DC Edge | Issue 2
The Americans are coming
1Investors are willing
Confidence among American corporates is reaching its highest point since the financial crisis, buoyed by strong balance sheets, large cash reserves and a rising stock market.
Source: Vistage CEO Confidence Index
Optimism is now the prevalent feeling and 2013 has started with encouraging momentum.
Source: CEOCINDX
One of the few positives resulting from global financial crisis is that many U.S corporates are now leaner, higher margin businesses with increased stock prices and improved ratings.
The S&P and Dow Jones are now at their highest point since 2008 and corporate ratings have doubled since the 2009 dip.
S&P 500 Index
These higher ratings are, in turn, inducing M&A activity; allowing some companies to make acquisitions which had previously lain beyond their reach.
2Investors are able
Beneath the renewed confidence is a deep and highly liquid U.S. debt market that has rallied since the crisis and is flowing into American corporates in record amounts. The High Yield Bond market issued a record $360 billion in 2012, up 71% from the $150 billion of issuance in 2007 and institutional loan issuance reached $300 billion, the highest amount since 2007 (source: CapitalIQ; JP Morgan High Yield and Leveraged Loan Research). The US CLO market has been in rude health over the last 12 months and January 2013 was the busiest month for U.S. CLO issuance since November 2007 with $9.9bn of funds issued.
These unprecedented issuance levels stand in marked contrast with Europe where the debt market has, until recent months, been severely constrained. The European CLO market has seen just €900m of new CLO liquidity in Q1 2013, as institutional managers grapple with new regulatory hurdles and limited new product supply. Furthermore, bank lending in Europe remains constrained as banks continue their efforts to meet new capital adequacy rules.
“There is no doubt that the rally in the American debt markets is supporting U.S. buy-outs once again and that the opposite is in evidence in Europe where debt markets remain smaller and less liquid. However, it is not a lack of available debt that is holding back European domestic and outbound M&A, it is a lack of confidence. We can easily raise the debt in Europe for good quality transactions but what we can’t raise are the low levels of confidence.”
Ciara O'Neill
MD Debt Advisory Group, DC Advisory
3There is pressure to invest
The principal motivator for activist campaigns is greater board representation and/or control, with the ultimate goal of transforming distribution policies, suboptimal capital structures and unfocused corporate strategies. Apple Corp is a notable example of where activist hedge fund shareholders have said ‘use it or lose it’, calling for greater distribution of cash (and succeeded).
Since 2008, 930 activist campaigns have been launched in the U.S. Of the 606 resolved cases, 116 have resulted in a dissident victory.
4Exchange rates make Europe an ideal target
US businesses are sitting on nearly USD2tn in cash which represents a sizeable war chest for investment. A significant portion of this sum represents trapped cash sitting overseas. Trapped cash – money earned abroad and liable for U.S tax if repatriated – is prompting U.S corporates to invest in further overseas expansion; a legitimate and lucrative option which sidesteps corporation tax and puts their money to good use elsewhere.
S&P 500 companies account for record cash reserves of approximately $1.2 trillion, of which pharmaceutical and technology companies are typically the largest holders. Last year Moody’s estimated the total for tech companies – including Intel – at $457bn, of which $289bn, or just over 60%, was held overseas. S&P predict an increase to more than $400bn over the next three years.)
Underpinning all of the above is the added stimulus of a favourable exchange rate. The dollar has materially increased in value against the €/£ since 2008 and there is no reason to forecast a radical change any time soon. US investors in Europe can still take advantage of the cut-price sale.
Sources: The Economist & JP Morgan
These trends make European investments very attractive for American investors
Where is the money going?
5Hitting a home run
The ‘Fly Ball’
1. Hit it high into the outfield. Investments are made to find new fields for the current stable.
Curtiss–Wright Corporation is an American engineering company with roots dating back to the Wright brothers' first flight in 1903; it has been publicly listed for over 80 years. Today it is an innovative multinational provider of technologically advanced products & services that support some of the largest industries in the world, including defence, energy and industrials.
Curtiss-Wright acquired the German valve manufacturer Phönix Group in February 2013. Phönix, headquartered in Germany, is a leading designer and manufacturer of severe-service valves and related support services to the global chemical, petrochemical and power markets.
Phönix has a strong track record of developing highly engineered, solution-specific valves for the most demanding applications. The acquisition of Phönix, whose three German factories will now operate within Curtiss-Wright's Flow Control segment, provides a unique opportunity for the American owner to expand into the chemical, petrochemical and power markets in Western Europe.
DC Advisory advised AXA Private Equity and management shareholders on the sale of Phönix-Strack Valve Group to Curtiss-Wright for approximately €82 million in cash.
Curtiss-Wright’s acquisition of Phönix Group
February 2013
The ‘Grounder’
2. Focus on keeping it close to the turf – your home turf. Investments are made to bring new products back home.
DC Advisory advised Sun European Partners on the sale of UK apparel brand Lee Cooper Jeans to Iconix Brand Group for $72m.
Iconix Brand Group Inc acquired Lee Cooper to grow its international business and bring what is largely a British brand into the United States. With Lee Cooper's portfolio of international licensees Iconix plans to leverage these new relationships to further grow its worldwide footprint.
Lee Cooper licenses casual wear, footwear and accessories under its namesake brand. The brand is sold in over 80 countries and represents about $500 million in annual global sales.
Iconix Brand Group's acquisition of Lee Cooper
February 2013
The ‘Swing for the fences’
3. Requiring a bold swing, a homerun allows you to round all the bases. Investments are made with IP or global relevance in mind.
The acquisition of Napier enables Wabtec to take valuable IP and technical capabilities to a global market; in particular the fast-growth Asian markets. Napier represents a strong strategic fit for Wabtec, allowing them to offer Napier’s sophisticated technologies to some of their leading industrial customers.
Wabtec Corporation's acquisition of Napier Turbochargers
January 2013
The ‘Steal’
4. When nobody is looking, run like hell. For the distressed investor.
Headquartered in the UK, Hampson was a world leader in the design and manufacture of tooling and assembly systems for large aerostructures and was listed on the LSE until November 2012, when it went into administration and applied to delist its shares. In November 2012, Hampson was acquired by American Industrial Partners (AIP) via a pre-packaged administration.
AIP is a mid-market private equity firm that makes controlling investments in industrial businesses serving American and global markets.
The transaction demonstrates the continued interest and high risk tolerance of US financial investors committing capital into European distressed situations. American private equity houses, in particular distressed specialists, are keeping an eye out for good opportunities among the European casualties.
DC Advisory and Sagent Advisors jointly advised on the sale of Hampson Industries PLC's US Operating Subsidiaries to American Industrial Partners.
American Industrial Partners' acquisition of Hampson Industries
November 2012
6What’s in it for U.S. us?
For a European vendor, selling to a strategic multinational trade buyer is a smart option. By nature, a strategic acquirer tends to be willing to pay a premium for a business that will enhance its model. As a result, in recent years strategic trade buyers have largely replaced the stampede of U.S. Private Equity funds (now net sellers with buy-side activity down in the first three quarters of 2012) who would bid up assets sold in auction during the boom years.
For the target company, a US parent comes with more advantages than a simple cash-injection. Acorn Media, for example, the new US parent of Agatha Christie, gives the brand exposure to an established US and international distribution network along with in-depth knowledge of the US customer-base. Likewise, Classic Media's acquisition of Noddy provides an international platform and extensive creative resources.
Sources: Mergemarket, FactSet and Bloomberg