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When it comes to dealmaking, the party may be over for private equity. But cash-rich corporate buyers have reason to cheer.
Jason Karaian and Tim Burke, CFO Europe Magazine
December 10, 2007
In Paris, private equity boss Guy Hands, of Terra Firma, remembered fondly a "bygone era" in credit conditions at a conference for fellow financial investors. In London, Jon Moulton, head of Alchemy Partners, told a gathering of corporate finance directors to expect "an era of significantly lower returns." Meanwhile, in Milan, Alessandro Profumo, CEO of UniCredit, told shareholders that the Italian bank was rethinking its business model given that a reduced appetite for securitisation will force it to hold more loans on its balance sheet.
As the credit crunch continues to wreak havoc throughout the financial services industry, many executives across the world's financial capitals are spouting a steady stream of doom and gloom.
But then there was Marcus Schenck, CFO of Dusseldorf-based utility E.ON. He lauded the "brilliant reception" the company's euro-denominated benchmark bond received in late September. Raising €3.5 billion, up from an initial target of €2.5 billion and reportedly attracting orders worth €12 billion, Schenck's mood could hardly be in sharper contrast to the financiers in Frankfurt and beyond. As he said to reporters, "Credit crisis, what credit crisis?"
Many finance chiefs are feeling the same way as 2007 draws to a close. Although the turmoil in credit markets is undoubtedly pushing up the cost of debt and denting equity valuations at some firms, for profitable, cash-rich non-financial companies across Europe — and there are many — the doomsday warnings have not yet come to pass. As far as dealmaking is concerned, with the exception of a brief respite in the summer when the turbulence first struck, it's been business-as-usual for a broad swathe of the European corporate world.
The value of European M&As in 2007 to late November reached €1.4 trillion, up from €1.2 trillion in all of 2006, according to research firm Dealogic. (See "Volume Down, Value Up" at the end of this article.) And plenty of those deals were announced after the credit crunch quelled the private equity frenzy of the first half of the year. A case in point: the blockbuster $140 billion hostile bid from Anglo-Australian miner BHP Billiton for rival Rio Tinto in November. BHP pledged to buy back $30 billion of its shares should its all-share offer succeed, but resistance from its target looks likely to push the value of a potential tie-up even higher.
In October, Finnish mobile-phone company Nokia snapped up American navigation-services provider Navteq for $8.1 billion in cash. Shortly after, a bidding war broke out between Garmin of the US and TomTom of the Netherlands over Dutch digital-mapping firm Tele Atlas. TomTom trumped Garmin's final bid by more than 20%, offering €2.9 billion in cash to clinch the deal.
In November, similar consolidation plays were made in the brewing industry, with Carlsberg of Denmark and Heineken of the Netherlands teaming up to offer £7.3 billion for the UK's Scottish & Newcastle. At around the same time, Anglo-South African brewer SABMiller won over shareholders at Grolsch with a €816m proposal, a whopping 80% premium to the value of the Dutch beer group's shares in the month before the offer.
In addition, German industrial giant Siemens recently said that it could devote "several billion euros" to potential deals, even after announcing a massive €10 billion share buyback programme in early November.
And despite only recently completing a protracted mega-merger with Gaz de France, the CFO of French utility Suez, Gérard Lamarche, says he has "a couple of ideas" for further deals. "I would love to do new transactions," he notes, although any major deal won't take place until the two companies are sufficiently integrated and the markets are convinced that the billions of euros in synergies that were promised when the deal was completed will indeed be delivered.
Of course, not everything went to plan for corporate dealmakers in 2007. Yet many of the year's most notable botched deals broke down after private equity investors pulled out of arrangements with non-financial corporate partners. (See "So Near, and Yet So Far" at the end of this article.)
What's more, financial investors, although stricken, have not fully retreated to the sidelines. In fact, according to Graham Randell, senior managing director at CIT Commercial Finance, there is a "good pipeline for the banks that remain open for deals," with debt finance in the range of €70m to €200m still available.
And despite the financial sector's torrid second half, it still produced the year's biggest deal, with Royal Bank of Scotland's consortium snatching ABN Amro from rival bidder Barclays in a €71 billion coup. Some predict that this landmark transaction will have long-lasting implications for the European M&A market.
When RBS teamed up with Spain's Santander and Belgium's Fortis to gatecrash Barclays' planned takeover of the Dutch bank, many analysts viewed the consortium's proposal as unworkable, largely because the sector had never seen a successful hostile, cross-border break-up bid. But by October, history was made.
