MARKET OBSERVATIONS Recap. Compilation of high-level perspectives on M&A, public equity, private capital, and the capital markets.

Transcription

1 January March February April May December November October September June July August WHAT S INSIDE Market Trends: U.S. M&A Deal Activity Was Solid In 2013 Market Trends: U.S. M&A Volume In 2013 Experienced Its Best Year Since 2007 Market Trends: Latin American M&A Activity in 2013 Market Trends: European Merger Activity Falls In 2013 Credit Trends: Bond Returns Follow Similar Paths But See Different Results In 2013 M&A Activity Tables MARKET OBSERVATIONS Compilation of high-level perspectives on M&A, public equity, private capital, and the capital markets Recap

2 Table of Contents Market Trends U.S. M&A Deal Activity Was Solid In 2013 (3) U.S. M&A Volume In 2013 Experienced Its Best Year Since 2007 (4) Latin American M&A Activity in 2013 (5) European Merger Activity Falls In 2013 (8) Rich Peterson, Director, Global Markets Intelligence, and Pavle Sabic, Director, Market Development, recap the M&A trends of 2013, providing insight based on data including transaction count and deal volume for global transactions. Credit Trends Bond Returns Follow Similar Paths But See Different Results In 2013 (9) Diane Vazza, Managing Director and Head of Global Fixed Income Research, takes us through the credit trends for 2013, commenting on bond returns and sector specific performance. M&A and Private Capital Activity (13) M&A Activity by Quarter S&P Capital IQ Market Observations 2013 Recap Page 2

3 Market Trends: U.S. M&A Deal Activity Was Solid In 2013 RICHARD PETERSON, Director, Global Markets Intelligence Certain market commentators have stated that the year of 2013 was a disappointing one for U.S. merger and acquisition (M&A) activity, but in the eyes of investors, this isn't necessarily accurate. For most of the year, 2013 was on track for one of the better years in the post-credit crunch era for M&A deal making. Furthermore, in a period that saw significant transactions such as Michael Dell and Silver Lake Partners acquiring computer maker Dell Inc. in a transaction worth $27.9 billion and 3G Capital and Berkshire Hathaway Inc. purchasing food products company H.J. Heinz Company for $28.7 billion, all appearances revealed that the recent year in deals, while not spectacular, was nonetheless solid. One critique of 2013's M&A activity was that a handful of deals represented a large share of this year's $1.14 trillion volume. While it is true that the top five announced US deals this year--totaling $246 billion--accounted for over 21% of aggregate deal value, such a concentration is not unusual or rare. As indicated in the table below, for the five year period of 2000 to 2004, the five largest U.S. M&A deals in each of those years accounted for more than one-fifth of deal value annually. Furthermore, while the top five U.S. deals for 2013 represent 21.5% of the year's total deal value (a level more than double that of 2012), that level of concentration is below 2009's number, when top five announced U.S. M&A deals represented over 37% of that year's deal activity. Additionally, for those who believe that big deals dominated this year's M&A activity, we at Global Markets Intelligence decided to investigate how U.S. M&A trends fared without the biggest deals in the transaction count. As shown below, excluding the five biggest deals historically, this year U.S. M&A activity would approach nearly $900 billion, a better than 10% improvement from last year's level, and still the strongest year since To that end, no matter how you slice it, M&A activity grew in 2013 as deal appetite abounded. Table 1. Concentration Of U.S. M&A Activity Top five U.S. M&A deals (bil. $) All U.S. M&A deals (bil. $) Top five U.S. M&A deals/all U.S. M&A deals (%) All U.S. M&A deals excluding top five U.S. M&A deals (bil. $) Year-over-year change for U.S. M&A deals excluding top five U.S. M&A deals (%) Year N/A % % % % % % % % % % % % 2013 YTD % N/A-Not applicable. YTD-Year-to-date. Source: S&P Capital IQ S&P Capital IQ Market Observations 2013 Recap Page 3

