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DEALTALK-Rallying stock markets help accelerate M&A plans

Published 09/10/2009, 12:57 PM
Updated 09/10/2009, 01:03 PM
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* Global recovery seen spurring more M&A next year

* M&A deals must have sound industrial logic

* Availability of financing is improving

By Victoria Howley

LONDON, Sept 10 (Reuters) - More companies could follow Kraft's lead and put long-held plans to buy rivals back on the agenda as confidence grows and stock markets reach yearly highs, bankers and analysts said on Thursday.

Industry experts do not expect a swift return to the frenetic dealmaking of 2007, but they say pipelines are healthier, supporting views that more bosses are getting ready to de-ice plans for mergers and acquisitions (M&A) that have been on hold since the start of the financial crisis.

"You've reached an inflexion point in the economic cycle, at least from the perception of (chief executive officers)," said Patrick McCullagh, head of U.K. and European credit research at asset manager Schroders.

"You are comfortable with your cash flow and you've now got ... businesses at a 30 percent discount to where they were 18 months ago - that's a strong reason for undertaking M&A."

Major indexes set new highs this week for 2009 - the UK's FTSE 100 top share index closed Wednesday over 5000 points for the first time since October - on mounting evidence of economic recovery.

The Organisation for Economic Co-operation and Development (OECD) also sees renewed expansion of gross domestic product in the United States and the euro zone in the third quarter, after, respectively, four and five quarters of loss.

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THE RIGHT STORY

While the credit markets are buoyant and pricing on bank debt is reducing, companies still need solid ratings and sound industrial logic to secure financing for M&A.

"We are seeing a series of straightforward strategic deals, the sort of corporate moves people have been talking about and expecting for a number of years," said Andrew Bell, global head of M&A at HSBC.

For the right deal that will generate value, financing availability has improved, Bell added.

Kraft's pursuit of Cadbury has been anticipated since 2007, when Mars bought Wrigley for $23 billion to create a global powerhouse in the confectionary industry.

For Kraft, the deal is a natural extension of a strategy to push into more overseas growth areas and products like chocolate that offer high margins than other parts of its portfolio, like cheese and frozen pizza.

Other examples of clear strategic M&A include Walt Disney Cos $4 billion purchase of Marvel Entertainment Inc, this year's biggest media deal. Disney will be able to use its marketing and entertainment clout to promote and build characters like Thor in ways Marvel never could.

Finnish retailer Kesko is also considering acquisitions in Russia, where the consumer sector has been booming for much of the last decade and where Carrefour has also pledged further expansion.

In the telecoms sector, meanwhile, French media giant Vivendi has offered $2.9 billion for Brazilian operator GVT, as it also looks to boost its presence in emerging markets.

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UK insurer RSA will find shareholders sympathetic if it proceeds with a rights issue of up to $1 billion - as long as it sets out sensible acquisition plans, top investors in the company told Reuters this week.

Andy Haste, who took the helm of RSA in 2003, has built credibility with investors after restructuring the company and cleaning up its balance sheet after it over-extended itself in the 1990s.

A report by Natixis predicts a higher incidence of M&A in sectors including pharmaceuticals, luxury goods, transport, IT software and oil services.

It said International Business Machines Corp could pursue SAP and lists AstraZeneca and Whitbread among potential takeover targets.

FINITE WINDOW

Bankers argue that companies should consider pursuing M&A sooner rather than later, before the recovery lifts potential targets out of range.

Liam Beere, co-head of European M&A at UBS, said that confidence is starting to return at companies that have weathered the financial crisis, with CEOs looking for opportunities to grow their top line by acquiring rivals that are still weak financially.

"If companies are willing to pursue targets aggressively, they may find they are able to make public company acquisitions more easily as shareholders are looking to M&A to drive performance," he said.

Marco Boschetti, global head of M&A and restructuring at business consultancy firm Towers Perrin said deals that closed in the second quarter of the year outperformed the market by 8.5 percent, compared to outperformance of 2 percent in the second quarter of 2008.

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He was referring to global deals worth more than $100 million, which were measured in a joint survey with London's Cass Business School against the MSCI world index.

"What this is saying is that there is a lot of value in deals at the moment and if you can afford to close a transaction you should go for it," he said.

Not everybody is convinced a sustainable recovery is underway, however, and the threat of double dip has not completely receded from the market.

"When you look at the ever shrinking bank lending to the private sector around the world it is as clear as the nose on my face that the global economy is still very, very sick," SocGen analyst Albert Edwards wrote in a strategy note.

(Additional reporting by Jane Merriman; editing by Simon Jessop)

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