| LONDON, April 30
LONDON, April 30 European shares, stuck in
neutral for nearly two months, are likely to get a shot in the
arm from corporate deal-making, which has posted the best start
to a year since 2008 and so far is outweighing sluggish earnings
Confidence in Europe's economy is pushing companies to
loosen their purse strings and deploy the record levels of cash
they hold. Telecom and healthcare have led the charge, but deals
in sectors more closely linked to economic growth, such as
capital goods and energy, are grabbing headlines.
This week, the battle for French power company Alstom
heated up with both General Electric and
Siemens AG in the fray. Siemens also entered talks to
buy assets from Britain's Rolls-Royce.
"We're just at the very beginning of the process and we
expect it to continue and to accelerate," said Patrick Legland,
global head of research at Societe Generale.
"It's going to be tilted towards very capital-intensive
industries - that is, industries where companies have to invest
a lot to generate their revenue (and) are coming under
increasing pressure from shareholders to add to their returns."
That is keeping the STOXX 600 at a
price-to-earnings multiple just shy of nine-year highs, despite
simmering tension in Ukraine, a United States-led selloff in
technology stocks and mixed results from Europe Inc.
Year-to-date, M&A activity involving a European target has
grown to more than $312 billion. That's more than double the
value over the same period last year and the highest since 2008,
according to Thomson Reuters data.
THE QUICKER FIX
However, 49 percent of the European companies tracked by
StarMine missed earnings expectations for 2013, a trend that has
worsened for the ongoing first-quarter results season. More than
half the companies in Europe that have reported have missed
At the end of last year, investors had hoped that the
economic recovery in the West would translate into a pick-up in
capital spending and in turn drive earnings.
"The capex cycle has not recovered as much as was expected,"
said Fadi Chamsy, a strategist at Deutsche Bank.
Instead, companies returned cash to shareholders in record
amounts in the form of dividends and share buybacks.
European shares are back to pre-Lehman levels, but the
profits they generate with money invested by shareholders - the
return on equity - is just 9 percent, or half of what it was in
2008, according to Thomson Reuters data.
"With the macro environment improving relatively quickly,
M&A is the easier, quicker fix. Companies which need to react
fast may seek inorganic growth as the best use of cash," said
One popular starting point to identify companies that might
be attractive targets is to screen for EV/EBITDA (enterprise
value/earnings before interest, taxes, depreciation and
amortization) - a popular metric when valuing mergers - and net
debt to equity.
Among non-financial constituents of the Stoxx 600 that have
an EV/EBIDTA multiple below 10 and low net debt to equity are
British services firm Rentokil and German engineering
group Bilfinger, which said it is eyeing some
acquisitions of its own. [ID: nL6N0MH35R]
READY FOR DEALS
An important driver is that investors, having pushed up
valuations in anticipation of an earnings recovery, are now
willing to back deals and have bid up prices of acquirers.
McKesson Corp added $3 billion to its market cap in
the two days after it announced its offer for Celesio AG
while Merck shares rose 5 percent after it announced
its offer for AZ Electronics.
Following the 2008 crisis and during the ruction in Europe
two years ago, companies focused on preserving cash.
But balance sheets have now moved from being conservative to
inefficient, Paras Anand, head of Pan-European equities at
Fidelity Worldwide Investment, said in a note, adding that he
expects American and Asian companies to be likely buyers of
"European companies are now ready for deals in a way they
have not been previously," said Fidelity's Anand.
(Reporting by Vikram Subhedar and Francesco Canepa; Editing by