European investors expect that merger
and acquisition (M&A) activity in Europe will increase in 2014, driven by a
gradual economic recovery and an increased willingness to put corporate cash
reserves to work, according to a quarterly survey by Fitch Ratings.
According to the credit ratings
agency (CRA) few respondents, however, anticipate the recovery to accelerate
into a takeover boom that could jeopardise ratings.
The 4Q13 survey, which closed on
4 November and reflects the views of managers who control an estimated €7 trillion
of fixed-income assets, found 56% of respondents expect that M&A will
return to a ‘through-the-cycle’ level in 2014, but that a prudent approach to
deal-making will protect bond investors from the risk of downgrades. Just 8%
expect a boom and 36% believe caution will dictate boardroom decisions and keep
deals at a modest level. The overall percentage of respondents expecting
moderate or significant use of cash to fund M&A activity was at its highest
level for more than two years.
Fitch also expects to see an increase in M&A activity in 2014, but says this
will probably be limited to strategic acquisitions, rather than the sort of
opportunistic deals seen before the start of the financial crisis. The rate of
activity is also likely to be accelerated by a closing window for companies to
raise low-cost debt.
The CRA believes the telecom
media and technology and consumer and healthcare sectors are among the most
likely to see more deals in 2014 as companies seek to increase scale to combat
dwindling top lines. In the telecom sector there is the potential for large,
multi-billion euro transactions, which could reduce competition and alleviate
the pressure on margins in many of Europe’s biggest markets. Regulators may,
however, oppose deals in the sector due to competition concerns, while large
cross-border deals are unlikely as politicians will be keen to protect domestic
Among consumer companies there is scope for consolidation in the alcoholic
beverages sector as markets are fragmented. In the pharmaceutical sector deals
will be driven by companies seeking to expand their pipeline or portfolio to
offset the impact of expiring drug patents.
Fitch concludes by noting that European
M&A activity has left ratings largely untouched over the last three years.
It has accounted for a negligible, and declining, single-digit share of
corporate downgrades, despite record low interest rates.
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