4 Market Trends: U.S. M&A Volume In 2013 Experienced Its Best Year Since 2007 RICHARD PETERSON, Director, Global Markets Intelligence By dissecting various segments of merger and acquisition (M&A) deal making, whether by location, sector, or acquisition technique, market professionals can gain valuable insight as to the direction and magnitude of the M&A landscape. We believe that one particular aspect of the merger market is worth reviewing- -strategic acquisitions, or deals where companies are buying other companies or assets excluding leveraged buyouts (LBOs). Additionally, a review of strategic acquisitions of U.S. businesses or assets conducted by U.S. acquirers may provide insight as to the financial health of U.S. buyers. As indicated in the table below, the past year marked the first time since 2007 that U.S. M&A volume, regardless of acquisition technique, topped the $1 trillion mark with $1.15 trillion in deals. Subtracting LBOs, 2013 M&A volume still exceeded the $1 trillion mark, as $1.05 trillion in strategic acquisitions were announced. That's a $250 billion, or 31%, jump from 2012's total of $801.2 billion in U.S. strategic deals. Moreover, the recent results marked the first time that strategic acquisitions topped the $1 trillion mark since 2007 and the best year for such M&A activity since 2000, when $1.68 trillion in transactions occurred. S&P Capital IQ data show nearly $849 billion in deal volume just for strategic deals that involve U.S. targets and U.S. buyers. That represents the best showing for such deals since 2000, when $1.29 trillion in activity occurred. The leading strategic M&A deal last year was Verizon Communications Inc. entering into an agreement to acquire the remaining 45% stake in the Cellco Partnership from Vodafone Group PLC for approximately $130 billion on Sept. 2, 2013.Overall, the average deal size for a strategic acquisition by U.S. buyers last year was $151.3 million, with an average valuation of 17.9x EBITDA. Table 2. Strategic U.S. M&A Activity Year All U.S. M&A deals (bil. $) U.S. Strategic deals (bil. $) Strategic deals involving U.S buyers and U.S. targets (bil. $) *Year to date. Source: S&P Capital IQ S&P Capital IQ Market Observations 2013 Recap Page 4

5 Market Trends: Market Trends: Latin American M&A Activity in 2013 PAVLE SABIC, Director, Market Development LatAm M&A Volume Compared to Rest Of World Chart Global Transaction Size Count 19,213 $1,377 m Count 1,633 $79 m Count 12,161 $596 m Count 17,087 $723 m Count 1,349 $82 m Table Biggest Deals In LatAm Rank Target Name Compañía Cervecera de Coahuila, S.A. de C.V. Anhanguera Educacional Participacoes S.A. (BOVESPA:AEDU3) Zendaleather S.A. and Unknown Stake in Seara Alimentos S.A. Transaction Size ($m) Headquarters Target Buyers/Investors Headquarters Buyers/Investors $2,900 Mexico Constellation Brands Inc. (NYSE:STZ) United States $2,846 Brazil Kroton Educacional S.A. (BOVESPA:KROT3) Brazil $2,728 Brazil JBS S.A. (BOVESPA:JBSS3) Brazil 4 Petrobras Energia Peru S.A. $2,600 Peru CNPC Exploration & Development China 5 HSBC Bank (Panama), S.A. $2,100 Panama Bancolombia S.A. (BVC:BCOLOMBIA) Columbia Source: S&P Capital IQ. Data as of February 10, S&P Capital IQ Market Observations 2013 Recap Page 5

6 Market Trends: Market Trends: Latin American M&A Activity in 2013 LatAm deal volume dropped in 2013 Despite the worlds M&A volume increasing LatAm continued to dip From over $100 billion in 2012 to around $82 billion in 2013 Chart 2. Announced Transaction Values By Period LatAm transaction count dipped only slightly in 2013 Deal count in 2012 was around 1,392 compared to 2013 s 1,349 Chart 3. Announced Transaction Count By Period $1500 $1000 $500 $ Source: S&P Capital IQ. Data as of February 10, S&P Capital IQ Market Observations 2013 Recap Page 6

7 Market Trends: Market Trends: Latin American M&A Activity in 2013 Panama and Peru Among Few Increasing M&A Transaction Values Majority of the big country players down in 2013 from 2012 M&A value and activity Panama s value was up 451% and Peru s 32% in 2013 with their transaction counts down 7% and 18% respectively Chart Compared To 2012 By Country 2012 Transaction Sum 2013 Transaction Sum 2013 Transaction Count 2012 Transaction Count $50, Transaction sum $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5, Transaction count $0 Argentina Brazil Chile Colombia Mexico Panama Peru 0 Source: S&P Capital IQ. Data as of February 10, S&P Capital IQ Market Observations 2013 Recap Page 7

