Deals wrap: Selling the ex-bankrupts
General Motors’ coming initial public offering may be a hard sell. After all, the automaker burnt investors with its Chapter 11 filing a little over a year ago. The IPO of GM and, in time, those of other cleaned up ex-bankrupts like Delphi and Chrysler, deserve cautious investor interest. *View article
Barnes & Noble shares soared 21 percent after the struggling bookseller said it was up for sale and could get a bid from its founder to go private. *View article *View NYT’s article on who may bid for the company
Citigroup is poised to put its British online bank Egg up for auction as part of a plan to dispose of billions of dollars in unwanted assets, the Financial Times says. *View article
The New York Times sits down with Guillaume d’Hauteville, vice chairman for investment banking in Europe at Nomura Holdings. He discusses the uncertainty surrounding M&A in Europe in a question-and answer-article. *View NYT article
Noted: Goldman sees more utilities M&A
Goldman Sachs analysts say M&A among Europe’s utilities is likely to pick up this year, and name Britain’s Shanks, Drax, International Power, the country’s water companies (Severn Trent, Northumbrian Water, Pennon and United Utilities), and Edison of Italy as the most likely targets. (Shanks, of course, is already in the Carlyle Group’s crosshairs.)
The Goldman team looked at company ownership; the political and regulatory backdrop; and the firms’ sizes and relative valuations to come up with its top picks.
From the note, dated Jan 7:
“We believe M&A activity will pick up over the course of 2010 as current market valuations provide a once-in-a-cycle opportunity for potential acquirers, current economic weakness is likely to accelerate sector consolidation and private equity firms are likely to deploy capital as credit markets open up …
“However, we expect the bulk of M&A activity to continue to come through disposals, as companies seek to strengthen their balance sheets, mainly to avoid credit rating downgrades as a result of their high gearing levels.”
Noted: Europe SA on the takeover trail?
A poll from UBS and the Boston Consulting Group finds a “surprisingly healthy” one in five European companies is likely to make a significant (EUR 500 mln+ in sales) acquisition in 2010. Some of the other key findings:
“Corporates are seeking growth: Strategic and growth-related considerations such as expansion of product offering, access to new geographies and access to new customers and distribution channels were the three most cited drivers of M&A activity, from a choice of 12 drivers.
“Lack of attractive targets and company valuations are main M&A barriers: Lack of attractive targets (cited by 40% of respondents) and, reflecting the speed and extent of stock markets’ recovery, high valuations (cited by 39% of respondents) were the most commonly cited barriers to M&A.
“Self-imposed financing constraints: Corporates plan to rely on internal financing for deals. 42% of respondents plan to use existing cash reserves or cash flow whilst 23% would use existing debt facilities. Beyond this there is a clear preference for equity financing (14%) over new bank loans (5%) or traded debt issues (4%). This suggests an upper limit to deal sizes over the next year – consistent with the early stages of other M&A waves.
“Not many mega deals yet: Only 20% of respondents expect a transformational deal in their sector vs. 43% in last year’s survey. This is consistent with (1) a preference for internal funding of deals, (2) product markets not having undergone the seismic change that many expected a year ago, (3) still relatively moderate risk appetite of senior executives and (4) perceived higher valuations …
“Corporate restructuring outlook: Restructuring expectations are high; 66% of respondents expect more deal-based restructuring in their industry over the next 12 months. “Forced” divestitures and voluntary sales of underperforming businesses are expected to feature heavily (29% of respondents each).
“Shareholder activism: A significant majority (75%) of respondents expect more pressure from investors, banks and other creditors to conduct more deal-based restructuring in their sectors.
Brief respite from brickbats
London’s bankers were hardly in celebratory mood last night, post-Darling, but Financial Times unit mergermarket persevered with their 2009 M&A awards, crowning Lazard financial adviser of the year for working on deals such as BGI-Blackrock and Glaxo-Stiefel, and lauding Swiss drugmaker Roche for its $47 billion buyout of Genentech. See the extensive list of winners — including Financial Adviser of the Year, Visegrad Group [that's the Czech Republic, Poland, Hungary and Slovakia] — here.
Curiously, though, there was nothing for Morgan Stanley — the No. 1 bank year-to-date for announced M&A globally and in the United States, according to Thomson Reuters data. And arch-rival Goldman Sachs was awarded just for its work in Germany, while Europe’s top M&A house in 2009, Deutsche Bank, also went empty handed.
Thomson Reuters magazine Acquisitions Monthly hosts its bash in January.
Keeping score: EMEA mid-market M&A halves
Highlights from Thomson Reuters data on mid-market (sub-$500 milion) deals. For October in European, the Middle East and Africa (EMEA):
· Average bid premium four weeks prior to announcement increased on average across sectors in EMEA year to date compared to same period in 2008 by 2% with bid premia rising slightly with half the sector showing an increase and half decreasing.
· Year on year Average Rank Value to EBITDA however decreased by 16% on average with only the Real Estate and Materials sectors increasing.
