European M&A is picking up but credit quality holds for now, says S&P
European mergers and acquisitions (M&A) activity has picked up substantially in 2014 and already looks set to surpass the 10-year European average for the first time since 2007, says Standard & Poor's Ratings Services.
With around USD373 billion booked in 2014, deal flow is comfortably exceeding 2013's relatively subdued totals.
"The risk aversion triggered by the financial crisis, which steered companies toward organic expansion, is beginning to fade as belief resurfaces that growth is returning," says Taron Wade, director at Standard & Poor's. "Low financing costs, the availability of debt, and the rise in acquirers' market caps are enabling this surge in M&A activity as well. Nevertheless, some companies are still being cautious, and the lack of large, transformative acquisitions reflects this."
In Standard & Poor's opinion, the jump in M&A activity likely indicates a positive shift in corporates' attitude toward the economic environment in Europe, as well as specific industry dynamics, such as tax benefits in the case of healthcare companies. But over the last 18 months we have not seen the return of large debt-funded M&A in Europe (and the corresponding decline in participants' credit quality), although this may change as confidence increases and companies take advantage of liquidity in the debt markets.
Several mega deals have boosted volumes in 2014, including Novartis and GlaxoSmithKline's asset swap, Lafarge and Holcim's merger, Numericable and Altice's acquisition of SFR, Medtronic's acquisition of Covidien, and AbbVie's acquisition of Shire Plc--these five deals together have contributed just over half of all deal making in the region. But, even by count, deal flow looks strong, with 65 per cent of the number of transactions in 2013 already seen this year.
In terms of the most vibrant sectors, healthcare companies have led the way in Europe this year, alongside notable contributions from telecoms, construction materials, and capital goods companies during the first six months of 2014. By buyer type, trade buyers are becoming more dominant as private equity firms find it harder to compete on price as valuations rise. However, if leverage available for financial buyers continues to increase, the proportion of transactions generated by private equity may grow.
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