M&A or A&E? Crisis to dominate dealmaking in 2009

Reuters, Thursday December 11 2008

By Quentin Webb

LONDON, Dec 11 (Reuters) – M&A banking next year will be more Accident and Emergency than Mergers and Acquisitions as companies slim down, banks pair up and the strong eat the weak.

Tough debt markets and homegrown business problems will make many potential acquirers hesitate, and bankers expect a drop in total M&A value, along with a rise in all-share deals.

In the year to date, global M&A is down 27 percent to $2.86 trillion from a record in 2007. Barclays Capital estimates next year will bring just $2 trillion to $2.5 trillion of deals. That would be the weakest year since 2004.

“We’ll see bargain-hunting by well-capitalised buyers, non-core disposals by restructuring companies, and all-stock defensive deals, in some instances government-induced,” said Hernan Cristerna, co-head of European M&A at JPMorgan.

Global stock markets have fallen steeply this year — the MSCI World Index of 23 developed-world markets has lost 43 percent.

Bankers and executives say that situation presents opportunities for cash-rich suitors including oil majors, such as Exxon Mobil Corp, Royal Dutch Shell Plc, BP Plc and Total SA . Consumer-goods giants such as Procter and Gamble Co, Nestle SA , and Diageo Plc have a similar opportunity set. “M&A should be countercyclical. In a perfect world, when prices are low, people should be doing more M&A, not less,” said Brett Olsher, co-head of global M&A at Deutsche Bank.

“All those targets that made a lot of sense for our industrial clients but were just too expensive are in the zipcode now.”

“DISTRESS-DRIVEN”

Many deals will be done to stave off collapse.

A majority of respondents in a UBS-Boston Consulting Group survey of 164 European companies predicted more M&A driven by “forced” restructuring, and all the banks and insurers who responded foresaw more restructuring next year.

As the credit crisis intensified this year, financial M&A made up almost a quarter of all deals, and sector consolidation is likely to continue in 2009 as smaller European and U.S. banks tie up with domestic peers, and insurers start to merge.

“Due to the continuing slowdown in the world’s economy and the ongoing shortage of financing, we are likely to continue to see some ‘distress-driven’ mergers and acquisitions, as we have done in 2008,” said Ian Hart, Citigroup’s co-head of M&A for Europe, the middle East and Africa.
Companies will also seek to raise funds for debt payments by disposing of peripheral businesses.

Miner Rio Tinto, for example, this week said it would expand a multibillion dollar asset-sale programme, as it plans to cut debt by $10 billion next year.

Car makers, smarting from a plunge in demand, may also sell assets. Ford Motor Co and General Motors Corp are interested in selling their Swedish businesses, Saab and Volvo.

But Cristerna at JPMorgan said many of next year’s disposals would not be traditional auctions. “We are likely to see more confidential, one-on-one discussions, to avoid the exposure of a pulled deal, or take a business unnecessarily through the distraction of an auction process,” he said.

PAPER DEALS

One big constraint on dealmaking is banks’ continued reluctance to lend. The leveraged loan market, which powered the boom-era buyouts, has all but shut as banks repair balance sheets and grapple with higher funding costs.
Loan financing for more creditworthy acquirers is also tougher, and the bond market, where these loans are usually refinanced, demands high premiums even for well-rated borrowers.

“Acquisition finance is likely to be available for the right deals, although leverage will continue to be constrained,” said Hart at Citigroup.
Private-equity funds are no longer able to fund deals through cheap debt but they may find other ways to spend an estimated $450 billion of capital, relying more on equity.

“Many private equity shops have a very significant war chest and they are in a strong position to provide certainty of execution to sellers,” JPMorgan’s Cristerna said.

“It just depends if their investors are willing to support a lower return profile as deals will need to be over-capitalised.”
Tough debt markets mean more share-based deals.

Year-to-date, all-stock deals are already up 37.5 percent compared while all-cash deals have plunged 40 percent, albeit from a much higher base, Thomson Reuters data shows.

“Those who make acquisitions will have to use equity financing much more so than in recent years,” said Sam Dean, global co-head of equity capital markets at Deutsche Bank.

Among the all-stock deals will be defensive combinations by companies seeking to offset tough markets, such as British Airways Plc, which is in talks with both Qantas Airways Ltd and Spain’s Iberia.

And deals will continue in sectors less linked to the economic cycle, such as healthcare or utilities. Big European utilities, for example, are poring over Essent and Nuon of the Netherlands, and some German power networks are up for sale.

BUYER’S MARKET

David Barnes, global head of corporate at law firm Linklaters, says the balance of power has shifted back to buyers, meaning lower premiums and more drawn-out deals.

“It’s much more of a buyer’s market than it was, and therefore prices will be weaker and deals will take longer,” Barnes said. “People are doing their homework much more carefully, and if there is a need to raise finance, it’s taking longer.”

A continued dip in deals may also prompt fresh job cuts at banks. Richard Madgwick, a senior consultant at recruiters Hudson, said M&A teams had already suffered job cuts alongside other investment bankers, and may endure more next year.

“Dealflow will continue to slow, so I think it’s a certainty that we’ll see more culls next year in M&A,” he said.

(Editing by Andrew Callus)

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