With Europe and the UK having undertaken differing approaches to the credit crunch, it’s interesting to see that the UK economy is now performing better than the Eurozone. That’s at least partly because of the UK’s focus on recapitalising the banking sector through vast amounts of quantitative easing, while the Eurozone has been slower to reduce interest rates and has also held back from flooding the economy with cash.
Cheap Assets
The effects, though, have been marked. For instance, while Eurozone GDP grew by just 0.2% in the first quarter of 2014, the UK economy grew by 0.8%. However, one further effect of a lower growth rate is lower asset prices and, as Vodafone (LSE: VOD) (NASDAQ: VOD.US) has found out in recent years, it is possible to get great European assets at low prices, as its deals to purchase Kabel Deutschland and Spain’s Ono attest. Indeed, Vodafone has the capital to continue with asset purchases following its decision to sell its stake in Verizon Wireless, with its balance sheet remaining only moderately leveraged and thus giving the company the scope to conduct further M&A activity.
While BSkyB (LSE: BSY) (NASDAQOTH: BSYBY.US) is yet to embark on a similar acquisition spree, its sale of a 6.4% stake in ITV is rumoured to be a prelude to potential offers for Sky Deutschland and Sky Italia. The idea behind the deals could be to create a larger Sky that can more easily cope with the potentially damaging effects of a war with BT on pay-per-view sport. As with Vodafone, Sky’s balance sheet looks capable of being leveraged up significantly and, with European assets remaining lowly priced, now could be a good time for the company to engage in bid activity.
Looking Ahead
Certainly, a strategy of buying undervalued European assets is a long-term one. As mentioned, the Eurozone is showing little sign of improved macroeconomic performance and so investors in Vodafone and, potentially, Sky must be prepared to wait for European purchases to come good. However, with Vodafone offering a yield of 5.9% and Sky’s yield being 3.6%, shareholders can afford to sit tight, pick up a decent income and wait for their respective strategies to come good. The Eurozone may be struggling, but it is most certainly not dead.
