Opportunities in Europe for Canada amidst Economic/Political Backdrop: PwC

May 26, 2011 | Corporate Member News

Canadians already at the forefront of capitalizing on increasing tensions in Europe

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 

About PwC’s Deal Team
PwC’s Deal Team (www.pwc.com/ca/deals) helps clients to achieve deal success—from concept to close and beyond. As part of the world’s largest Transaction Advisory practice1, and with our global Corporate Finance group being 2010 Upper Mid Market M&A Advisor of the Year2, the PwC Canada Deals Team is your gateway to an exciting new world of emerging M&A opportunities.

Follow PwC on Twitter @PwC_Canada_LLP and on Facebook at http://www.facebook.com/pwccanada.

Firm Description
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See http://www.pwc.com/ for more information. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 5,700 partners and staff in offices across the country.

“PwC” is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

Note to Editors: PwC has changed its name from PricewaterhouseCoopers to PwC in the fall of 2010. ‘PwC’ is written in text with a capital ‘P’ and capital ‘C’. Only when you use the PwC logo is the name represented in lower case.

1 Source: Kennedy;”Business Advisory Services Marketplace 2009-2011″ ©BNA Subsidiaries, LLC. Reproduced under license.
2 Source: Acquisitions Monthly Awards 2010 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

For further information contact:

David Rowney, PwC
Tel: 416 365 8858
email: [email protected]
Kiran Chauhan, PwC
Tel: 416 947 8983
email: [email protected] 

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