Bloomberg News

Dealmaking Rebound Falters as Crisis Threatens Confidence

June 28, 2012

Dealmaking Rebound Falters as Europe Crisis Threatens Confidence

Walgreen Co., the biggest U.S. drugstore chain, this month agreed to pay $6.7 billion in stock and cash for 45 percent of U.K. pharmacy chain Alliance Boots, its largest ever takeover. Photographer: Jason Alden/Bloomberg

Dealmaking failed to make a comeback in the second quarter as the European debt crisis and volatile stock markets forced companies to delay big acquisitions.

Takeovers fell about 2 percent from the first three months of the year to about $450 billion, the lowest level since 2009, according to data compiled by Bloomberg through June 27. Eaton Corp. (ETN:US)’s proposed purchase of Cooper Industries Plc (CBE:US) and Pfizer Inc. (PFE:US)’s sale of its infant-nutrition unit were the only deals to top $10 billion.

While many companies are weighing transactions, chief executive officers for the most part refrained from pulling the trigger on deals as Europe struggled to contain its debt crisis, intensifying concern about the fallout on global economic growth. Takeovers in Europe fell 20 percent in the quarter, while Asia eked out a gain of around 3 percent, data compiled by Bloomberg show. North America was the best performing market, with dealmaking rising 10 percent to almost $190 billion from the previous quarter.

“The one factor which is restraining deals is euro-zone risk,” said Roger Altman, founder of the New York-based advisory firm Evercore Partners Inc. “It affects all buyers, financial and strategic. At the margin, it may affect strategic buyers more because, for them, any acquisition generally represents a bigger decision.”

‘Normalized Levels’

The 17 members of the euro zone are fighting to maintain their currency union and service debt that amounted to 8.2 trillion euros last year, according to Eurostat. Spain became the biggest regional economy yet to seek a bailout in the quarter, requesting as much as 100 billion euros ($125 billion) in aid for its banks, while Italian bond yields surged on concern the crisis may spread into the core of the euro area.

Stock markets fluctuated in reaction, hampering dealmaking. The Standard & Poor’s 500 Index posted an average daily price change of 0.76 percent in the 50 days through June 25, compared with about 0.5 percent in the first quarter, according to data compiled by Bespoke Investment Group and Bloomberg. The VStoxx Index (V2X), a gauge of European stocks’ volatility, has climbed about 50 percent from its March 19 low this year. On June 4, the index rose to a peak of 36 for the year.

“The impact of Europe has weighed more heavily on global markets than previously forecast,” said David Killingback, head of Asia-Pacific mergers and acquisitions at Bank of America Corp. (BAC:US) “We expect M&A volume in general to remain muted, but do expect to see activity in some areas such as Asia outbound for resources and industrials to rebound to more normalized levels.”

Strong Fundamentals

Many conditions for dealmaking are ripe, spurring some chief executive officers to take the plunge.

Walgreen Co. (WAG:US), the biggest U.S. drugstore chain, this month agreed to pay $6.7 billion in stock and cash for 45 percent of U.K. pharmacy chain Alliance Boots, its largest ever takeover. Belgian brewer Anheuser-Busch InBev NV (ABI) is pushing to take full control of Corona brewer Grupo Modelo SAB (GMODELOC) in a deal that could be valued at as much as $20 billion, according to people familiar with the process.

Petroliam Nasional Bhd, the Malaysian oil and natural-gas company, said today it agreed to buy Progress Energy Resources Corp. (PRQ) for C$4.8 billion in cash ($4.7 billion).

The companies in the S&P 500 are holding about $2.92 trillion in cash and marketable securities, according to data compiled by Bloomberg. Financing costs have also fallen. Average yields on company bonds worldwide have dropped to 4.18 percent as of June 26 from this year’s high of 4.82 percent on Jan. 3, according to the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield index. That compares with an average last year of 4.56 percent.

Attractive Valuations

“In many respects the fundamentals for M&A, in terms of cash on balance sheets, financing costs, and valuations, have never been better,” said Henrik Aslaksen, global head of M&A at Deutsche Bank AG. “As soon as we see some stabilization, activity should pick up.”

