Europe turns to Europe for deals as US and Asia M&A slips

[LONDON] European companies are turning to their backyards for growth via mergers and acquisitions.

The volume of deals in Europe in the first half of the year reached about US$250 billion, more than 70 per cent higher than spending in the first two quarters of 2016, according to data compiled by Bloomberg.

Markets are beginning to settle from tumultuous political events, such as the UK's decision last year to leave the European Union and the French presidential elections, and economies in Southern Europe are improving, pushing the continent's chief executives to look for new growth at home.

At the same time, relatively high equity valuations - European companies' shares have a total return of about 10 per cent this year, in line with their counterparts in the US - are enabling businesses to make purchases using stock. That's helped Europe outpace dealmaking in the US and Asia, where spending fell 8.6 per cent and 11 per cent respectively in the first half, the data show.

"The effect of many of the current political situations around the world is forcing European players to think about European consolidation," said Luigi de Vecchi, Citigroup's chairman of corporate investment banking in continental Europe.

"The stars are aligned and politically, industrially and financially, the time is now."

It's been the biggest deals, with buyers paying US$10 billion or more, that's driven European M&A growth this year, according to David Lomer, co-head of M&A in EMEA at JPMorgan Chase & Co.

"Mergers have been a defining feature of 2017, particularly in the UK and Southern Europe," Mr Lomer said.

Among the biggest deals globally this year are: Italy's Atlantia SpA, controlled by the Benetton family, has offered to buy Spanish rival Abertis Infraestructuras SA in a 16.3 billion-euro (S$25.623billion) offer that would create the world's biggest toll-road operator. 

French lensmaker Essilor International SA agreed to buy Luxottica Group SpA, the Italian maker of Ray-Ban sunglasses, for about 22.8 billion euros in stock. 

French billionaire Bernard Arnault moved to consolidate control over Christian Dior for about 12.1 billion euros, folding the fashion house's operations into the LVMH luxury empire.

"Growth and value creation through M&A is firmly back on the agenda in the European boardroom," said Cathal Deasy, head of M&A for Europe, the Middle East and Africa at Credit Suisse Group AG in London.

"After a subdued 2016 for European acquirers, particularly within Europe, we have seen a robust bounce back in the first half and expect activity to continue for the remainder of the year."

Buyers announced almost US$200 billion in deals involving companies based in the Mediterranean countries of France, Spain and Italy this year through June, according to data compiled by Bloomberg.

That's about 60 per cent above the volume announced in the first half of 2016.

Political reforms - such as Spanish Prime Minister Mariano Rajoy's work to rein in the country's deficit - are beginning to pay off and European buyers that had been looking abroad to diversify their holdings are starting to look for deals at home.

Southern European lenders seeking to clean up their balance sheets from their exposure to toxic real estate assets have also triggered mergers and investment opportunities for financial investors keen to snatch up particular assets.

Banco Santander SA stepped in to take over smaller rival Banco Popular Espanol SA last month before the bank collapsed under a mountain of bad property loans.

The Brussels-based Single Resolution Board, set up in January 2015 to deal with euro-area bank failures and minimize impact on financial stability and taxpayers, forced the sale in its first major action.

The regional uptick has propelled local investment banks up the league tables. Italy's Mediobanca SpA is among the top five advisers on Europe-to-Europe deals so far this year, the data show.

Beyond corporate M&A in Europe, which will continue in the coming months, "financial investors will play an important role given high levels of liquidity and benign financing conditions, both in lending and capital markets," said Francesco Canzonieri, Mediobanca's global head of corporate finance and country head for Italy.

BLOOMBERG