M&A appetite in UK outpaces US and Europe

BY Fraser Tennant

The appetite and capacity for M&A deals among the UK's largest corporates is currently exceeding that seen in the US and Europe, according to the new edition of the KPMG Global M&A Predictor published this week.

The M&A Predictor – a tool that helps member firm clients to forecast worldwide trends in mergers and acquisitions – reveals that, between June 2015 and June 2016, the forward P/E ratios (KPMG’s measure of corporate appetite or confidence) of the UK’s largest corporates are forecast to increase by 13 percent.

In comparison, the P/E ratios for corporates in the US and Europe are forecast to be 6 percent and 8 percent respectively.

 “With the debt markets more accessible than they have been for some time, our view is that the capacity for deals by UK corporates is showing little sign of diminishing," declares Andrew Nicholson, KPMG’s head of M&A in the UK. “Couple this increasing buoyancy with a more stable economy and a greater convergence between vendor and purchaser price expectations, and all the signs are there that UK deal volumes will increase steadily over the coming months.”

However, despite Mr Nicholson’s view that the outlook for M&A in the UK remains bright, the M&A Predictor data also highlights the fact that increasing confidence still does not appear to be reflected in actual transaction levels (completed deal volumes fell in the UK and globally over the six-month period from January to June 2015).

“Globally, it feels like there has been a slight slowdown in the market,” concedes Mr Nicholson. “The continuing impact of low oil prices and political instability in some regions should not be overlooked and, of course, one wonders whether this will be exacerbated by the recent volatility seen in the capital markets. However, we continue to have strong expectations for deal activity in the coming months and there are real pockets of strength to be found.”

In terms of sector expectations, the M&A Predictor confirms the ongoing challenges facing the global energy sector, as evidenced by the 19 percent fall (accompanied by a drop in profits) in market capitalisations of the largest energy companies between June 2014 and June 2015.

Further afield, the M&A Predictor notes that the defensive healthcare sector appears stable (an 18 percent increase in market capitalisation and a 7 percent rise in appetite for M&A) as does telecommunications, with an 8 percent increase in M&A appetite.

Report: M&A Predictor - September 2015

Berkshire Hathaway boosts Phillips stake

BY Richard Summerfield

Fresh on the heels of the firm’s $32bn acquisition of Precisions Castparts, Berkshire Hathaway has announced that is has a taken a $4.48bn stake in oil refiner Phillips 66, making it the company’s biggest shareholder.

According to a filing made with the US Securities and Exchange Commission on Friday evening, Berkshire has amassed a 57.98 million share, or 10.8 percent stake in the company. The move marks a return to the business after divesting two-thirds of its stake last February.

In 2014, Berkshire traded a significant portion of its stake in the Phillips 66 unit for a chemical-business investment which was subsequently absorbed by Berkshire’s Lubrizol division.

However, Berkshire is believed to have begun rebuilding its holding in Phillips 66 in the second quarter of 2015, when it bought $3.09bn worth of equities in the firm. As a result of the conglomerates announcement, Phillips shares closed Friday at $77.23.

Since Berkshire traded away the majority of its holding in Phillips, the firm has continued to blossom. Since the spinoff, Phillips stock has more than doubled in value.

Berkshire’s disclosure underlines its belief that the energy sector is likely to be a growth area. This is Berkshire’s most significant energy investment in around two years, though it only represents a mid range investment by Berkshire’s standards. The conglomerate, which has a diverse portfolio of over 80 firms, typically takes much larger holdings, including $20bn stakes in Wells Fargo & Co. and Kraft Heinz Co. The firm also has a $10bn holding in Coca Cola and IBM.

Berkshire hopes that low oil prices will continue to drive demand for gasoline, diesel and other petroleum products. This demand has been ably demonstrated in the US over the last 12 months; since prices began to tumble last year, gasoline demand in the US has climbed to an eight year high. Following the company’s outlay in Phillips 66, Berkshire will hope this demand continues to grow.

