Mergers galore!

24 April 2008

Interest rates may be creeping up and oil may still be expensive, but the world's stock markets still enjoyed good gains throughout late February and March.

In the US the Dow moved up +3,64% between weeks 6 and 11, and managed to break through the psychologically important 11000-point barrier for the first time in almost five years. Similarly, the FTSE was up +3,49%, and briefly edged above 6000 points in week 11 - again its best for five years or so.

Strongest of the mainstream indicators however was France's CAC 40, which put on +4,38% and went above 5000 points for the first time since mid 2001. There were smaller gains for the DAX Composite index and Japan's Topix 500, and like the other indicators, both are enjoying the kind of buoyancy that was last seen in the boom of the late 1990s.

The key driver for the mainstream indicators is a major surge in mergers and acquisition (M&A) activity. Although interest rates in the Euro-zone are being gently edged upwards, the cost of borrowing is still incredibly cheap, and this is helping to encourage some very big pan-European deals in sectors such as banking, insurance and telecommunications.

Material Mergers

This also applies to the materials producing sector, which continues to consolidate. The last 18 months has seen Cemex buy RMC, Holcim acquire Aggregate Industries and, after a fashion, Saint-Gobain buy BPB. These were followed this February by Nippon Sheet Glass (NSG) launching a bid for Pilkington, the UK-based glass manufacturer, which it already owned 19,7% of.

The much-anticipated Japanese company's UK£ 1,65 (€ 2,38) per share bid values Pilkington at UK£ 2,2 billion (€ 3,17 billion), and will create a world market leader in the flat glass (i.e. construction products) sector, with an expected 14% global share.

With this deal underway, bid speculation is now focusing on Hanson. The company has long been considered an acquisition target, but the key barrier has been its on-going problem with litigation in the US from former employees that were exposed to asbestos.

Interestingly though, there are now rumours circulating that Hanson is looking at ways of spinning-off its US businesses, which represented 47% of the company's revenues last year. If these rumours turn out to be true, the would clear the way for an acquisition of the remaining parts of Hanson that operate in the UK, Australia, Asia-pacific and parts of mainland Europe.

But it is not just acquisitions and speculation that are driving the sector. The biggest gainers between weeks 6 and 11 were Schindler and Italcementi, which both reported impressive gains in net profits last year of +21,9% and +16,2% respectively.

All these factors helped the CEM Index for the sector to a +5,05% gain over the five weeks, taking it to a record high of 148,68 points.


M&A activity is certainly not limited to the materials sector, with numerous deals underway between contractors. The most attention grabbing of them all has been a bid from a consortium lead by Ferrovial to acquire UK airport operator BAA for UK£ 8,8 billion (€ 12,7 billion). However, this UK£ 8,10 (€ 11,7) per share bid, officially launched at the end of March after several weeks of rumour, did not go down well with BAA shareholders. The sentiment seems to be that a figure of UK£ 9,00 (€ 12,96) per share, which would value the company at UK£ 9,78 billion (€ 13 billion), would be needed to entice the current owners to sell.

One deal which is on-going is Amec's planned sale of its French subsidiary, Spie. The company announced in November that it was looking for a buyer for the UK£ 1,75 billion (€ 2,52 billion) per year business. In its earnings announcement in mid-March Amec said it was holding talks with a number of interested parties, and expected to conclude the sale by the middle of the year.

All this M&A activity breeds speculation of course, and the end of February saw Impregilo issue a short statement saying that, contrary to rumours, it was not planning a merger with fellow-Italian Astaldi.


But unlike the materials sector, it all this M&A activity is having a fairly limited effect on the CEC Index. During the five weeks under review it gained +5,46% to finish at an all time high of 199,62 points. However, Ferrovial's shares fell back on the news of its BAA bid, and Amec was almost unmoved.

There were some big gains in the sector, Eiffage, Strabag and Veidekke being particularly notable, but these were more to do with strong financial results - Eiffage for example saw its net profits rise +33% last year.

But it seems merger gossip is never far away. Spanish construction and real estate group Sacyr is reported to be quietly buying-up shares in Eiffage. It remains to be seen what comes of this, but it should be noted that fully acquiring Eiffage at its current share price would cost a rather hefty € 5,65 billion.

Strong results were definitely the driver in the equipment sector. As reported in last month's business pages, +20 to +30% rises in operating profits were the order of the day for the companies publishing results early in the year. That trend generally continued throughout the sector in late February and March, although it should be noted that the Japanese manufacturers use a fiscal year that runs until 31 March.

It was a good few weeks all round for the companies that make up the CEE, with an overall gain of +5,71% taking the Index to 193,91 points - again an all-time record. With all three constituent parts hitting highs, the CET Index for the whole industry also touched a new record, finishing week 11 up +5,40% at 175,36 points.


Having shown encouraging signs of strengthening earlier in the year, the US Dollar slipped back against the Euro in March. Between weeks 6 and 11 the Euro gained just over two cents, or +1,96% to take it back to €1 = US$ 1,22. In fact it was a period of general strengthening of the Euro, with it putting on gains against almost all of the other European currencies, and what losses it did make were marginal.

The key factor here is interest rates. The European Central Bank (ECB) has added two increments of +0,25% to the cost of borrowing since December. In the US the Federal Reserve is also increasing rates, but having made 14 consecutive +0,25% increases, the end must be in sight for this policy.

So with rates flattening out in the US, but likely to keep on climbing in Euro-zone, the single European currency should become a more attract investment and therefore the stronger currency.

March also saw an interesting development in Japan, with the bank of Japan ceasing its policy of “qualitative easing”. The idea behind qualitative easing was to increase the money supply in Japan to tackle its problem of deflation.

If inflation is defined as too much money chasing too few goods (so prices rise), then deflation is the opposite - too many goods and not a big enough supply of money to buy them (so prices fall). With interest rates already at 0%, this policy whereby the Bank of Japan (BOJ) issued more and more money and used it to buy government bonds, was the obvious solution to the country's woes.

It seems to have worked, with the BOJ confident enough in Japan's recent economic recovery to end qualitative easing and tighten the money supply. The next step will be rises in interest rates, but that seems to be a bit of a distant prospect at the moment.

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