Fiat, Glaxo, EDF reinvent M&A

A GlaxoSmithKline logo is seen outside one of its buildings in west London, February 6, 2008.

LONDON (Reuters) - The twinning of two big HIV-drug operations, EDF's nuclear dealings, and Fiat's audacious bid to forge a global carmaker show necessity is now the mother of invention in mergers and acquisitions (M&A).

Deprived of the huge bank loans that powered boom-year cash takeovers, companies are striking more complex deals that share future risks and benefits between both sides, or where know-how itself can be traded for an ownership stake.

These tie-ups take longer to agree and are harder for investors to decode. But they allow executives to be strategically bold without gorging on leverage, and offer some hope of a pickup in M&A, which has languished even as stock markets have grown more optimistic.

"To get deals done in this environment, you need to be creative," said Simon Dingemans, Managing Director, European M&A at Goldman Sachs.

"The common theme is risk-reduction, while still wanting to take advantage of the opportunities out there."

Andrew Witty, the GlaxoSmithKline Plc (GSK.L) veteran who became the British drugmaker's chief executive a year ago, epitomizes this approach.

Last month, Glaxo and U.S. peer Pfizer Inc (PFE.N) struck a deal to pool their HIV operations, including Glaxo's Combivir and Epzicom, into a joint venture that will hold nearly a fifth of the market for treatments against the virus.

Glaxo starts with 85 percent of the venture, but Pfizer's stake could reach 30.5 percent, depending on successes in drug development and sales.

Unveiling the deal, Witty said Glaxo was "not interested in a classic big piece of M&A," but instead was "very focused on bolt-on acquisitions or innovative deal structures which allow us to build more efficient business models."

He reprised that strategy this week, swapping a factory and eight medicines for a stake in Africa's biggest generic-drug maker, Aspen Pharmacare (APNJ.J), to expand Glaxo's reach in emerging markets.

FIREPOWER

The global financial crisis has taken a brutal toll on M&A: at $599.6 billion, worldwide announced deals in the first four months of the year were just 42 percent of the pre-crisis deals racked up in January-April 2007.

And although stocks have staged a dramatic recovery since early March and the economic gloom has lightened a shade, deal-making remains hamstrung by a shortage of bank debt and big disagreements over valuation.

Bankers say smarter deal structures can help sidestep these sticking points.

This week, after many months of negotiations, French power group EDF (EDF.PA) reached an multi-part deal to sell a stake in its British nuclear unit to Centrica Plc (CNA.L).

Instead of an original plan to buy a quarter of British Energy for more than 3 billion pounds, Centrica will trade 1.1 billion pounds in cash and its majority holding in Belgium's SPE for a 20 percent stake in BE.

EDF and Centrica also set up an 80-20 joint venture to build new nuclear power stations in Britain.

Centrica Chairman Roger Carr, a seasoned dealmaker, said the agreement helped "preserve balance sheet firepower as we focus the group on growth opportunities in the UK and North America."

ACQUISITION CURRENCY

Noah Bulkin, an investment banker who advised EDF, said agreements such as "contingent value rights," allowing the original owners to share some of the benefits if an asset prospers, can help bridge price gaps between buyers and sellers.

These figured in EDF's original purchase of British Energy.

"We expect to see more creative deal structures: straight debt-financed cash bids are more difficult to pull together at the moment in most sectors," added Bulkin, who is director, UK investment banking at Bank of America Merrill Lynch.

"So people will increasingly think about how to use existing non-core stakes and assets as acquisition currency."

Perhaps the boldest plan underway is Fiat SpA (FIA.MI) Chief Executive Sergio Marchionne's attempt to create a global carmaker, selling the 6 million autos a year that he says is vital for survival in the ailing industry.

Without laying out its own money, Fiat has instead agreed to swap small-car technology and market access for a stake in bankrupt U.S. rival Chrysler.

It is also vying with other suitors to acquire much of General Motors Corp's (GM.N) international operations, perhaps giving GM a stake in the new entity. In both deals it is banking on government financial support.

Dingemans at Goldman Sachs cautioned joint ventures and similar deals required extra "patience and perseverance," but forecast more to come. "We're certainly looking at a number of similar situations and expect there will be others until we get back to a more stable environment," he said.

(Editing by Andrew Callus)