Some buyers are already seeking to take advantage of weak valuations in Europe. Mexican billionaire Carlos Slim’s America Movil SAB took a 2.9 billion-euro stake in Dutch mobile operator Royal KPN NV this month, following a similar investment in Telekom Austria AG. Canada’s CGI Group Inc. agreed to buy U.K. technology company Logica Plc in May for about 1.7 billion pounds ($2.7 billion).

The Stoxx Europe 600 Index (SXXP) is trading for 5.3 times the cash generated by its companies, according to weekly data compiled by Bloomberg. That compares with a ratio of 7.5 for the S&P 500, the benchmark gauge for U.S. equities. On that basis, European companies were as much as 29 percent cheaper than their U.S. rivals earlier this month, the biggest discount since 2009, the data show.

Goldman Leads

“Notwithstanding the challenging macro picture, there is strategic interest from global acquirers in European companies,” said Gregg Lemkau, the head of M&A for Europe, the Middle East, Africa and Asia at Goldman Sachs Group Inc. (GS:US) “Valuations are down and there are a number of successful businesses with strong existing franchises that are available at what appears to be a discount.”

Goldman Sachs leads the global league tables for mergers so far this year, advising on $221.8 billion in transactions, followed by Morgan Stanley at $209.9 billion and JPMorgan Chase & Co. (JPM:US) at $186 billion.

Earnings Slump

Some companies are being pushed toward asset sales as earnings slump. French media conglomerate Vivendi SA (VIV) is weighing options including a sale of its Activision Blizzard video-game unit, which is valued at $13 billion, according to people familiar with its plans. Research In Motion Ltd., the Canadian maker of the BlackBerry smartphone grappling with an exodus of customers to Apple Inc.’s iPhone and Google Inc.’s Android system, last month said it hired JPMorgan and RBC Capital Markets to review its strategy. Finland’s Nokia Oyj (NOK1V), once the world’s No. 1 mobile phone manufacturer, has said it may sell assets as it seeks to stem losses.

Announced deals in North America included Energy Transfer Partners LP’s $5.3 billion offer for Sunoco Inc. and Marubeni Corp. of Japan’s $3.6 billion takeover of commodities trader Gavilon Group. Asia deals topped $100 billion, including Alibaba Group Holding Ltd.’s agreement to repurchase a 20 percent stake in itself from Yahoo! Inc. for about $7.1 billion.

“Our pipeline looks good,” said Piero Novelli, co-head of global M&A at Nomura Holdings Inc., which advised Marubeni on the Gavilon deal. “But it needs to be discounted by a lower completion probability, due to challenging market conditions.”

Emerging Markets

Emerging-market dealmaking has also been uncertain. Takeovers in Latin America slid 60 percent from a year earlier to $20.3 billion. Asia-Pacific’s total, up 6 percent from the first three months of the year, fell 22 percent from the same period a year earlier.

The Chinese economy is cooling at the same time as “significant political challenges in India,” said Vikas Seth, co-head of both emerging-market M&A and Europe, Middle East and Africa mergers at Credit Suisse Group AG. (CSGN) “And Brazil is slowing as commodity prices moderate.”

Economists are paring forecasts for Chinese growth, with Credit Suisse predicting a 7.7 percent expansion this year, the slowest since 1999. India’s 5.3 percent growth in the first quarter was the weakest in nine years and Brazil’s first-quarter growth missed forecasts even as policymakers cut taxes and interest rates to encourage consumer spending.

This year’s largest announced deal, Glencore International Plc (GLEN)’s $25 billion takeover of copper- and coal-miner Xstrata Plc (XTA), was thrown into doubt this week after Qatar’s sovereign wealth fund demanded a better offer. The Persian Gulf kingdom owns about 11 percent of Xstrata, making its support essential to a deal that can be blocked by just 16 percent of investors under U.K. merger rules.

“We do think there will be a turning point at some stage, and a long-run M&A cycle will follow,” said Antonio Weiss, the head of investment banking at Lazard Ltd., the largest independent merger adviser. “And it will be truly global. But we’re not there yet.”

To contact the reporters on this story: Matthew Campbell in London at mcampbell39@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editor responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net


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