SocGen: “The world might be on the brink of a sixth merger wave since the 1880s – the previous being the 1990s wave in information technology. This time, the underlying reason is globalisation”

September 24, 2013 4:48 pm

Charge into M&A deals jolts ‘animal spirits’ to life

By Ralph Atkins in London

Have animal spirits returned to global markets? A pick-up this month in merger and acquisition activity, share listings and corporate bond issuance – especially in the US – has signalled a surge in the most precious commodity in finance: confidence. The latest exuberance was Tuesday’s acquisition by Applied Materials, the US semiconductor equipment company, of rival Tokyo Electron to create a $29bn electronics group. Identified in the 1930s by John Maynard Keynes as an important economic driver, an eruption of “animal spirits” could start a virtuous circle of entrepreneurial risk-taking and investment – and further lift equities. Any benefits would wane quickly, however, if deal activity were merely the result of aggressive central bank policy action or structural changes forced by regulators.“There are animal spirits, but the animals are genetically modified and on artificial stimulants,” warns Mark Cliffe, chief economist at ING.

Capturing imaginations is the increase in investment bankers’ workloads. A Société Générale researchreport circulated last week argued the world might be on the brink of a sixth merger wave since the 1880s – the previous being the 1990s wave in information technology. “This time, the underlying reason is globalisation,” it argued.

The value of merger and acquisition activity rocketed this month with Verizon’s $130bn buyout of Vodafone’s stake in a US wireless joint venture. In the first nine months of the year, the value of US M&A deals, at $854bn, has been the strongest since 2008, according to Dealogic.

Global corporate bond issuance so far this year, at $1.6tn, is the highest since Dealogic’s records started in 1995 – the deals list dominated recently by the $49bn raised by Verizon to fund its deal with Vodafone.

Meanwhile, the business of bringing companies to equity markets has also been brisk. The value of US initial public offerings so far this year is the highest since 2007. UK IPOs have had their best September for nine years, although Europe has lagged behind.

Such activity would push equities higher if it signalled that companies expected faster earnings growth – especially as speculative investors sought out the next M&A target and calculated companies’ break-up values.

Whetting appetites has been the high levels of cash on companies’ balance sheets, which could be used for acquisitions. The world’s top corporate spenders on capital investment have cash equivalent to more than 9 per cent of assets – still close to the 2010 crisis peak, according to Standard & Poor’s.

The positive effects of deal activity on the real economy depend, however, on the right kind of “animal spirits”. Central banks want the sort of risk-taking that encourages investments in factories and jobs – and thus creates sustainable economic growth.

The surge in corporate debt issuance, however, was largely the result of companies refinancing existing borrowing and trying to pre-empt monetary tightening by the Federal Reserve.

This month, bond investors fretted about the Fed slowing its asset purchases, or quantitative easing. Higher yields, which move inversely with prices, have resulted in portfolio losses – and corporate bond issuance has slowed noticeably in Europe this month.

But confidence remains robust, argues Jean-Marc Mercier, global head of debt syndication at HSBC. “Nobody is bringing forward their issuance because they think that next year is going to be more difficult . . . There is more confidence in board rooms.

“If investors were worried about rising yields, then they wouldn’t buy fixed income – but they are; they are confident about getting their money back and that the yields are compensating them for the risk.”

Financial strategists, however, see scant evidence of companies stepping up the sort of investment that would expand capacity.

“Companies have put expenditure off over the past few years, so capital expenditure aimed at increasing efficiency will increase – it is already happening. It does not amount to what I regard as traditional, expansional capital expenditure,” says Graham Secker, European equity analyst at Morgan Stanley. “How many UK companies are encouraging analysts to raise their earnings forecasts? None of them.”

Despite the surge in IPOs, equity investors are still cautious about chief executives with grand plans – and often lobby instead for higher dividends and share buybacks, says Robert Buckland, global equity strategist at Citigroup. “The stock market should be a capital provider. But I think it has mutated into a capital extractor.”

And M&A activity may not be enough to turn the mood in financial markets. For individual companies, an acquisition amounts to serious investment. But at a macroeconomic level M&A deals are about reshuffling assets – as with Verizon/Vodafone – or consolidation, as in Microsoft’s acquisition of Nokia, the Finnish mobile telephone group.

The risk is that “animal spirits” prove more hamster than bull-like. Mr Cliffe at ING says “This isn’t in any way a normal bull market.”

 

September 19, 2013 6:40 pm

SABMiller gains as M&A wave forecast

By Bryce Elder

So far, 2013 has been the quietest year for global mergers and acquisitions in nearly a decade. Société Générale analysts think it is about to get very noisy.

Globalisation, SocGen told clients, was about to trigger the sixth great M&A wave. On more than 140 pages it listed hundreds of potential takeovers, 23 of which it rated as probable or likely.

Among its UK predictions, SocGen reckoned AB Inbev would buy fellow brewer SABMiller in a $110bn deal. Its analysts gave the long-rumoured takeover a 50 per cent probability of becoming real, seeing AB Inbev offer £38.40 per SAB share; SAB closed the day up 3.6 per cent to £33.04.

A bid from Suntory of Japan for drinks maker AG Barrwas rated a 60 per cent chance by the broker, making it slightly more likely than Barr and Suntory teaming up to buy Britvic. And SocGen was 90 per cent certain that BHP Billiton would launch a $55bn offer for Mosaic, the US-listed potash miner.

“Overall, analysis has shown that M&A are a major source of value destruction,” the broker conceded. But that analysis “fails to capture the main attraction of M&A: to push competitors to react and also pursue M&A deals”.

Britvic added 1.4 per cent to 588.5p while Barr ended flat at 536p. BHP rose 1.2 per cent at £19.08 as a global risk-on trend lifted the FTSE 100 66.57 points or 1 per cent to 6,625.39.

Randgold Resources led the risers, up 8.1 per cent to £48.41, as gold miners mirrored bullion’s strength.

Demand for emerging markets exposure lifted Aberdeen Asset Management 6.4 per cent to 390.8p, which had dropped on Wednesday amid worries that a trading update due next week would temper guidance.

A contract win in Kazahkstan saw Petrofac add 4.7 per cent to £14.12. The lump-sum contract, if converted, would be worth around $1bn net to Petrofac and would made 2015 profit targets look secure, said Credit Suisse.

Bernstein Research upgraded Diageo, up 2 per cent to £20.61, to “outperform”. Western Europe had shrunk in significance against emerging markets, with Diageo’s spirits brands “completely dominant” in Latin America, it said.

Ocado rose for the 13th straight day, up 4.1 per cent to a record high of 420p on more than eight times the daily average volume. Dealers had nothing new to explain the spike beyond Monday’s trip for analysts to see Ocado’s new warehouse and a hopeful-sounding retread of speculation that it might be a target for Amazon.

Among the fallers, Johnson Matthey slipped 1.5 per cent to £28.52 after UBS advised taking profit. A 20 per cent rally since April had priced in the improving demand for catalytic converters while leaving little room for error ahead of results in November, it said.

Tesco lost 0.3 per cent to 377.3p. In the same week as Tesco said it had ditched Nomura as its corporate broker, Nomura cut Tesco off its “buy” list. It preferred Wm Morrison, up 0.3 per cent to 292.5p.

Gulf Keystone Petroleum lost 8.2 per cent to 200p after its interim results revealed a temporary production shutdown and showed cash falling to $101m, which gave a fillip to speculation that the Iraq explorer might look at raising development funds with a convertible bond. GKP would not be drawn on its 2014 budget but told analysts that, while it could raise debt, new equity was not an option.