· JP Morgan top the European Mid-Market M&A rankings YTD, up from third position for same period 2008
· EMEA Mid-Market M&A from January to end of October down 49.6% compared to same period last year, to US$110.2bn from US$218.8bn.
· EMEA Mid-Market M&A activity for October at US$12.2bn, down 12% from September’s US$13.9bn, but down 34.9% compared to October 2008 which stood at US$18.7bn.
Noted: Deutsche sees M&A “wave”
Like UBS and Societe Generale, Deutsche Bank’s researchers are now forecasting a resurgence in M&A and say investors should “prepare to ride the wave”.
They concede that “picking actual as opposed to potential M&A targets is a notoriously difficult exercise” but have come up with 30 potential European targets, based on strategic and financial criteria. While bank lending remains a problem, they say that is not always an insurmountable hurdle, and should spur more stock-based deals (see graph below).
In a note dated Nov. 4, the DB team writes:
“Following two years of below-normal levels of merger and acquisition (M&A) activity in Europe, we believe the conditions are in place for deals to return to the fore as a major driver of returns: Public markets are well and truly open for financing, low organic growth should spur expansion by acquisition, rising equity markets and sub-peak valuations make stock an attractive acquisition currency, and confidence is returning to boardrooms and executive offices.”
Here are their 30 top targets:
Bad will
Most binges are followed by hangovers, and so the takeover boom earlier this decade is likely to translate into some hefty goodwill impairment charges for major European companies, as they mark down the value of assets bought when the party was in full swing.
This graph, lifted from a new report by Houlihan Lokey, shows the proportion of companies in each sector of the DJ Stoxx 600 index that have a book value of equity at least 10% above their market capitalisation. The bigger the dark blue line, the worse shape the sector is in – step forward autos, banks, insurers, other financial institutions, and real estate-companies.
Read the full Reuters story on the report here. And here’s an earlier HL release on U.S. goodwill impairment.
Is the worst over?
Merger mania is back, at least that’s what the numbers seem to show.
A staggering total of about $60 billion worth of corporate deals have been announced or rumoured in global markets since Saturday alone. The takeover feast is impressive, spread as it is across diverse sectors such as foods, semiconductors, financials and telecoms.
Kraft Foods’s blockbuster $16.7 billion offer to buy Cadbury has suddenly turned the spotlight back to dealmaking and swept away markets’ lingering concerns of patchy economic growth. The rising deal volume is a welcome relief for investment banks, who’ve gone through a torrid year after Lehman’s bankruptcy last September brought M&A to a halt. The dealmaking will help them partly fill their coffers with much-needed advisory fees and a kick up in the league tables.
No doubt with many equity markets rallying to 2009 highs, and lured by prospects of improved valuations, many buyers are chasing deals while prices are seen as cheap. That could have been the thinking behind Abu Dhabi’s move to offer $1.8 billion to buy loss-making Nasdaq-listed, Singapore-based Chartered Semiconductor in a chip sector emerging from its worst downturn.
Many companies are simply being opportunistic, but with the economic tsunami having left so many companies floundering there the opportunity to reel in cost savings and restructuring bargains through mergers could outweigh any lingering caution about whether the recovery is for real or not.
Spark needed
Could the sale of Britain’s biggest electricity distribution network help re-energise infrastructure dealmaking?
The supposedly steady business of buying and running roads, ports, and power grids has had a torrid time. The credit crunch has undermined some big infrastructure players, made it tricky to finance deals, and revealed that demand for some services — like toll roads and airports — is flakier than expected. Asset sales have run aground, instead of commanding the big premiums they would have fetched in the frantic debt-fuelled auctions of yore.
Nonetheless, optimists say the world’s long-term infrastructure needs are enormous. They are also cheered by the record $100 billion or so of funds that Preqin says are currently being raised (albeit slowly). And there may be some chinks of light on the M&A front. As Greg Roumeliotis and I wrote earlier:
“EDF’s possible sale of British or French power networks worth billions of euros suggests infrastructure dealmaking is set to recover after a dismal year for the once-hot asset class.
“The French utility owns Britain’s biggest electricity distribution network and France’s power grid RTE. It has not begun any formal sales process for either, but bankers and investors say advisers are working toward possible sales.
What green shoots?
European bankers may be having more conversations that could lead to M&A than six months ago, but this week’s deal figures from Thomson Reuters still make dismal reading.
So far this year, European M&A has been worth $356.6 billion, a 51% fall compared to last year at this time. Excluding government investments, merger activity in Europe totals $239.1 billion, a 67 percent decrease from 2008 levels.
Here is another of this week’s data points:
“Germany’s E.on has agreed to sell its natural gas distribution subsidiary, Thuega AG, to a group of German utility companies for $4.1 billion, topping the list of worldwide mergers this week. Goldman Sachs, which advised Thuega, and @visory Partners GmbH, which advised the consortium, could share an estimated $30 million to $35 million in advisory fees on completion of the deal.
