It has been an incredible week for rainmakers and for investors eager to bet on mergers and acquisitions. In such an environment, one may wonder whether news about a takeover of Rio Tinto (LSE: RIO) by Glencore (LSE: GLEN) and a merger between BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) will soon hit the headlines…
M&A Landscape
Germany’s ZF Friedrichshafen announced on Monday it would acquired TRW Automotive of the US for almost $12bn, in a deal that will create the world’s second-largest car parts maker. In the US, Microsoft said it would buy Sweden’s Mojang, the maker of Minecraft, for $2.5bn, while Cognizant agreed to acquire TriZetto for $2.7bn. On Tuesday, Airbus said it would shed assets worth 2bn euros of revenue. On the same day, Spain’s JazzTel received a €3.4bn offer from France’s Orange.
Of course, the biggest deal of the week could still come from the UK. The outcome is highly uncertain, but SABMiller (LSE: SAB) may well receive a record-breaking offer from the world’s largest brewer, AB InBev. The deal would be worth more than $110bn. AB Inbev certainly has the financial wherewithal to entice SAB shareholders. Alternatively, SAB could make another attempt to buy Heineken, although such a combination doesn’t strike me as being in the best interest of SAB shareholders.
Glencore/Rio & BP/Shell
There are obvious risks for stock investors in this environment as equities appreciate beyond fair value, but that’s nothing new. It has been this way for some time now. So, it could just be business as usual. In fact, one may argue that opportunities lie ahead, and jumbo deals could be waiting in the wings. A merger between BP and Royal Dutch Shell is one appealing combination, for instance.
Pressure on profits and declining returns are perfect ingredients for a jumbo merger in the oil sector. After all, regulatory hurdles may be surmountable. BP and Royal Dutch Shell may tie the knot, but both companies could also attract bids from their US rivals. Their shares don’t price in an M&A premium right now.
Elsewhere, recent rumours about a takeover of Rio Tinto by Glencore also make sense. My colleagues Rupert Hargreaves recently pointed out that Rio, with a market cap of £60bn, is bigger than Glencore, but Glencore may well use its stock as M&A currency if it wanted to go for Rio. I think Anglo American is a more palatable target for major miners.
Credit Conditions/Financial Discipline
Loose credit conditions are the engine of M&A activity. At a time spreads on debt financings are just as low as they were during the credit crunch, bankers talk of multi-billion syndicated facilities and high-yield bonds that are conveniently priced, of course. This points to earnings accretion via M&A. Synergies are up for grabs and also play a pivotal part in deal-making. If regulators continue to put pressure on banks, asking for more stringent capital requirements, which seems likely, the banks’ top clients — such as SAB, AB InBev, BP, Shell and others — will be the winners. The same may apply to their shareholders, but only if financial discipline in M&A is maintained.
