* Restructuring plays outpace market over last five
* KPN, Abengoa, Pandora among stocks with potential for
By Tricia Wright
LONDON, June 16 A weaker-than-expected economic
recovery in Europe, a bleak outlook for corporate profits and
the resurgence of hostile merger activity are pushing investors
to bet on troubled firms with restructuring potential.
Dutch telecom operator KPN, Spanish renewable
energy firm Abengoa and Danish jewellery company
Pandora are just a few examples of stocks seen
offering upside as they turn themselves around and - in some
cases - attract potential acquirers, fund managers say.
"We're at the beginning... of the corporate activity cycle,
and that means that the kind of businesses that are ripe for
consolidation or takeover or improvement are probably the better
quality, long-duration franchises," Paras Anand, head of
pan-European equities at Fidelity Worldwide Investment, said.
When flushing out restructuring opportunities, investors are
comforted by the knowledge that many badly managed businesses
have already collapsed, with shareholders having made a call on
which firms they would continue to back.
UK electrical goods retailer Dixons, for example,
benefited from problems at music retailer HMV when store groups
across Europe were struggling in the face of reduced consumers'
disposable incomes as governments imposed austerity. Dixons is
now merging with Carphone Warehouse.
So how to screen for good bets in corporate Europe? For
Exane BNP Paribas' analysts, one metric worth watching is how
much a company devotes to capital expenditure and research and
development relative to its market value. The higher that ratio
gets, the more likely it is that the firm's spending has been
inefficient - potentially signalling a radical shake-up is in
"(Firms may have) their strategy wrong, or market conditions
change, or competitors are extremely aggressive and there has to
be a strategic and structural response from those companies...
(restructuring) is definitely something to look at," said Ian
Richards, global head of equities at Exane BNP Paribas.
Their basket of Europe's top 25 apparent lame ducks, which
as of February 2014 included Peugeot, Austrian oil and
gas group OMV and Franco-Italian chipmaker
STMicroelectronics, has outperformed the broader Euro
STOXX 50 in four of the last five years.
It has also paid to focus on companies that need to improve
their balance sheets on the basis that a low interest rate
environment has proved advantageous for firms with debt.
This investment strategy should prove more fruitful for
firms based in Europe than in the UK, fund managers say. While
the European Central Bank recently cut interest rates to record
lows, the Bank of England stunned the markets by saying rates
could rise sooner than expected.
Britain's Thomas Cook, a holiday operator, and
Trinity Mirror, a newspaper publisher, are examples of
firms that have been striving to turn themselves around.
Even well-known restructuring stories like French retail
giant Carrefour can still offer upside as broader
market sentiment fails to adequately price the full extent of
Its move to sell off some of its overseas businesses after
an aggressive expansion into Asia and Latin America meant it
took its eye off the ball nearer to home has turned it into a
serious investment proposition once again.
Carrefour is one of the biggest holdings in the Investec
Global Special Situations Fund.
Finland's Nokia, which sold its once dominant
handset business to Microsoft after tough pressure from
U.S. rival Apple, is another such widely known play.
Stan Pearson, head of European equities at Standard Life
Investments, holds Nokia along with telecoms stocks KPN,
Hellenic Telecom, Tele2, Telecom Italia
, and Deutsche Telekom.
"Effectively we're making a judgment that the market might
be pricing that they can do a certain amount of improvement, but
it's not willing to give them the full benefit in terms of the
scale of the improvement they can make," he said.
(Graphic by Vincent Flasseur, editing by Lionel Laurent)