Deal mania surges worldwide, more to come
Monday, November 20, 2006 3:57:15 PM (GMT-06:00)
Provided by: Reuters News
(Adds updated Dealogic numbers, new analyst comments)
By Richard Hubbard
LONDON, Nov 20 (Reuters) - Merger and acquisition activity worldwide surged on Monday with a focus on real estate, mining, media and exchanges, propelled by private equity funds and the push for cost-cutting and new growth among corporations.
In the past two days, U.S. deals included a move by private equity firm The Blackstone Group [BG.UL] to buy Equity Office Properties Trust <EOP.N> for $20 billion, and mining group Freeport-McMoRan Copper & Gold's <FCX.N> pact to buy copper miner Phelps Dodge Corp. <PD.N>.
The pace of global mergers has jumped to $3.39 trillion so far this year -- an all-time high, research firm Dealogic said. The previous record was $3.33 trillion in 2000, it added.
"If you quantify the boom so far, we haven't seen anything yet," said Teun Draaisma, head of European equity strategy at Morgan Stanley.
The surge is being driven by profitable companies with piles of cash to invest, and by the flood of money into private equity funds that needs to be put to work, analysts said.
Global financial sponsors buyout volume has hit $601.3 billion so far this year, and accounted for 17 percent of global merger volume, Dealogic said.
Financial institutions, telecommunications, real estate and raw materials have been the busiest sectors for consolidation this year. Analaysts said they expect banks, insurers and energy companies to remain heavy consolidators into 2007.
Draaisma calculates that European M&A this year is on track to hit $1.2 trillion, matching the record in 2000. Relative to the size of the overall market, the volume of new deals is still below previous peaks.
At the time of the last peak in M&A activity there were a lot of hostile deals and many bidders were offering their own stock instead of cash to finance the deal, Draaisma said.
"We haven't seen any of that yet, it's been mostly smaller companies, quite friendly deals and mostly in cash," he said. "Nothing we look at suggests we're seeing a peak in the M&A cycle."
In fact, many of the drivers of the current M&A boom remain stable, such as low interest rates, liberal credit markets, high CEO confidence, and rising stock markets, analysts said.
"The biggest thing that could put the brakes on this boom would be a change in the availability of credit -- if there was a concern about default rates or a change in the ability of companies to service their loans," said Robert Filek, a partner with PricewaterhouseCooper's transaction services group.
INVESTOR FEARS MUTED
Few investors can see an immediate end to the trend, at least until one of the recent deals turns sour.
"There's an enormous wall of money that has been raised ... and that money needs to be invested. Maybe the music will stop when we get a significant (deal) failure," said Ted Scott, director at F&C Asset Management's retail funds arm.
"Increasingly they (deals) are becoming more risky and marginal gains are being made. Some of the valuations are quite toppy, to say the least," he added.
But amid a benign global macroeconomic environment and low interest rates, which have created a wide spread between the cost of debt and the return on equity, deals to consolidate industries and capture cash flows are expected to dominate.
In the mining sector, the global consolidation story has been running all year as companies scramble to add reserves and capitalise on record-high metal prices. Those that do not succeed could become targets themselves.
"The mining sector stocks have all got so much cash on their balance sheets there is a risk they are getting vulnerable," said Chris Tinker, equity strategist at inter-dealer broker ICAP.
Blackstone's bid for Equity Office Properties sets a benchmark for a takeover by a single private equity fund. The deal also marks the third-largest leveraged buyout in history, behind RJR Nabisco Inc. in 1988 and HCA Inc. earlier this year
Blackstone has been the busiest private equity fund so far this year, with $83.8 billion in deals, Dealogic said.
Among other U.S. deals unveiled on Monday, Bank of America <BAC.N> agreed to buy U.S. Trust Corp, the private banking unit of Charles Schwab Corp. <SCHW.O>, for $3.3 billion. U.S. stock exchange Nasdaq <NDAQ.O> launched a $5.1 billion offer for the London Stock Exchange <LSE.L>, but the overture was rejected.
Canada's TD Bank Financial Group <TD.TO> <TD.N> agreed to buy the 43 percent of its U.S. retail banking arm, TD Banknorth Inc. <BNK.N> , it does not already own in a $3.2 billion deal.
Private equity firm Apax Partners [APAX.UL] won a tender valued at between $1.04 billion and $1.25 billion to buy control of Tnuva, Israel's largest food company, according to Israeli media reports.
In media, private equity giant Kohlberg Kravis Roberts [KKR.UL] unveiled a $3.1 billion deal in Australia to set up a joint venture with Seven Network Ltd. <SEV.AX> to enter the TV magazine and online media businesses.
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