Strategy

Cheap European Assets Spark U.S. Interest in M&A

The euro’s slide may continue if a Greek exit takes place. But even if the currency isn’t cheap yet, European M&spamp;A assets are – and U.S. corpo...
Andrew SawersJune 13, 2012

With the euro hitting record lows against the U.S. dollar, currency analysts are getting out their rulers and wondering how far they can extrapolate the downward trend.

The euro touched $1.23 at the beginning of June, well down from this year’s high of $1.35 achieved two months ago. That has prompted some foreign-exchange experts to say they can’t rule out the possibility of the euro hitting parity with the dollar if Greece leaves the single European currency.

Most agree that parity following a so-called Grexit would be an extreme scenario. More likely would be a fall of perhaps 10 cents from current levels. David Woo, head of global rates and currencies research at Bank of America Merrill Lynch, actually believes the euro would appreciate over the medium term if Greece were to leave. “Greece has held the eurozone hostage for long enough,” he told CFO European Briefing, while emphasizing that a Greek exit is not his core assumption.

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Woo reckons the euro will continue to slide to around $1.20, then start recovering toward $1.30 by year-end. He argues that things will have to deteriorate before there is an aggressive policy response from both Europe and the United States. “The only thing that can stem the dollar’s rise is very aggressive monetary easing coming from the Fed,” he said. “I don’t think that’s on the cards until things get worse.”

Woo suggested, however, that while the euro may not be a particularly cheap currency at the moment, underlying European assets are cheap — “very, very cheap.” Not only is the dividend yield of the Eurostoxx 50 index significantly above that of the S&P 500, “the differential is now literally two standard deviations” from historical norm, he said.

Moreover, the fact that Spanish government bonds are at 6.5% yields compared with 10-year U.S. Treasury yields at 1.5% means the market “is basically discounting an almost 60% devaluation of Spain over the next 10 years,” Woo said.

On the mergers-and-acquisitions front, Woo said that U.S. companies are now starting to look at Europe: “These assets are starting to look really attractive. We’re now seeing U.S. corporates making acquisitions in Europe. They can purchase European companies more cheaply than at any time over the last ten years.”

In March, for example, UPS agreed to the acquisition of Dutch group TNT Express for €5.2 billion ($6.5 billion). In April, Watson Pharmaceutical sealed a deal for Actavis for €4.25 billion from Deutsche Bank, which had taken control of the indebted group in 2008.

If sentiment were to improve, or if the right European policy response were made that helps reduce the risk premium in European assets, “you’re going to see the euro going up because you’re going to see money coming to Europe scooping up European assets.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.

 

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