Global M&A trends in 2013: the ineluctable shift of tectonic plates
June 2013 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Global M&A phenomena have traditionally been associated with cycles where periods of buoyancy have been succeeded by low market activity. But M&A activity has remained stagnant since the modest 2010 rebound, with levels in 2012 roughly similar to those in 2011. Optimists say this is encouraging given euro woes and fiscal cliff concerns.
Although the economic crisis has forced financial institutions to take a more prudent stance, aimed at rebuilding capital and confidence, and the sovereign crisis has led the eurozone countries to adopt austerity policies, major corporate players are, paradoxically, sitting on a pile of cash that they are reluctant to use for investment in growth projects or to give to their shareholders (even though Apple did do just that recently, probably because its reserves were so ridiculously high).
Building reserves in perilous times is a logical move and several factors, such as deleveraging, policy uncertainty and pension deficits, as well as opportunistic borrowing, have been cited to provide an underlying rationale for such behaviour.
Such war chests can also become the perfect instrument for a new M&A cycle, once the clouds over the global economy have given way to more clement skies and constraints on corporations begin to lift. Of course, the danger when following this trend is to overpay for acquisitions and to create, with the cash that was supposed to provide protection in difficult times, a new bubble on the ‘next big thing’. The availability of (cheap) money has always had the effect of pushing prices up.
Another classic model when discussing M&A trends is to look at geographical displacement of activity. China’s outbound investments continue to attract the interest of all forward-looking players. Chinese outbound M&A activity increased by 26 percent in 2012 compared with 2011, generating a total deal value of $37.8bn compared to $29.9bn, according to Capital Dragon Index 2012. Europe (which attracted one-third of Chinese outbound investment) remains the preferred destination. The trend is also towards minority investments. Outbound investment is one of China’s focuses now and will likely remain so for the next 30 years. China aims to use this to move up the value chain, away from low-cost manufacturing towards output driven by innovation. This requires Chinese companies to ‘go global’. Increasing outbound M&A is a means to develop internationally competitive companies and to integrate China (and the RMB) into the global economy. Chinese investment is also driven by large resource deals, notably in Africa and South America.
On the global M&A scene, private equity players retain a crucial role. Activity can be split between new money, restructurings and exits, in part to support and build a track record for wider fundraisings. In many countries, leverage finance continues to be in short supply for anything other than the private equity houses with the strongest track record. This allows alternative credit providers to support sponsors as well as making high yield the financing of choice for mid-market deals and above.
The shortage of leverage finance has fuelled the drive for alternative deal structures. We have seen an increasing number of ‘all-equity’ deals (in the hope of adding a layer of debt after a subsequent restructuring) and partnering between corporates and financial sponsors where corporates act as sellers of non-core assets as well as joint venture partners to private equity funds. In addition, a portion of vendor financing at closing is often seen as a necessary evil by corporate sellers.
The race for natural resources is boosting the M&A deal flow: this was true in 2012 and will remain so in 2013. In 2012, and in the first quarter of 2013, two of the largest global M&A deals were transformational ones in the energy and resources sector: Rosneft’s acquisition of TNK-BP and the merger of Glencore with Xstrata.
Rising global energy demand and investment requirements impact the energy sector. Globally, the oil and gas majors are increasing their divestment activity as they focus on core assets and geographies. In North America, sales of unconventional resources (including shale oil and gas) and consolidation are pushing up deal volumes in the upstream segment, according to IHS Herold’s 2013 ‘Global Upstream M&A Review and Outlook’. Besides its influence on the M&A market, the impact of unconventional gas continues to spread, affecting gas prices and thus investment in gas projects, as well as putting pressure on price indexation with oil, changing trade flows in LNG, and challenging the economics of low carbon generation.
In Europe, tightened liquidity, as well as economic and regulatory uncertainty, are prompting disposal programs by energy giants (such as E.ON, RWE and Repsol). Simultaneously, regulated assets that provide predictable returns are becoming increasingly attractive for investors in light of continuing economic uncertainty, creating the right conditions for deals to be struck between corporate sellers and financial investors (including private equity funds and insurance companies), sometimes allied to energy groups (such as the sale of Total’s gas transport and storage assets, TIGF, to a consortium comprising EDF and the Government of Singapore Investment Corp; or the sale of E.ON’s Open Grid Europe to a consortium led by Macquarie). Energy assets are also attracting international interest from buyers outside Europe, including Chinese corporates (e.g., the acquisition of 25 percent in Portugal’s REN by State Grid of China), sovereign wealth funds (e.g., the sale of 30 percent of GDF SUEZ’s exploration and production division to China Investment Corp) and infrastructure investment funds.
Moreover, the unfinished implementation of the unbundling between generation, transport and distribution set out in the EU Third Energy Package continues to provide opportunities for inbound foreign buyers and financial investors. In that respect, the EU Commission’s recently published guidelines on unbundling rules should provide more certainty to financial investors in transport and distribution assets.
Arnaud Coibion is a partner and Louis Culot is an associate at Linklaters LLP. Mr Coibion can be contacted on +32 25 019 018 or by email: firstname.lastname@example.org.
© Financier Worldwide
Arnaud Coibion and Louis Culot