S&P Global Ratings has just published its quarterly update on the latest mergers and acquisitions (M&A) credit trends in Europe. The report highlights that M&A activity has been largely driven by overseas buyers, especially from Asia and the U.S. On a rolling 12-month basis, M&A transactions undertaken by firms buying into Europe has crossed the 10-year peak it had reached in the second quarter of 2007. Chinese buyers have been particularly active, with China National Chemical Corp.'s €42 billion bid for Swiss chemical company Syngenta AG and Beijing Enterprises Holding's purchase of EEW Energy for €1.4 billion being the notable transactions during the first quarter.
European firms have remained somewhat conservative in their use of fully debt-financed acquisitions; but this trend could change spurred by ECB’s latest round of easing measures. Meanwhile, the report also notes that the recent move by U.S. authorities to thwart the $160 billion deal agreement between Pfizer and Allergan is unlikely to hinder the cross-Atlantic deal-flow in any significant manner. Firms from both sides of the pond will continue to look towards means to evolve by growing inorganically in order to secure a wider product base or to access newer markets.
There has been no instance of downgrades resulting directly from M&A transactions in 2016 so far. However recent evidence suggests that M&A-related downgrades have been gradual. There have been four M&A-related downgrades from 2015 and one from 2014 since S&P Global Ratings published its quarterly outlook in December 2015. Furthermore, there are currently six companies on negative outlook or CreditWatch with negative implications following their M&A deals in 2015, and three remaining from deals in 2014.The ultra-loose monetary policy measures of the European Central Bank have clearly offered a fillip to the debt capital markets. Against this backdrop, S&P Global Ratings expects European firms to capitalize on the prevailing favorable credit conditions. Broadly, valuations are on the rise and the increase has been particularly steep in transactions announced or completed by IT and healthcare firms; albeit a few industries still continue to lag their 10-year average. This could perhaps impact the credit quality, as firms will be swayed to use debt financing more aggressively. In the report, S&P Global Ratings has also identified a diverse set of factors that could drive M&A activity in major sectors.
- Autos, lodging and technology could see heightened M&A activity due to digital and general technological disruption.
- Consumer product businesses could pursue M&A transactions in order to counterbalance the effects of slowing growth in emerging markets.
- Cost-cutting and the search for new avenues of growth will primarily drive M&A transactions in building materials, chemicals, packaging, technology, telecoms, and shipping sectors.
- Big pharmaceutical companies will pursue acquisitions to help them rebuild their portfolios and broaden the product pipelines amid diminishing market share on key products owing to the spate of patent expiration seen lately.
- Larger players in agribusiness are expected to look for acquisitions to help them bring in efficient business practices such as consolidating the seed and crop protection market, since these segments are currently suffering from high inventories and low prices.
- The chemicals sector is likely to see rebound in M&A activity aided by favorable financing conditions, accumulated cash cushions, limited organic growth opportunities, decreased valuations, continued private equity activity, and a desire to move up the value chain to specialty chemicals
With monetary policy likely to remain favorable over the foreseeable future, S&P Global Ratings expects European firms to increasingly use cheaply available credit for propping up inorganic growth. This will boost M&A deal activity for the whole of 2016, leaving the door open for leverage to grind higher.
These reports and more are available via S&P Global Market Intelligence’s RatingsDirect®, the official web-based source for access to credit ratings and research from S&P Global Ratings.