Whither art thou, The Return of M&A?
The arm-flailing excitement elicited by Kraft’s pursuit of Cadbury has not yet been matched by many other large-scale cross border deals.
M&A bankers in private may boast that they are busy again, but with the window before the Christmas break about to close, the likelihood of another blockbuster bid in Europe diminishes by the day.
For risk arbitrageurs, and those with similar interests, the dearth of large takeovers means trades can be crowded, and deal spreads squeezed in.
So, what to do until all these mega-mergers begin to plop from the end of the pipeline?
Optionality is the order of the day, according to boutique brokerage Aviate Global’s events analyst, Jeremy Power.
The logic here is compelling. Getting into crowded takeover situations can be very bad for your health.
Instead of rushing in headfirst only to be left bereft of your limbs, a better strategy for the current market is to hold companies attractive on a fundamental basis, but where there is also potential for a bid or a re-rating as a result of speculation from another deal.
The current economic and corporate landscape, as Power notes, appears to signal what will be an explosion of takeover activity:
With corporates’ risk appetite returning as fears over the depth of the downturn abate and signs of recovery emerge, we believe many see this as a potentially historic window of opportunity to acquire strategic assets at attractive valuations given where equity markets sit relative to recent history. In addition, the improvement seen in the credit markets, particularly in terms of the availability of financing for the financially strong, provides an additional advantage for well placed corporates.
Add in the current weakness of the pound against the dollar, and the euro against the yen and there are several opportunities, especially in the resources space, that begin to look compelling for strategic buyers.
Continued resource M&A is likely to be driven by China’s rampant appetite for energy and need for energy security — something seen already this year with Chinese bids for explorers in the Iraqi Kurdistan region. Says Power:
As China and other “energy-short” economies continue to look to secure resources, we believe we will continue to see more M&A in the E&P space, particularly for companies with assets outside the US Western Europe and Australia, where political opposition to such deals is likely to be reduced and diplomatic leverage is greater.
So, what are the companies Aviate pulls out as providing the M&A optionality needed in this market?
On the resources side, we have BG, Lonmin, Anglo American and Repsol.
Among those listed away from resources are Man Group, Smith & Nephew, Wellstream, Cobham and Meggitt.
Related links:
An M&A cheat sheet - FT Alphaville
Today I shall short Adecco, Danone, Deutsche Telekom, Diageo… - FT Alphaville
