Prepare to dump bonds as M&A takes off, SG says


Societe Generale’s asset allocation team reckons cash-rich corporates are going to start ploughing money into deals as the economy recovers, and that spells a brighter future for stocks than bonds. The graph above is lifted from a note published earlier this week, in which the French bank shows how equities tend to outperform bonds as M&A becomes proportionally more important (they measure it as a percentage of GDP).

The Paris- and London-based team adds:

“Beyond share buybacks, we believe three main factors will trigger a strong M&A cycle: equities are still cheap versus bonds, productivity gains should continue to be a priority for corporates and the primary credit market has reopened, with access to cheap financing. Furthermore, higher industrial concentration leads to stronger pricing power.”

“M&A is currently a massive source of alpha for stock pickers as control premiums are above 40% in the U.S. and above 25% in Europe.”

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.

DealZone Daily

Talk continues to swirl around Kraft’s potential bid for Cadbury. On Thursday Reuters reported a top shareholder in the British confectioner would accept 820 pence a share — well above Kraft’s first cash and shares offer but only a little higher than where the stock has been trading in recent days.

Activist investor Nelson Peltz, who has stakes in both Cadbury and Kraft, may now become a factor, a report says. A contractual obligation not to criticise Kraft’s management comes to an end on Friday. Will fireworks ensue when the gag is removed?

Other deal-related news in Friday’s papers include:

* BP Plc (BP.L) has had talks with Ghana’s national oil company about a possible joint bid for Kosmos Energy’s stake in the huge Jubilee oilfield off the coast of the country, Bloomberg said, citing two people familiar with the matter.

DealZone Daily

Blackstone boss Stephen Schwarzman’s taste for theme parks. The merits of a bid for British grocer Sainsbury. And why are Indian outsourcers shy of blockbuster M&A?

For these and the rest of the latest deals news from Reuters, click here.

And here’s what the newspapers are saying. (Some external links may require subscriptions).

* CME Group Inc (CME.O), the world’s largest derivatives exchange, is in talks to take over the Chicago Board Options Exchange in a deal that would value the largest U.S. options market at up to $5 billion, according to Crain’s Chicago Business.

Under pressure

 	 REUTERS/Yiorgos KarahalisRestructuring a company’s finances usually means someone takes a loss.

But who should take that loss is often a difficult and nerve-jangling process. Brinkmanship is the usual tactic with hard deadlines often the only way to draw situations to a close. Clever application of legal strategies usually helps also.

All of these factors are at play in the upcoming restructuring of Wind Hellas. The big Greek mobile operator has 3.2 billion euros of debt but is running out of cash to pay its interest bills.

Of the company’s lenders, those at the bottom of the pile — the subordinated bondholders, owed 1.17 billion euros — are under most pressure.

Sovereign Funds sextuple down

They may be placing smaller bets, but sovereign wealth funds were back with a vengeance in the third quarter.

Global corporate mergers and acquisitions activity involving sovereign wealth funds jumped sixfold to nearly $22 billion in the quarter, with 37 deals completed. Global announced M&A volumes involving state investment vehicles stood at $21.8 billion, up from $3.6 billion in the second quarter, according to our data.

The number of deals more than doubled from 17 in the April-June period. Only two weeks into the fourth quarter, there were five pending or completed deals with a combined value of $164.7 million. At the height of the boom in the first quarter of 2006, sovereign wealth funds sealed 35 deals worth $45.7 billion.

Keeping score: Brazilian IPOs and Russian M&A

Highlights from the Thomson Reuters Investment Banking Scorecard:

Banco Santander (Brasil) SA raised $7.0 billion in an initial public offering in New York and Sao Paulo, marking the largest IPO by a Brazilian company on record and the second largest IPO this year behind an offering from China State Construction Engineering, which raised $7.3 billion in July.
Global initial public offerings for year-to-date 2009 total $59.4 billion, a 35% decline from last year at this time.  Despite a flurry of recent offerings, nearly 80% of IPOs this year, by proceeds, have come from companies based in China, Brazil and the United States.

An $11.7 billion bid by Russia’s Vimpelcom for Kyivstar, a Ukrainian provider of wireless telecommunications services partly owned by Norwegian state-owned Telenor ASA ranked as the week’s biggest deal and the largest acquisition by a Russian company this year.
Overall, worldwide M&A totals $1.5 trillion for year-to-date 2009, a 38% decline over last year.  Acquisitions by Russian companies total $28.6 billion so far this year, a decrease of 53% compared to 2008.

In its second common stock offering this year, Nomura Holdings Inc, raised $5.1 billion, marking the third largest Japanese follow-on offering this year behind Sumitomo Mitsui Financial Group ($9.4 billion) and Mizuho Financial Group ($5.9 billion).
The volume of follow-on offerings in Japan totals $35.6 billion for year-to-date 2009, nearly eight times greater than the volume seen during year-to-date 2008.  Capital raising by financial issuers dominates the market this year, accounting for 77% of total issuance.

DealZone Daily

On a quiet day for deals, worth noting that Royal Bank of Canada joins the growing queue of prospective buyers of a wealth management business. Read the exclusive Reuters story here. On a larger scale, Wynn Macau‘s strong debut in Hong Kong ups the ante for Europe, where bookbuilding for the IPO of Poland’s PGE starts next week. For more deal-related news from Reuters, click here.


* The U.S. Federal Deposit Insurance Corp is questioning the positive conclusions given to Citigroup Inc’s management team in a government-mandated review in the aftermath of the financial crisis, the Wall Street Journal says.

* A management buyout of Malaysia’s national carmaker Proton Holdings could be possible, the firm’s chairman was quoted as saying in the Star newspaper.

Deals du Jour

Bank of America fails to meet a deadline to hand lawmakers further details about its acquisition of Merrill Lynch and faces the possibility of new charges from U.S. securities regulators. Meanwhile, Oracle Corp (ORCL.O) Chief Executive Larry Ellison says Sun Microsystems Inc (JAVA.O) is losing about $100 million a month as European regulators delay approving his company’s $7 billion purchase of the struggling hardware maker. And in Asia, China Investment Corp, the $200 billion sovereign wealth fund, buys a 14.5 percent, $850 million stake in trading firm Noble Group (NOBG.SI), giving China greater exposure to global commodities and trading expertise.

For these stories and more deals-related news from Reuters, click here.

Here’s what we found in Tuesday’s papers:

* The head of confectioner Cadbury PLC (CBRY.L), which is facing a possible takeover by U.S. food giant Kraft Foods Inc (KFT.N), said there were some “complementary elements” in the two companies’ portfolios, according to a Wall Street Journal report.

* Plantation and palm oil processor Wilmar International (WLIL.SI) is expected to spin off its China food operation, raising up to HK$27.3 billion ($3.5 billion) in a flotation of shares in Hong Kong in October, the Hong Kong Economic Times reported. Reuters story here.

The bulls and bears on equity rallies and M&A

Rising stock markets and talk of improving economic confidence have prompted a barrage of analyst notes on how the M&A market is picking up.  Check out what I wrote on the subject earlier Thursday .

Here’s a few quick points from others:

Citigroup said that as global economic indicators stabilize, financing markets reopen and equity markets recover, hostile takeovers may be poised for a sharp resurgence. “Indeed, many recent high profile M&A transactions have been unsolicited or hostile in nature,” a note said.

My colleague Quentin Webb talked about mergers and aggravation, or hostile bids,  in July.