News: Buffett's Berkshire takes $4.48 billion stake in Phillips 66

Schlumberger and Cameron agree $14.8bn merger

BY Richard Summerfield

Given the current volatility in commodities, it is little surprise that we are beginning to see more M&A activity in the oil and gas space. To that end, Schlumberger Ltd announced this week its agreement to acquire Cameron International Corp in a deal worth around $14.8bn, including the assumption of debt.

Under the terms of the deal, Cameron shareholders will receive 0.716 Schlumberger shares and a cash payment of $14.44. According to a statement released by the two firms, the agreement places a value of $66.36 per Cameron share, a premium of 37 percent to Cameron’s 20 day volume weighted average price of $48.45 per share. The deal has been approved by the board of directors at both firms. Pending shareholder, regulatory and other closing conditions, the transaction is expected to close in the first quarter of 2016.

Regulatory approval could pose an issue for the two companies. In November, Schlumberger's two closest rivals - Halliburton Co and Baker Hughes Inc - agreed to merge in an effort to lower costs in a pressurised market, but the deal was blocked by antitrust authorities in the US. However, the fact that there is little crossover between the services offered by Schlumberger and Cameron may allay any regulatory concerns.

The acquisition of Cameron is an important one for Schlumberger, given the company’s standing as one of the world’s largest producers of energy equipment. In the statement, Paal Kibsgaard, chairman and chief executive of Schlumberger, noted, “This agreement with Cameron opens new and broader opportunities for Schlumberger. At our investor conference in June 2014, we highlighted how the E&P industry must transform to deliver increased performance at a time of range-bound commodity prices. With oil prices now at lower levels, oilfield services companies that deliver innovative technology and greater integration while improving efficiency, which our customers increasingly demand, will outperform the market.”

The proposed merger of the two companies is not the first time they have been associated. In 2012 the firms established a joint venture – OneSubsea - to target the deepwater industry. OneSubsea is a supplier of heavy duty machinery which allows Big Oil firms to control the flows of oil and gas they find and bring it to the surface.

The acquisition of Cameron is expected to help Schlumberger achieve significant synergies, by lowering operating costs, streamlining supply chains and improving manufacturing processes.

Jack Moore, chairman and chief executive of Cameron, said, “This exciting transaction builds on our successful partnership with Schlumberger on OneSubsea and will position Cameron for its next phase of growth. For our shareholders, this combination provides significant value, while also enabling them to own a meaningful share of Schlumberger. Together, we will create a premier oilfield equipment and service company with an integrated and expanded platform to drive accelerated growth. By bringing together Cameron and Schlumberger, we will be uniting two great companies with successful track records, performance and value creation.  We look forward to working closely with Schlumberger to achieve a seamless post-closing integration and long term value for all of our stakeholders.”

News: Schlumberger to buy oilfield gear maker Cameron in $14.8bn deal

Teva to buy Allergan Generics in $40.5bn deal

BY Fraser Tennant

Teva Pharmaceutical Industries Ltd has announced that it has signed a definitive agreement to acquire Allergan Generics in a $40.5bn transaction.

The acquisition - which some analysts are describing as the largest carried out by an Israeli company - brings together two leading generics businesses with complementary strengths, brands and cultures, and will provide patients with greater access to affordable, quality medicines.

Once the acquisition is complete, Teva, which reported net revenues of $20.3bn in 2014, will become one of the largest drug manufacturers in the world.

To be financed through a combination of new equity, debt financing and cash on hand, upon closing, Allergan will receive $33.75bn in cash and shares of Teva valued today at $6.75bn – an estimated under 10 percent ownership stake in Teva.

“This transaction delivers on Teva’s strategic objectives in both generics and specialty,” said Erez Vigodman, president and CEO of Teva. “Through our acquisition of Allergan Generics, we will establish a strong foundation for long-term, sustainable growth, anchored by leading generics capabilities and a world-class late-stage pipeline that will accelerate our ability to build an exceptional portfolio of products – both in generics and specialty as well as the intersection of the two."

