without rail and with a sensible balance sheet structure – our sum-of-the-parts points to a fair value of around 500p for National Express,” says Collins Stewart. That’s about 70 percent above where the company’s share price is currently.

Buying National Express would make First Group into the UK’s biggest transport company. Failing that, there are plenty of other companies out there that might look to do a deal during these hard times: Arriva, Go-Ahead, and Stagecoach all come to mind.

Xstrata is different from most other major mining companies. Rather than being a long established group with strong links to a particular country, such as Australia for Rio and BHP, South Africa for Anglo American, or Brazil for Vale, it is a relative upstart with few ties to any particular territory, aside from its tax inspired domicile, Switzerland.

The group’s culture might seem innocuous but it is important, particularly when Xstrata has this week proposed a “merger of equals” with South African stalwart Anglo American. Unlike many of its rivals, Xstrata’s raison d’etre is doing deals, led by raucous chief executive Mick Davis.

The company floated in March 2002 with an initial value of £2 billion. Since then, a number of transformational acquisitions such as the $19 billion purchase of Falconbridge, and the recovery in global commodity prices, has meant the group is now valued at £20 billion. At its record high last year, when it tried to buy platinum producer Lonmin, it was worth £67 billion.

Xstrata’s strength is that it has always been much closer to its customers than other, perhaps more parochial groups keener on looking after their employees. The presence of trading entity Glencore on its shareholder register, with a third of Xstrata’s stock, is testament to this.

Davis’s true loyalty showed earlier this year when he effectively enabled Glencore to retain this stake, by funding its participation in January’s £4.1 billion rights issue, via a side deal selling certain Glencore coal assets in Colombia to the group for $2 billion.

The current tilt at Anglo American, now worth £24 billion, looks a deal too far for Xstrata. For one, Glencore looks likely to be diluted down to a sixth of the combined group, as the proposal currently lies. Secondly, Anglo American will vigorously defend its independence, as it is already showing, helped by implicit South African support.

Glencore must have approved Xstrata’s move but that in effect puts Xstrata in play, if it is indeed willing to effectively relinquish control. That is highly significant. The end result might either see Anglo American making a “pacman” offer for Xstrata to defend itself or else encourage Vale, which has approached Xstrata before, to make a play for it.

Ultimately Xstrata, with few political connections, looks the more vulnerable participant in this process.

Its half-year review time in investment banking, when London’s top firms gather up their heavyweights and engage with the press.

Each year a different business line takes the spotlight. In the pre-crisis boom times of 2007, M&A bankers held centre stage. Everybody wanted to talk to them. They were the most popular kids in school.

This year it was the turn of capital markets bankers to shine.

As my colleagues Douwe Miedema and Jessica Hall wrote earlier, mammoth bond sales and massive rights issues kept investment banking revenue rolling in in the second quarter.

Take a look at my own story for the contrasting performance of the M&A market - quarterly M&A fees hit an eleven-year low.

But at least the green shoots of economic recovery are a source of hope.  Unless you believe we are in for a W shaped recession, and then they are poison weeds.

Having the engine of cheap exports able to secure oil and other resources can’t be bad for firing up global economic recovery. So Sinopec’s purchase of Swiss oil explorer Addax Petroleum — China’s biggest overseas acquisition — should be an encouraging event.

Addax brings high-potential oil blocks in West Africa and Iraq. These are areas that tend to present difficulties for Western oil companies, so the deal exposes gaps that big emerging powers such as China, India and South Korea are looking to exploit. Certainly, these corners of the world are less politically perilous for the People’s Republic than the United States, where local politicians blocked CNOOC’s $18.5 billion bid for oil company Unocal in 2005.

Is it too convoluted to suggest that the bad blood still dripping from the failed Unocal bid might wind up being the grease that gets a world of other deals done for China?

With Anglo having spurned a premium-less bid from Xstrata, the chances of the proposed “mergers of equals” getting done is dimming. The spurned suitor said it was disappointed, but that’s about all it said, so while the possibility of a hostile approach cannot be ruled out, analysts say such a costly alternative is highly unlikely.

Analysts had been reasonably upbeat on Xstrata’s proposal, talking up the merits of a tie-up even as the steel industry shuddered and the government of South Africa, where Anglo has the bulk of its operations, squawked.

But just as investors were dumping their Anglo shares, talk emerged of the possibility of interest from two emerging market heavyweights: China’s Chinalco and Brazil’s Vale. Anglo’s stock quickly steadied.

Having been thwarted in its bid to acquire much larger miner Rio Tinto, China has shown tremendous appetite for a deal that would secure it the resources it desperately needs to keep its industry humming. The same goes for Brazil.

If it turns out Xstrata has opened the door to state-backed muscle for a deal — targeting itself as well as Anglo — Xstrata CEO Mick Davis may find his own firm fending off takeovertures.

Just when you thought M&A was dead, along comes the $68bn “merger of equals” proposal between Anglo-Swiss mining giant Xstrata and rival Anglo American.

Xstrata confirmed over the weekend that its chief executive Mick Davis recently wrote to Anglo American’s outgoing chairman Sir Mark Moody-Stuart about doing a deal. On the back of that, Anglo’s shares surged as much as 12.4 percent before falling back during Monday’s trading.  Spurred on by uncertainty in the global economy, a need for substantial cost-savings, the recent merger of Rio Tinto’s iron ore business with that of BHP Billiton’s – and a belief that Xstrata must double its size to catch its closest competitor, Rio Tinto – and you have the rationale behind Davis’s thinking.

“The combination would create a premier portfolio of operations diversified across multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth,” Xstrata said in a statement. According to Citi analysts, the deal “makes financial and strategic sense, and could create synergies of up to $750m.  The combined entity would be a global leader in base metals, platinum, ferrochrome and coal”.

Put another way, the new company would be number one in zinc and platinum production, as well as thermal export coal and ferrochrome.  It would be number two in copper, number four in nickel, and number five in iron ore and coke. Even though metal prices have made major gains for the year to-date, mainly driven by robust Chinese industrial activity and restocking, Chinese imports of those commodities are slowing.  Xstrata sees a tie-up with Anglo American as a defensive move.

While some of Xstrata’s major shareholders – including Glencore, BlackRock and Capital Group – are said to be behind such a merger, Xstrata’s financial advisers, Deutsche Bank and JPMorgan Cazenove, will be facing substantial difficulties to close a deal. Already, Anglo American’s advisers, Goldman Sachs and UBS, are mounting their client’s defence.  Apparently, Anglo’s assets are better quality and have more durability.  “Why would you want to dilute that portfolio with lower value assets?” an informed source told Reuters.

There would also be a clash of cultures between the two mining groups.  Anglo American’s chief executive Cynthia Carroll is understood to have a more command-and-control style, while Davis believes in more self-autonomy of business units.  Indeed, Carroll has so far not been persuaded by Davis’s overtures since Xstrata recapitalised its balance sheet with a $5.9 billion rights issue in March. “Anglo’s reluctance to do a deal and the stark difference in corporate cultures make a tie-up a possibility rather than a probability, in our view,” Citi stated.

It is also unlikely that Xstrata could go hostile since that would rankle the South African government, which has a 5.5 percent stake in Anglo through the Public Investment Corporation.

As for Brazil’s Vale, which has been mooted as an alternative partner for Anglo American or Xstrata, it would be financially stretched.  It has $9bn of net debt: gearing that up further would “seriously risk” its investment grade rating.  Paper financing would be complicated by Vale’s dual structure of ordinary and preferred shares.