In its latest Capital Markets Flash report, PwC discusses the potential impacts of continued political and economic divergence in Europe on Canadian capital markets and Canadian enterprises.
The report sets out a contrarian view that Europe may be an attractive destination for investment:
“For those with a long term view, rapidly changing conditions in Europe may be an opportunity for investment,” says Kristian Knibutat, PwC’s Canadian deals leader. “In fact, many Canadian entities have already capitalized on political and economic challenges on the Continent by pursuing acquisitions using a country or bottom-up approach,” Knibutat adds.
Dealmaking in politically volatile markets is not, however, without risk. Identifying, understanding and planning for all the contingencies is a critical exercise.
“If the 2008 credit crisis has taught us anything, it’s that planning for the worst is also an important undertaking and not always a wasted effort,” Knibutat says.
The four outcomes highlighted in the report include:
Outcome # 1 – Prolonged slow economic growth in Europe
The report surmises that the most likely by-product of the European crisis is prolonged slow growth in developed Europe, mainly as a result of broad based austerity measures. Canada would be negatively impacted by less demand for goods and services and increased competition from surplus European capacity. On the flipside, there would be buying opportunities, adding to what Canadian entities have already pursued in Europe recently:
- Last year, Canadian firms were involved in 102 European acquisitions worth $15.8 billion – higher than the Europe-bound deal tally at the 2007 market peak. 60% of activity involved a large pension fund or private equity firm.
- The average deal value of Canadian acquisitions in Europe was $255 million, well above the 2010 Canadian deal average ($93 million)
- 2011 looks to be nearly as strong, with 38 deals worth $2.7 billion announced year to date.
The report says there are three approaches to acquisitions in Europe in today’s environment: either 1) bottom up—focusing on the analysis of individual companies or assets with long-term value propositions that can be acquired at attractive valuations 2) distressed investing—this can be, but is not limited to, companies sold through court-governed creditor protection, or 3) a country approach—buying in pockets of relative strength such as the UK, Germany or Turkey.
In the distressed arena, opportunities are expected in the following areas:
- capital intensive firms unable to access sufficient financing within battered European debt capital markets;
- consumer – oriented entities suffering under the weight of domestic austerity measures;
- government assets / service businesses that may be monetized to generate cash;
- non-core assets, non-core lines of service and intellectual property, which can be monetized to generate cash (this may be common in the financial services sector, ahead of tough financial sector regulation).
“Canadian buyers in Europe have already demonstrated a strong country bias. Deals in 2010 were largely in the UK and within the safer European countries, like Germany. We did not observe a high volume of distressed acquisitions,” Knibutat says.
Outcome # 2: Currency Volatility
The report also explores currency volatility (specifically an appreciation of the Canadian dollar versus the euro) which is a second potential outcome that Canadian entities should be prepared for. Currency fluctuations can reduce margins which impacts one’s ability to pursue M&A and raise capital. However, appreciation also provides an opportunity for capital investment because a strong Canadian dollar makes European capital investment more affordable, the report says.
Outcome #3: Cross Asset Contagion
History has shown that euro currency weakness happens to coincide with weakness across a number of financial markets. So even if you don’t have a dollar invested in Europe, weakness on the Continent has a high probability of negatively impacting the value of your other, apparently unrelated investments or interfering with M&A and/or capital raising processes. On the flipside, coordinated market weakness may present some buyers with a window of opportunity to pursue deals in temporarily depressed domestic markets. The best way to take advantage is to have a short list of acquisition targets and strong understanding of their true long-term value propositions.
Outcome # 4: Euro zone breakup and/or political contagion
The report says this is the most unlikely outcome. However, should the political backdrop in Europe deteriorate to the point of forcing a eurozone breakup, there is a risk that there will be similar “pushback” to bailouts and financial and monetary intervention in North America or elsewhere in the world.
“Overall, the message we leave with deal makers is to be prepared for market and political volatility in Europe and look for buy-side opportunities. The challenge will be in finding the right targets with long term value propositions while assessing and mitigating risks,” says Knibutat.
The full report can be accessed at: http://www.pwc.com/ca/cmf
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1 Source: Kennedy;”Business Advisory Services Marketplace 2009-2011″ ©BNA Subsidiaries, LLC. Reproduced under license.
2 Source: Acquisitions Monthly Awards 2010
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|David Rowney, PwC
Tel: 416 365 8858
email: [email protected]
Kiran Chauhan, PwC
Tel: 416 947 8983
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