In sharing a commitment to patient safety and quality, Teva and Allergan aim to create a company which will transform the global generics space all over the world.

"This transaction will accelerate Allergan's evolution into a branded Growth Pharma leader, enable a sharpened focus on expanding and enhancing our global branded pharmaceutical business and strengthen our financial position to build on our proven track-record of value creation led by effective capital deployment," said Brent Saunders, CEO and President of the Dublin-based Allergan.

“We will have the potential to add scale in existing therapeutic areas, expand into new therapeutic areas and geographies and evaluate strategic transformational deals as we continue to build on our position as the most dynamic branded growth pharma company.”

The financial advisers for Teva during the transaction were Barclays and Greenhill & Co, while Sullivan & Cromwell LLP and Tulchinsky Stern Marciano Cohen Levitski & Co served as legal counsel. For Allergen, J.P. Morgan is acting as sole financial adviser and Latham & Watkins LLP is serving as lead legal adviser.

The Teva/Allergan transaction has been unanimously approved by the board of directors of both companies and is expected to close in the first quarter of 2016.

Mr Vigodman concluded: “We look forward to delivering the benefits of this transaction to our stockholders, and better serving patients, customers and healthcare systems throughout the world.”

News: Teva to buy Allergan generic business for $40.5 billion, drops Mylan bid

Anthem poised to acquire Cigna in $54.2bn insurance industry megadeal

BY Fraser Tennant

Anthem Inc. and Cigna Corporation have announced that they have entered into a definitive agreement whereby Anthem will acquire all Cigna’s outstanding shares in a transaction valued at $54.2bn - the largest deal ever seen in the history of the insurance industry.

The combined health services company will cover approximately 53 million medical members with well positioned commercial, government, consumer and specialty businesses, along with a market-leading international franchise.

“We are very pleased to announce an agreement that will deliver meaningful value to consumers and shareholders through expanded provider collaboration, enhanced affordability and cost of care management capabilities, and superior innovations that deliver a high quality health care experience for consumers," said Joseph Swedish, president and chief executive of Anthem.

Expected to become an industry leader due to enhanced diversification capabilities, the united companies will utilise their complementary strengths, including Anthem’s Blue Cross and Blue Shield footprint in 14 states (and Medicaid footprint via its Amerigroup brand in 19 states) with Cigna’s US and global portfolio of health and protection services.

Mr Swedish continued: “We believe that this transaction will allow us to enhance our competitive position and be better positioned to apply the insights and access of a broad network and dedicated local presence to the health care challenges of the increasingly diverse markets, membership, and communities we serve.”

Upon close of the transaction, Mr Swedish will serve as chairman and chief executive of the new entity. David Cordani, currently Cigna’s president and chief executive, will take on the role of president and chief operating officer. Additionally, and effective upon close of the transaction, the Anthem board of directors will be expanded to 14 members with Mr Cordani and four independent directors from Cigna’s current board joining Anthem’s.

“Our companies share proud histories and an even brighter future," said Mr Cordani. “Going forward our new company will deliver an acceleration of innovative and affordable health and protection benefits solutions that help address our health system's challenges and provide supplemental insurance protection, and health care security to consumers, their families, and the communities we share with them.”

Cigna’s financial and legal advisers for the transaction are Morgan Stanley and Cravath, Swaine & Moore LLP, respectively. For Anthem, the financial advisers were UBS Investment Bank and Credit Suisse with White & Case LLP serving as legal adviser.

Although the transaction is expected to close in the second half of 2016, regulatory scrutiny may delay consummation of the deal for a year at least. Adding to concerns is Anthem and Cigna’s lower opening on the New York Stock Exchange following the announcement of the transaction - lost ground which both companies may struggle to regain.

News: Anthem to buy Cigna for $54B in mega insurance merger