8 Market Trends: European Merger Activity Falls In 2013 RICHARD PETERSON, Director, Global Markets Intelligence Beset by sluggish economic conditions and ongoing credit and fiscal issues, the European landscape for merger and acquisition (M&A) activity during 2013 was marked by a decline in the aggregate value of deals and the number of announced transactions, according to information from S&P Capital IQ. In sum, European announced M&A transactions totaled $650.2 billon during 2013 from 16,651 deals. The total deal value represents a 14% drop from 2012's total of $756.3 billion, while the individual transaction count slumped by over 2,000 deals, or 11%, from the previous year's tally. With regard to deal count, the results for 2013 were the slowest since 2009, when 14,489 deals occurred. As for aggregate deal value, the past year saw the first sub-$700 billion year for deal making since Examining 2013 European merger activity on a quarterly basis, however, provides a small glimmer of optimism. From 2013's nadir in the first quarter, where just $135.4 billion in announced deals occurred, each successive quarter saw improving merger volume. Nearly $159 billion in deals took place in the second quarter and more than $172 billion and more than $184 billion took place in 2013's third and fourth quarters, respectively. Conversely, deal count for European M&A saw a decline in activity with each successive quarter. The past year's opening quarter marked the high water mark for deal activity with 4,225 announced deals. This was followed by 4,218 deals in the second quarter, 4,199 deals in the third quarter, and only 3,919 deals in the fourth quarter. Brazilian telecommunications firm Oi SA's agreement to acquire Portugal Telecom SGPS S.A. in a deal valued, with assumed liabilities, at almost $19 billion, was the year's top European M&A transaction. That was followed by Vodafone AG making a tender offer to acquire cable and satellite service provider Kabel Deutschland Holding AG for almost $12.4 billion. Table 4. European Announced M&A Transactions Announcement date Ranking value including net debt of target (bil. $) Number of deals *Year to date. Source: S&P Capital IQ S&P Capital IQ Market Observations 2013 Recap Page 8

9 Credit Trends: Bond Returns Follow Similar Paths But See Different Results In 2013 DIANE VAZZA, Managing Director, Head of Global Fixed Income Research, Standard & Poor s Ratings Services NICK KRAEMER, FRM, Director, Global Fixed Income Research, Standard & Poor s Ratings Services Although 2013 was a year punctuated by Federal Reserve announcements, legislative standoffs, and record legal settlements for banks, none of these factors could stand in the way of speculative-grade bond returns. On the other hand, the road for investment-grade bonds was a bit more challenging. Whether broken down by rating or industry, returns paint a mixed picture for the year. While some sectors saw tremendous returns for 2013, others finished the year in negative territory. Overall, corporate bond returns finished the year with a strong negative relationship according to rating level (see chart 1). The largest gains for 2013 were in the 'CCC/C' category, which returned a very strong 13.6%. The 'B' rating category came in a distant second, returning a healthy 8.7% for the year. However, once you move into investment-grade territory, bond returns swing negative. The 'BBB' category saw modest losses of 0.57% for the year, while the combined 'AAA/AA' rating category posted an annual loss of 3.36%. Despite finishing the year in very different positions, investment-grade and speculative-grade bonds generally followed a similar path (on a monthly basis) throughout 2013 (see chart 2). The key difference between the two bond types was their responses to the Federal Reserve's May announcement that it would begin pulling back on its monthly bond purchase program. Returns on all classes of corporate bonds fell sharply and deeply into negative territory in May and June following large selloffs of fixed-income instruments on the uncertainty caused by the announcement. However, once the Fed began calming fears surrounding the near-term cessation of its quantitative easing (QE) program, bonds rebounded again in July. This rebound was much less enthusiastic among investment-grade bonds, which returned only 0.59% in July compared with 1.72% for speculative-grade bonds. Corporate bond markets swung back into negative territory in August as investors feared the outcome of an upcoming Congressional fight over a budget deal. Eventually, this too would be resolved, leading to strong returns in September and October, though along the same lines as in July (with returns on investment-grade bonds trailing those of speculative-grade bonds). Results by sector were also mixed, though fairly consistent with results by rating when considering their rating distributions. The largest gains were seen in the media and entertainment sector, coming in at 4.92% for the year (see chart 3). This is not surprising considering that roughly 90% of the rated issuers in this sector have a speculative-grade rating. At the other end of the spectrum was the utility sector, which saw the largest losses for the year at -2.14%. Not surprisingly, this sector has a very strong ratings profile with the vast majority of issuers rated investment-grade. As a general rule, most industries' monthly bond returns also followed similar paths as the investment-grade and speculative-grade segments. While some investors expected the speculative-grade bond rally that began in 2012 to end earlier this year, 2013 still proved to be a strong year for the asset class. However, returns in 2013 still pale in comparison to those from 2012 (see table). Bond returns are lower than they were last year across all rating categories and industrial sectors, with an average decline of 8.8%. The largest declines relative to 2012 were in the banks and brokers, telecommunications, and homebuilders and real estate companies sectors, all with returns that were over 12% lower in Also, it appears that the fortunes of investment- and speculative-grade bonds have switched since Back then, investment-grade categories all returned over 10% while speculative-grade bonds had more modest returns. In the last three years, various forms of quantitative easing by the Fed have helped to propel bond returns to spectacular levels. However, with the program set to slow over 2014, the outlook is for far more subdued performance for both investment-grade and speculative-grade bonds in the new year. S&P Capital IQ Market Observations 2013 Recap Page 9

