REFILE-Mergers & acquisitions start to pick up pace

By Danielle Robinson

July 6 (IFR) - Bankers have been saying all year that M&A was ready to pick up, and as the second half of 2012 kicks off, it looks like that prediction is finally coming true.

A flurry of deals has been announced in the past few weeks, including Dell's US$2.4bn purchase of Quest Software , Walgreen's US$6.7bn acquisition of a 45% stake in Alliance Boots and Anheuser-Busch InBev's purchase of a remaining stake in Grupo Modelo for US$20bn.

For the most part, the deals are typical for corporates in slow-growth environments -- they tend to be small, don't involve a lot of leverage and are acquisitions of assets that immediately complement existing businesses and boost revenue.

Although an impasse between buyer and seller regarding price is still keeping the deal flow on the slow side, bankers are reporting an increase in discussions between parties.

Because US corporations have spent the past few years cutting operations to the bone to add to the bottom line, M&A often seems like the next best thing to boosting earnings during a period of limited growth.

"I'm very optimistic about issuance for the rest of the year," said Leo Civitillo, managing director and global co-head of fixed income capital markets at Morgan Stanley.

"Based on discussions the Street is having, there is a very good chance that you will see M&A driving the fixed-income market to another level in the second half," he said.

"We have a very robust backdrop for M&A, with a lot of cash on the corporate side and a healthy fixed-income market with very low rates."

BUILDING BRIDGES

A number of acquisitions and spinoff-related bridge loans have already been signed, which will at some point be replaced with permanent longer-dated bond issues.

Those include Abbott Laboratories, which has taken out a US$7.5bn bridge related to its spinoff of AbbVie, its pharmaceutical division.

Eaton, a diversified manufacturer has a US$6.7bn bridge, related to its US$11.8bn cash and stock financing of its acquisition of Cooper Industries.

Nestle has the big M&A-related bond deal everyone is waiting for. Earlier this week it signed an US$8.5bn bridge loan to back its US$11.85bn takeover of Pfizer Inc's infant nutrition business.

Glencore is also likely to come to market in the months ahead to take out a US$1.5bn bridge put towards its US$6bn purchase of Viterra, a Canadian grain and oilseed company.

Walgreen will look to issue about US$3.5bn of bonds to take out a bridge related to its Alliance Boots acquisition, and UPS's US$5bn bridge for the cash portion of its acquisition of TNT Express.

UPS will also come to market for part of the US$6.8bn financing for its acquisition of TNT Express. UPS said it will finance the purchase with US$3bn in cash and the rest with debt.

Expectations are for more cross-border deals, given that much of the US$1.7trn in cash on US corporate balance sheets is kept offshore.

That would presumably mean more multi-currency deals, while the larger M&A deals are very likely to include bond offerings in US dollars, given the US market's depth and openness compared to the euro markets.

"We expect to see a lot of US companies looking to Europe for cheap targets," said Jody Lurie, credit strategist at Janney Capital Markets.

Federal Reserve data show that there was US$1.74trn of cash on non-financial US corporate balance sheets at the end of the first quarter this year, with the 25 largest of 7,100 public companies in the US accounting for 44% of all of that cash, and the largest 50 for 53%.

Lurie noted that of the US$538bn in cash on hand at the 10 US companies with the biggest cash positions, at least US$240bn has been generated by foreign subsidiaries and held overseas.

Rather than being taxed by bringing that money to the US, "companies have been exploring foreign investments as means to put this cash to use," said Lurie.

In the past year both Microsoft and Cisco, which are number three and four on the list of top companies by cash holdings, have entered into sizable acquisitions in Europe.

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