European Companies may be Attractive Targets in 2017–Despite Political Uncertainty

By | December 14, 2016


By Ben Dummett

European companies look set to be attractive takeover targets in 2017.

But some deal makers are concerned about the impact of U.S. President-elect Donald Trump’s perceived protectionist leanings and Britain’sEuropean Union exit.

“I think [deal] volume will not be meaningfully different than what we have seen this year,” said Wilhelm Schulz, Citigroup’s head of mergers and acquisitions for Europe, the Middle East and Africa. He added that “Europe as a target is going to be a big theme”– which is underscored by Praxair Inc.’s move to restart merger talks with Germany’s Linde AG in November.

Rising stock prices, bolstered by a healthy economy, are often a primary driver of M&A. However, the broad-based Stoxx Europe 600 index is down 2.3% this year, as political volatility highlighted by the Brexit vote and Trump’s election has weighed on business and consumer confidence. Still, the index is up 4% in December, benefiting in part from a global rally in financial stocks.

European M&A, including divestments, is down around 7.4% in 2016 on the comparable period in 2015, as measured by number of deals–which at 11,932 is the lowest since 2004, according to Dealogic. On a value basis, activity is down by more than 18% over the same period, but remains the third-highest annual level since 2008, bolstered by mega transactions such as the Bayer AG- Monsanto Co. deal.

Political uncertainty is likely to be a staple of 2017. Faced with two years of talks to negotiate a split from the EU, economic growth in the U.K. is seen slipping in 2017 to 1.4% from 2.1% this year. Elections in Germany and France could also weigh on sentiment.

Meanwhile, the European Central Bank warned in November that Mr. Trump might adopt protectionist policies as part of his effort to protect domestic jobs and cut the U.S.’s trade deficit.

“The implications of the recent U.S. election for the euro area financial stability are highly uncertain,” the ECB warned in its latest Financial Stability Review.

But in an environment where “we have experienced a number of significant political events over the past few years, including the euro crisis, Brexit and the Italian referendum, companies cannot sit on the sidelines indefinitely,” Cathal Deasy, head of EMEA M&A at Credit Suisse Group AG, said.

Some bankers suggest the relatively slow growth in Europe could fuel more deals like Fresenius SE’s $ 6.18 billion pact in September to buy IDC Salud Holding S.L.U. The German health care group estimated there would be EUR50 million ($ 53 million) in annual pretax cost savings from the deal. Easy monetary conditions meant Fresenius could also rely on cheap debt to finance most of the deal.

“If you combine [the slow growth in Europe] with a wall of cash that the ECB and the Bank of England are still sustaining that should give you a good backdrop for some companies to try to either buy growth, supported by synergies, or to crystallize the value of their units,” Borja Azpilicueta, head of advisory at HSBC for EMEA, said.

China is expected to drive a lot of the European M&A activity in 2017, because of its appetite for high-end manufacturing technology and other expertise to help spur domestic consumption. Mr. Trump may boost that demand if he pursues a trade war against China, encouraging Chinese companies to focus on Europe.

Already tensions have flared between the U.S. and China, after outgoing President Barack Obama this month blocked the proposed takeover of Germany’s Aixtron SE by a unit of China’sFujian Grand Chip Investment Fund LP because of security concerns.

The number of Chinese deals involving European-targeted companies rose almost 70% in 2016 from 2015, while total value of transactions more than tripled to nearly $ 95 billion, according to Dealogic. Volumes benefited in part from China National Chemical Corp.’s$ 43 billion bid for Swiss seed giant Syngenta AG.

Still, China’s deal activity targeting Europe could be at risk in 2017, as the Chinese government has signaled it may clamp down on large overseas transactions, in a bid to support the yuan.

    (END) Dow Jones Newswires   12-14-161003ET   Copyright (c) 2016 Dow Jones & Company, Inc. 



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