10 Credit Trends: Bond Returns Follow Similar Paths But See Different Results In 2013 Chart Corporate Bond Returns By Rating (%) (2) (4) (6) Investment grade Source: Standard & Poor's Global Fixed Income Research AAA/AA A BBB Speculative grade Chart Monthly Corporate Bond Returns (%) Investment grade (%) Speculative grade (1) (2) BB B CCC/C (3) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Source: Standard & Poor's Global Fixed Income Research S&P Capital IQ Market Observations 2013 Recap Page 10

11 Credit Trends: Bond Returns Follow Similar Paths But See Different Results In 2013 Chart 3. Corporate Bond Returns By Sector (1) (2) (3) Utility A&D Telecom Consumer Capital goods Transportation Health care Insurance Oil and Gas A&D--Aerospace and defense. CP&ES--Chemicals, packaging, and environmental services. Homebuilders/RE--Homebuilder/real estate cos. FI--Financial institutions. FP&BM--Forest products and building materials. M&E--Media and entertainment. Source: Standard & Poor's Global Fixed Income Research. Source: Standard & Poor's Global Fixed Income Research Homebuilders/RE CP&ES Retail/restaurant High tech Banks and brokers FI FP&BM Auto Metal/mining/steel M&E Table 4. Historical Annual Subsector Bond Returns (%) Rating/sector AAA/AA A BBB BB B CCC/C Aerospace and defense Auto Banks and brokers Capital goods Chemical, packaging, and enviromental services Consumer Financial institutions Forest products and building materials Health care High tech Homebuilders/real estate cos Insurance Media and entertainment Metals/mining/steel Oil and gas Retail/restaurant Telecom Transportation Utility Source: Standard & Poor's Global Fixed Income Research S&P Capital IQ Market Observations 2013 Recap Page 11

12 Access Global Fixed Income Research This article is part of our Global Fixed Income Research content currently accessible on RatingsDirect. Additional exclusive content is accessible to subscribers who upgrade their RatingsDirect package to include the Global Fixed Income Research add-on, including access to all of our full, comprehensive analyses, underlying data download capability, and quarterly webcasts. For more information, please contact or visit us on the web at To help evaluate your strategic portfolio positioning, develop your investment ideas and identify potential gaps and opportunities, Standard & Poor's Global Fixed Income Research provides top down information on: Global credit trends Macroeconomic conditions Sector-specific developments that impact the global capital markets including ratings transitions and anomalies Distressed, default and recovery research Global Fixed Income Research is available through RatingsDirect, the online source for Standard & Poor's Credit Ratings and Research. Related Research Credit Trends: U.S. Composite Credit Spreads Daily (March 27, 2013), March 27, 2013 Credit Trends: Distressed Debt Monitor: The U.S. Distress Ratio Falls To A Pre-Eurozone Crisis Level, March 26, 2013 Economic Research: U.S. Weekly Financial Notes: Moving On Up!, March 15, 2013 Credit Trends: U.S. Credit Overview (Feb. 28 March 6, 2013) (Premium), March 7, 2013 S&P Capital IQ Market Observations 2013 Recap Page 12

13 M&A Activity by Quarter Transactions North America and Europe North American Target M&A (Strategic vs. Financial Buyer) Millions $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Jan'10- Mar'10 Apr'10- Jun'10 Jul'10- Sep'10 Oct'10- Dec'10 Jan'11- Mar'11 Apr'11- Jun'11 Jul'11- Sep'11 Oct'11- Dec'11 LBO$ 10, , , , , , , , , , , , , , , , Strategic$ 171, , , , , , , , , , , , , , , ,465.4 LBO# Strategic# 3,448 3,341 3,404 3,699 3,947 4,048 3,878 3,923 4,041 4,051 4,114 4,880 4,167 3,959 4,465 3,983 Jan'12- Mar'12 Apr'12- Jun'12 Jul'12- Sep'12 Oct'12- Dec'12 Jan'13- Mar'13 Apr'13- Jun'13 Jul'13- Sep'13 Oct'13- Dec' Source: S&P Capital IQ European Target M&A (Strategic vs. Financial Buyer) $600,000 $500, Millions $400,000 $300,000 $200,000 $100,000 $0 Jan'10- Mar'10 Apr'10- Jun'10 Jul'10- Sep'10 Oct'10- Dec'10 Jan'11- Mar'11 Apr'11- Jun'11 Jul'11- Sep'11 Oct'11- Dec'11 LBO$ 11, , , , , , , , , , , , , , , , Strategic$ 145, , , , , , , , , , , , , , , ,991.9 LBO# Strategic# 3,437 3,433 3,374 3,990 3,918 3,873 3,871 4,121 3,806 3,621 3,481 3,716 3,217 3,225 3,307 2,952 Jan'12- Mar'12 Apr'12- Jun'12 Jul'12- