Monday, 24 September 2018

IFR Top 250 2007: On target for a new record

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Ongoing mega-deal speculation, increased institutional liquidity and sector-wide consolidation all stand to make the second half of 2007 highly charged for the global M&A industry. Deborah Cust reports.

Last year’s worldwide M&A volumes looked hard to beat at the end of 2006, but at the half-way stage, 2007 looks as if it could be well on its way to doing so. The figures speak for themselves: worldwide M&A volumes totalled US$2.33trn (€1.75trn) for the year to June 12, an increase of 61% on this time last year.

Within that total, Europe has seen an 83% increase in deal volumes, amassing a staggering US$961.8bn (€722.7bn) of deals and outpacing the US, which has seen a 52% increase in volume, with deals valued at US$917bn (€689bn). These figures lay testament to the surge in activity that is currently being seen, and by all accounts a downturn seems questionable at this stage.

As Paul Staples, managing director of investment banking at BNP Paribas, said: “We have experienced a strong first half to the current year, ahead of our expectations, and we have a robust deal pipeline for the remainder of the year.”

Perhaps not surprisingly, the financials sector is the hottest global industry so far this year, with the announcement of 1,992 deals worth US$505.1bn (€379.5bn), up from US$237.3bn (€178.4bn) in the same period last year.

Europe can claim the credit for US$303.7bn (€228.3bn) of this year’s total, with the continuing fight for ABN AMRO contributing US$187bn (€140.5bn) from the RBS-led consortium and Barclays bids, while UniCredit’s offer for Capitalia adds a further US$25.9bn (€19.5bn) to the tally.

The energy and power sector follows, with 1,284 deals totalling US$347.7bn (€261.4bn) announced so far this year. The largest deal globally within the sector was Enel and Acciona’s US$58.7bn (€44.1bn) bid for Spanish utility Endesa, closely followed by the largest ever private equity-backed deal, Kohlberg Kravis Roberts’ and Texas Pacific Group’s US$44.4bn (€33.4bn) offer for Dallas-based energy group TXU (see the TXU profile in this report).

Real estate has been the third most active sector since January 1, with the announcement of 989 deals valued at US$237.2bn (€178.3bn) including Unibail Holding’s US$19.4bn (€14.6bn) offer for Dutch retail property group Rodamco Europe.

The top three most active sectors in Europe mimic those globally, with financials leading the way, followed by energy and power where deals are valued at US$165.4bn (€124.3bn), and the real estate industry managing US$96.8bn (€72.7bn) of transactions.

The only two global sectors that are quieter compared with this time last year are telecommunications and retail. Deals in the retail sector were only slightly less active, reaching US$72.9bn (€54.8bn) compared with US$73.9bn (€55.5bn) for the same period last year. The telecoms sector, on the other hand, has seen a larger drop, with US$114.3bn (€85.9bn) of announced deals compared with the 2006 equivalent of US$203.2bn (€152.7bn).

Robin Jowitt, M&A partner at Ernst & Young, says of the current situation: “The level and profile of deal activity is forcing management teams to evaluate continually the range of businesses they are in."

Financial sponsors

The surge in financial sponsor activity can be put down in part to increased liquidity in the institutional investor base. Whereas a few years ago, the majority of LBO funding fell squarely in the lap of the banks, remarkably, more than 50% of European LBO funding is now provided by institutional investors. In the US, the proportion is even higher, but the story is different in Asia, where institutional liquidity is still at a minimum.

When you combine increased liquidity with the record fundraisings seen in recent times and an environment where debt is cheap, the result not only means that deals can get bigger but also that there are more investors willing to foot the bill.

Ernst & Young’s Jowitt said: “You see a lot of assets that could potentially be better off in other hands. Private equity is providing firms with the liquidity to efficiently redeploy resources, allowing companies to consider selling non-core assets to improve returns or invest in fast growing sectors or geographies such as India and China.”

He added that the attraction of the: “private equity model provides the incentive for entrepreneurial management teams to run their businesses on a stand-alone basis”.

To date this year, the worldwide total for private equity-backed M&A has reached US$557bn (€418.5bn), a staggering 93% increase on 2006, with US private equity deals up 150% and European buyouts up 51%. Private equity-backed M&A accounted for 23.9% of global deal flow.

LBOs accounted for more than half the total value of deals in the global high-tech and retail industries. Both sectors saw private equity contribute 59.5% of the overall activity with financial sponsor deals making up 45.9% of all deal flow in the consumer products market.

Looking at these figures regionally, buyouts accounted for at least 70% of the deal activity in three US sectors, high-tech (71.9%), telecoms (76.8%) and retail (70%). In Europe, that proportion of sectoral LBO activity was only seen in the retail sector, where 78.6% of the total activity can be attributed to private equity. That said, the European telecoms and media and entertainment industries still saw more than 45% of deal flow attributable to buyouts.

