31 JUL

2017

Asset Allocation , Topics

European M&A gaining ground

M&A activity has been intensive in the US for a few years and could accelerate in Europe over the coming months. Europe has changed dimension since the French election as political uncertainty faded quickly and the Eurozone’s activity cycle appears strong, pushing earnings near double-digit growth.

Global M&A operations could be pushed higher as:

  • Global gearing remains low, below its long-term average, balance sheets are sound, companies are cash-rich;
  • Money is cheap, corporate bond yields are close to record lows;
  • Corporate margins are toppish, mainly in the US, and organic growth remains low and below pre-crisis average levels, even if they have recently slightly rebounded;
  • Companies need to adapt to new policy frameworks: new regulations from authorities, new policies such as a potential border tax or capital controls, Brexit, the digital revolution becoming a predominant factor for shareholders.

M&A activity should accelerate in Europe: while global volumes are near record highs, Europe is lagging. In 2016, the global acquisition volume amounted to USD2,300bn, representing 7% of global market capitalization, o/w USD1,300bn in North America and only USD468bn in Europe. European volumes stand at only half their 2007 record levels but activity is finally accelerating. This momentum should continue as international acquirers, particularly US, are intensifying acquisitions in a context of a historically attractive Euro currency and low valuations (P/BV is still one standard deviation lower than in the US).

Prefer equities to credit: European corporate credit markets have been relatively unaffected by the M&A wave in some past periods such as in 2015, while equities have been well correlated. Acquisition premia are close to 27% in Europe and should rise towards the global average of 35%. The increasing volume and the attractive current premia are an opportunity to buy a basket of targeted European corporate names which most fit the above criteria.