The following commentary comes from Joe Rundle, head of trading at ETX Capital.
High profile M&A activity in the U.S. last week livened up a worried market beset with euro zone slowdown fears, debt drama and a looming US budget battle. Heinz shares shot up last Thursday after Warren Buffett’s Berkshire Hathaway and 3G’s takeover of the global ketchup maker for $28billion. Peers Kellogg, Kraft Foods and General Mills shares rose in reaction to the news on that day.
American Airlines and US Airways announced a merger to form the largest airline in the world valued at $11billion. And, Anheuser-Busch InBev is selling its Mexican brewery group to Constellation Brands for around $2.9billion. Also last week, computer maker Dell went private in a $24.4billion buyout by Michael Dell while Liberty Global struck a deal to buy Virgin Media for around $15.75billion. Furthermore, there are reports suggesting that UK telecom giant Vodafone is eyeing a bid for German rival Kabel Deutschland.
So what do the deluge of recent deals signal the long awaited return of M&A after three years of relatively low deal activity?
The global crisis of 2008 and the sovereign crisis of 2010 has undoubtedly forced global blue-chips to hoard cash piles and build up cash reserves given the high-risk of initiation deals carry in poor economic environments. But, companies now need to put the cash to work in order to unlock value for shareholders and 2013 may just be the year of the M&A revival.
US companies appear to be better placed to enter deals given the stronger earnings growth generated by major corporates since 2008 and the fact that leading US players have a global footprint and in many ways have been able to mitigate their exposure to the crisis in Europe. For that reason, US companies are likely to drive the M&A revival with the recovery in the US providing a greater reason for firms to depart with cash to add value by announcing deals. But, let’s not forget about the European corporates as some look ripe to enter the M&A foray:
It’s all about confidence for European players – the sovereign crisis has had major companies on their knees in the past two years, prompting a risk-averse tone which led them to refrain from entering the deal space. With slowing growth in the euro zone and a persistent debt crisis clouding the outlook, management at leading companies have been rather prudent in their strategic approaches. But this attitude may be changing soon – equity markets are at multi-year highs, central banks have left the doors wide open for continued easing, interest rates are at ultra low levels and some believe the worse of the debt crisis may even be over but only time will really tell. What is clear, is that European companies with large global footprints and sturdy balance sheets/cash piles together with sound fundamentals, are now having to contend with impatient shareholders to provide value. This will ultimately lead Europe to follow US peers closely behind in M&A activity as confidence is surely returning.
In that case, here are three companies worth monitoring as they offer value to perspective bidders:
Portugal Telecom: the recent deal news in the telecoms industry [Virgin/Liberty and Vodafone/Kabel Deutschland] augurs well for further consolidation in the sector. Portugal’s economy has made a meaningful recovery this year versus neighbour Spain, driving confidence back into Portugal’s corporate sector. Portugal Telecom has an advanced fibre service with access into Brazil and exposure to telecom operations in Namibia and Angola.
Ocado: UK online food distributing play Ocada has been growing strongly over the years thanks to a greater shift to online shopping and seasonal effects. The company’s alternative business model from super-market peers appeals to a growing number of users and in response, Ocado has pumped more funds into its distribution network and technology in order to feed its expansion.
Africa Oil: With its lucrative and attractive onshore wells in Kenya and Ethiopia, management at Africa oil has a successful track record in drilling fields and turning them into disposal assets. It’s onshore wells are likely to garner the eyes of suitors looking to expand or add the East Africa area into their portfolio.