The RBS-led consortium's offer was mainly cash, making Barclays' share-based bid look particularly wobbly when the credit crunch pummelled banks' share prices across the board. The three consortium members also made the complex break-up proposal look easy, with Fortis making a critical breakthrough by winning approval for a €13 billion rights issue. For its part, Santander has made the best start in the break-up by selling Antonveneta, an Italian division of ABN Amro, to Italy's Monte dei Paschi di Siena for €9 billion. This made the Spanish bank a notional profit of €2.4 billion on assets it owned for only a few weeks.
As for the ABN Amro deal's broader implications, Tom Shropshire, a partner at law firm Linklaters, which advised RBS, sees the takeover as a "road map" for future transactions. "People talk about the M&A landscape differently having seen this deal happen," he says. "Consortium no longer just means private equity houses getting together. It means corporate entities. And not only corporate entities, but corporate entities that have very complex businesses."
Indeed, since RBS made its consortium bid, several other high-profile deals have involved trade players teaming up either to buy or break up targets. Akzo Nobel, a Dutch chemicals group, announced an £8 billion takeover of UK rival ICI in August. The deal includes an agreement to sell ICI's adhesives and electronic-materials divisions to Germany's Henkel for £2.7 billion. The Carlsberg/Heineken break-up bid for Scottish & Newcastle is another example.
For these bidders, RBS's success in its own deal may prove inspiring. "One day there will be a deal more complex [than the ABN Amro takeover] — I'm sure that's the case," Shropshire says. "But this was pretty darn complex," he adds.
The Twilight Zone
Now that the "froth has come off" prices and banks "aren't falling over themselves to lend," corporate dealmakers should have the upper hand over private equity and other financial players in the takeover market, according to David Raff, head of the corporate group at law firm DLA Piper.
But the opportunity won't last for- ever, cautions Wieland Janssens, global head of the financial sponsors group at ABN Amro. "We're in an unusual period where we've had a financial crisis but not an economic crisis yet — it's a twilight period," he says. "Equity valuations have kept up relatively well, so corporates' currency is still very good, particularly if they're paying with stock. But it may not last for long."
Jason Karaian is deputy editor and Tim Burke is a senior staff writer at CFO Europe.
So Near, and Yet So Far
From abandoned buyouts to mismatched mergers, plenty of dealmakers lost out this year.
As renowned American football coach Knute Rockne once said, "Show me a good and gracious loser and I'll show you a failure." By Rockne's measure, there were plenty of M&A failures in 2007.
In November, Qatari investment fund Delta Two ended months of talks with UK supermarket chain J Sainsbury, dropping a planned bid for the retailer. Delta Two's Paul Taylor said his colleagues still considered the supermarket chain "an excellent company" with a "leading market position and strong long-term growth opportunities."
Good and gracious sentiments indeed, and one of the year's more notable M&A failures. Delta Two's withdrawal emphasised the clout of pension funds in takeover situations. Delta Two reportedly needed to devote an extra £500m to Sainsbury's pension fund before the trustees would back a deal. This and other factors — including troubles in the credit markets — made an offer too expensive, according to the fund.
A merger between Nuon and Essent seemed like a promising partnership when the two Dutch energy companies agreed a combination in February. But the deal was scrapped in September after months of due-diligence drama.
Essent was reluctant to reveal commercially sensitive information to Nuon until it was convinced a deal would go through. Nuon was unwilling to accept the merger's proposed exchange ratio — which would see Nuon take 45% of the combined entity — without the information in question. The result: deadlock.
The deal could have created a Netherlands-based utility large enough to fulfil global expansion opportunities. Instead, both companies are now rumoured to be takeover targets. As Essent CFO Rinse de Jong says, the worst case scenario is that "rather than keep one player in the game, we [could] lose both players."
Nevertheless, Nuon and Essent are forging ahead with back-up plans. By 2011, they and other integrated Dutch energy companies must separate their network-operating businesses from commercial activities such as power generation. For Nuon, explains CFO Doede Vierstra, the company's options include remaining independent, although it seems that a merger or joint venture is more likely. "We believe that the mechanics and the economics of the energy world around us will dictate that scale is of key importance," he says.
De Jong, meanwhile, is confident that Essent has a bright future for now. "We have a large project pipeline," he says. Convincing shareholders that past growth can be maintained for a "reasonable time," the CFO adds, should buy the company some time to "survive on our own, grow the company, and continue to create value up to the moment where shareholders will again take stock of their situation." — T.B.