By Danilo Masoni
MILAN (Reuters) - The $40 billion takeover of British broadcaster Sky (L:SKYB) and other new deals in Europe have broken a summer lull to bolster investor optimism over an M&A revival in the region.
Europe has not traditionally been the preferred destination for M&A investors, but 2018 started with a boom that saw activist campaigns targeting big names from food group Nestle (S:NESN) to miner BHP Billiton (L:BLT) and paints maker Akzo Nobel (AS:AKZO).
In the last three months, however, the value of transactions more than halved as trade war concerns and political worries gripped markets and M&A bankers waited on the sidelines.
But this week's Sky takeover, a merger involving miner Randgold Resources (L:RRS) and the acquisition of Italian fashion house Versace showed that M&A in Europe is anything but dead and could help drive positive share price performance. Philippe Ferreira, cross-asset strategist at Paris-based Lyxor, which oversees some $165 billion of assets, said he was "constructive" over the outlook for European M&A.
"Even if volumes have come down a bit, activity remains buoyant and is likely to remain so," he said, mentioning Sky and drugmaker Shire (L:SHP) in the UK and pointing to Germany and Switzerland as other regions where large deals are in the pipeline.
Sky shot up 8 percent after the deal with Comcast (O:CMCSA) was announced and Randgold added 6 percent after saying it would be taken over by Barrick Gold (TO:ABX) in a deal that Bernstein analysts say could signal the start of renewed consolidation in the mining industry.
Shire is being acquired for $62 billion by Takeda Pharmaceutical Co Ltd (T:4502), the largest overseas purchase by a Japanese company.
Dealogic data show the value of deals in Europe more than halved to $182 billion in the third quarter so far from the previous quarter, sliding below year-ago levels. U.S. deals fell at a smaller pace and remained above year-ago levels. That has fueled some pessimism about whether the early boom in M&A would continue.
"A lot of deals aren't happening," said a London-based trader, focused on special situations. He cited the lack of any big banking merger and no move by U.S. tech giant Amazon to buy a cheap retailer despite continued speculation.
On Wednesday, Deutsche Bank (DE:DBKGn) dismissed speculation that it might seek a merger as "fictions", while the Telegraph reported that Amazon (O:AMZN) made preliminary approaches for online food delivery company Deliveroo that had made no progress.
BUMPER YEAR
Still the year is set to be a bumper one and dealmaking activity could get a further boost if concerns that the U.S.-Sino trade war could damage Europe's export-oriented economy ease. A softening of political risk would also help, investors said.
"We continue to expect M&A as a big driver for European equity markets. A lot of companies have cash and big balance sheets but the problem is it's difficult to announce a big deal in this market which has a lack of visibility," said Societe Generale (PA:SOGN) strategist Roland Kaloyan.
"If we see some better newsflow coming on the political side and the macro side, that will be a strong catalyst to see more deals," he added.
With nearly $1 trillion worth of deals, European M&A is on track for its strongest year since the 2007-2008 global financial crisis, tracking global dealmaking. An unprecedented record of mega-deals, of which Sky is one, however, has lifted Europe's share of deal values to almost 30 percent, the strongest since 2012.
Investor sentiment this month was buoyed by hopes that the United States and China could resume talks on trade, while worries over a no-deal Brexit and the Italian budget eased.
A trader at a European bank however said some investors are wary of acquisitions that could hit share prices. The takeover of Monsanto (NYSE:MON) has cost Bayer (DE:BAYGn) 18 billion euros of market value so far, but that may be an exception.
According to a study by Cass Business School for investment adviser Willis Towers Watson, shares in European acquirers have bucked a negative global trend by outperforming their regional index by 2.8 percentage points this quarter.
Over a one-year period, the outperformance was 6.2 percentage points, against a 3 percentage point underperformance worldwide, the study published on Monday showed. Possible picks range across different sectors.
Among the stocks that U.S. bank Morgan Stanley (NYSE:MS) believes are well placed to play the revival in European M&A are retailer Kingfisher (L:KGF), electrical parts supplier Rexel (PA:RXL), hotel operator Accor (PA:ACCP) and telecoms infrastructure supplier Nokia (HE:NOKIA). Their break-up candidates include engineer ABB (S:ABBN), miner Anglo American (L:AAL) and car maker Daimler (DE:DAIGn).
Lyxor's Ferreira said his outlook had not changed much this year and that interest from foreign investors in M&A in Europe had grown and that could support the market.
"We talk with several funds investing in M&A and they are pretty much satisfied with the returns they got on European M&A," he said.