By Victoria Howley
LONDON | Fri Feb 10, 2012 7:17am EST
(Reuters) – Bankers are dusting off pitches for long-expected deals as a flurry of company bids worth over $50 billion in the last few weeks sparks hope that Europe’s depressed M&A market is on the verge of a fragile resurgence.
Dealmakers point to Roche’s (ROG.VX) $5.7 billion hostile offer for Illumina (ILMN.O), ABB’s (ABBN.VX) $3.9 billion bid for Thomas Betts (TNB.N) and Glencore’s (GLEN.L) mammoth $41 billion approach for Xstrata (XTA.L) as potential green shoots.
“We are seeing classic early indicators of a recovery in M&A – industry leaders taking action, hostile activity and cash deals,” said Gregg Lemkau, head of European and Asian M&A at Goldman Sachs (GS.N).
“Strategic conversations with companies have picked up. If we can build on this momentum, it should give others more confidence to transact,” Lemkau said.
Even including Glencore, the European, Middle Eastern and African mergers and acquisitions market is worth just $77 billion so far this year, according to Thomson Reuters data, about a third of its value in the full first quarter of 2011.
M&A is a lucrative business for investment banks because it does not require capital behind it and fees are often shared between fewer banks than capital markets mandates like initial public offerings.
Glencore’s two advisers, Citigroup and Morgan Stanley, are set to share $50 million to $70 million in fees in the event of a successful deal, based on estimates from Thomson Reuters and Freeman Consulting.
The recent awakening of debt markets and a mini-rally in equities could inject life into a sluggish market that endured its slowest January for nine years, provided debt-laden Greece does not get in the way.
“Investor appetite towards risk is better, but most people are still wary about what is happening around Greece,” said Giuseppe Monarchi, co-head of M&A for Europe, the Middle East and Africa at Credit Suisse.
“A default would be a major setback for the market.”
Greece this week pushed through more wage and budget cuts, but euro-zone ministers demanded further steps and parliamentary approval before providing aid to keep the country afloat.
Long-awaited industry consolidation and companies that have excess cash to put to work are most likely to feature in deals that could emerge in the next few years if the M&A market really starts to build towards its next peak.
Glencore Xstrata, which would have a combined market capitalization of over $80 billion if its deal goes through, is almost certain to look at rival miner Anglo American (AAL.L) in the intermediate term, dealmakers said.
Xstrata tried to buy Anglo in 2009, preceded a few years earlier by an attempt from Brazil’s Vale (VALE5.SA) (VALE.N).
Bankers in the consumer sector have started to talk about a combination of AB InBev (ABI.BR), the world’s largest brewer, and global peer SABMiller (SAB.L) as a case of “when, not if.”
In a global brewing industry marked by huge consolidation over the last decade, bankers are praying for one final $80 billion plus deal between the two giants.
In the pharmaceutical sector, an acquisition of perennial target Shire could result in a deal worth tens of billions of dollars, and in telecoms western European markets like Spain and Germany are ripe for consolidation.
One banker that advises telecom companies described a merger between Telefonica’s (TEF.MC) 02 and KPN’s (KPN.AS) e-plus in Germany as one of the sectors “old chestnuts.” KPN said last month there were currently no talks about this.
HEALTHY DEBT MARKETS
The European Central Bank’s longer-term refinancing operation (LTRO) has improved European banks’ liquidity and ability to lend, setting up loan and bond markets as more accommodating for M&A.
“I am more encouraged than I was at the end of 2011, I thought it would be a bleak first quarter, but it’s not turned out that way,” a senior loan banker said.
Loan bankers are waiting for syndication of ABB’s $4 billion bridge facility for the purchase of U.S.-based Thomas & Betts because it is expected to set a new benchmark.
“There has been little to test it so far, but in the corporate loan market there’s a feeling that banks are willing to do deals, classic corporate M&A deals with big bond bridges,” the senior loan banker said.
The European high-yield bond market has shown signs of life in the last few weeks, an important source of funding for private equity dealmaking.
“There is no doubt that the European high-yield market has had a strong open to 2012, and fund inflows continue to be strong because just on a process of elimination, investors cannot get yields of 7-10 percent anywhere else,” said a high-yield banker.
(Additional reporting by Tessa Walsh, and Natalie Harrison; Editing by Erica Billingham)
Jacqueline Tongko 