Seven of the top 15 buyouts of all time when ranked by value have been announced this year. The previously mentioned KKR and TPG-led consortium involved in the buyout of TXU claims the title of biggest buyout ever, but this may not be a record that it can claim as its own for long given the current penchant for mega-deals.

KKR has hardly been out of the news since the start of the year as it also emerged as the buyer of US-based credit card and payments processor First Data for US$27bn (€20.3bn).

And in March, the private equity group also joined forces with Stefano Pessina, the deputy chairman of Alliance Boots, to mount a US$21.5bn (€16.2bn) offer for that UK health and beauty group. KKR has since been wrestling with Alliance Boots’ pension fund trustees, which have threatened to block the bid in the High Court if issues surrounding a possible shortfall in the amount that KKR plans to inject into the pension fund cannot be resolved.

This year’s other high profile and high value buyouts include TPG Capital’s and GS Capital Partners’ US$27.3bn (€20.5bn) bid for US telecoms group Alltel Corp, and CVC Capital Partners’ non-binding offer for Spanish tobacco group Altadis, valued at US$20.9bn (€15.7bn).

Regional activity

Homing in on country specifics, the US has seen the most prolific activity to date this year, with the Netherlands trailing in second place with the announcement of 218 deals for a total value of US$256.2bn (€192.5bn), up from US$34.4bn (€25.8bn) at the same time last year.

The offers for ABN AMRO clearly account for a huge proportion of that value, but other sizeable deals involving Dutch targets include the US$19.1bn (€14.3bn) offer for property group Rodamco Europe by French commercial property company Unibail Holding and Essent’s US$14.5bn (€10.9bn) offer for state-owned power utility Nuon.

The UK, in third place, has seen a 38% increase in announced M&A over the same period last year. To date in 2007, some 1,212 deals valued at US$180bn (€135.2bn) have been announced, compared with US$130.54bn (€98.1bn) in 2006.

The largest of the 2007 deals has been the private equity-backed offer for Alliance Boots. Spohn Cement’s US$18.4bn (€13.8bn) offer for building materials group Hanson was the second biggest UK deal and Thomson Corporation’s US$18.3bn (€13.8bn) offer for financial data provider Reuters Group rounds off the top three.

Spain has also seen its fair share of activity this year, with the announcement of 331 deals for a total consideration of US$150.8bn (€113.3bn), a 238% increase on the US$44.7bn (€33.6bn) for the equivalent period in 2006.

The bid for Spanish utility Endesa is the headline deal to date. The US$58.7bn (€44.1bn) bid from Spanish infrastructure group Acciona and Enel of Italy is yet another example of utility consolidation that may continue for some time yet, while the high-profile race between CVC and the UK’s Imperial Tobacco for Spanish tobacco group Altadis will see Spain continuing to make the headlines for a while to come.

What happens next?

But what about the second half of the year? As one could expect, views as to how long these massive levels of deal flow can be sustained are mixed.

“The European M&A market continues to demonstrate resilience, with strong transaction appetite from major corporate clients and leading financial sponsors. At this stage, we see no compelling evidence of a meaningful slowdown in market activity,” said BNP Paribas’s Staples.

Highlighting the differences between the US and European markets, Henrik Aslaksen, co-head of European M&A at Deutsche Bank, said: “In the US, much of the consolidation has more or less been completed. In the EU there is more to go and with the slower economic growth. We could be at a similar stage to the US in the future, but we can’t predict what the markets will be like at that stage.”

In terms of which sectors will be active over the next six months, natural resources, including utilities, will continue to be ones to watch, according to Aslaksen. FIG is a big M&A driver, with real estate also continuing to feature strongly. As for where the deal flow may be focused geographically, he highlights the emerging markets.

“Corporations in China, India and Russia are ambitious, have big plans and are becoming good clients.”

With the low levels of institutional liquidity currently present in Asia, it is easy to see how that region’s activity, especially in relation to financial sponsor deals, could escalate under the right circumstances.

The pharmaceutical sector, faced with the impending 2012 off-patent threat, could also be one to keep a close eye on as groups look to acquisitions to boost pipelines.

Do these higher levels of liquidity mean that riskier deals are coming to the table more often? Not necessarily. Although there may be a few transactions that could be considered borderline, the overall view seems to be that these should be kept to a minimum as long as the markets remain vigilant and keep a look out for warning signals, and if advisers, lenders and investors all keep their heads.

That said, rising interest rates could see deals that could once have been pulled off in the low interest rate/high liquidity environment struggling in future.

A hike in interest rates could also spell trouble for companies that are trying to pay down debt following highly leveraged deals. In addition, the emergence of controversial covenant-light structures as have been seen in the KKR/Alliance Boots bid, warning signals might be triggered too late to be able to provide a workable solution to problems. (See separate article in this report on Leveraged Finance.)

But with recent bid speculation surrounding the likes of ICI, Cable and Wireless and SocGen, it is certainly shaping up to be a highly charged second half of 2007.

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