European M&A Set for Healthy New Year

European deal making is set to outpace the U.S. this year and signs point to a healthy 2018 as a stronger economy and greater cooperation across the eurozone pushes executives to target major acquisitions within the region.

Both the U.S. and, to a lesser degree, Europe have benefited this year from economic growth and rising stock prices–key ingredients for mergers and acquisitions. But in the U.S. uncertainty over adoption of tax reform and other proposed government policies encouraged some companies to sit on the sidelines for much of the year, awaiting greater clarity before pursuing M&A. By contrast, a closer knit Europe is emboldening chief executives to pursue major deals across the continent, seeking new sources of growth and scale to fend off competition and technology disruption. That unity comes amid the eurozone’s attempt to forge the best terms possible in divorce talks with Britain and the May election of European Union advocate Emmanuel Macron as France’s president.

“The level of CEO confidence in Europe is high, as good as I have ever seen it,” said Francois-Xavier de Mallmann, chairman of investment banking at Goldman Sachs Group Inc. in London. “There is a supportive environment to execute strategic transactions and many CEOs are looking to take advantage of this.”

That confidence in Europe showed itself this September in a deal to merge the rail business of Germany’s Siemens AG with French train maker Alstom SA. Siemen’s Chief Executive Joe Kaeser described the tie-up as “a new European champion in the rail industry for the long term,” amid increasing competition from China’s CRRC Corp., the world’s biggest rail supplier.

Banker optimism for M&A activity in Europe next year also comes as private-equity firms face mounting pressure to invest their cash piles. Apollo Group Management LLC, for example, raised $23.5 billion this summer for the world’s largest-ever buyout fund. That pressure to invest is pushing the larger PE firms to seek bigger and more complex deals such as the $6.42 billion privatization of Dutch payments company NETS A/S by a Hellman & Friedman LLC-led consortium in September and the $4 billion Blackstone Group LP-CVC Capital Partners’ acquisition in August of Paysafe Group PLC, a U.K. online payments processor. Such acquisitions are harder to complete because of the shareholder and regulatory approvals they require.

“We’ve seen a material pickup in private-equity firms’ willingness to undertake large public-to-private transactions, a clear indication of how keen they are to deploy material amounts of capital in situations,” said Cathal Deasy, M&A head for Europe, the Middle East, and Africa at Credit Suisse Group AG.

Led by gains in domestic and cross-border deals within Europe, overall M&A in the region is almost flat so far in 2017 from the year-ago period measured by total value of deals, according to Dealogic. The total number of transactions has risen about 4.4%. The number of deals involving a U.S. company is up year-over-year by a little less than in Europe. More striking, however, on a value basis activity is down about 15%, supporting the view of companies’ hesitancy to seek big and thus riskier deals without clarity on the White House’s fiscal policies.

Bankers and their clients may get that certainty by Christmas. That is when the U.S. government could sign in to law proposed reforms to cut corporate taxes.

That said, some companies aren’t waiting to make mega takeover bets, a potential sign of more, even bigger, deals next year. Last week, Walt Disney Co. agreed to buy most of 21st Century Fox Inc. for $52.4 billion in stock.

Still the outlook for M&A in Europe isn’t without valuation and regulatory risks, some bankers say. Just as stock-price gains, cheap debt and corporate earnings growth have powered deal making, any shock to those conditions could undermine it, they say. In Europe, the Stoxx Europe 600 index is up 7.6% so far this year and has gained steadily from its lows in 2009. Meanwhile, per-share earnings of companies comprising that benchmark are up more than 20% since the end of 2016, which is set to be the sharpest yearly rise since 2010.

Europe’s effort to broaden its scrutiny of foreign acquisitions of domestic companies represents another potential threat to deal making at a time when the U.S. Committee on Foreign Investment has blocked a number of deals including that of Germany’s Infineon Technologies AG to acquire a unit of U.S. manufacturer Cree Inc. In October, the U.K. government announced plans to extend its powers to block foreign acquisitions of British companies that threaten national security to include makers of advanced technology alongside military equipment manufacturers–following a similar move by the German government in July.

“The biggest threat [to deal making] is protectionism,” said William Rucker, Lazard Ltd.’s U.K. chief executive. “So far the impact has been minimal,” Mr. Rucker said, noting that he is currently “seeing significant activity across all sectors.” But “the question is, will [protectionism] increase and how will it vary country by country.
Source: Dow Jones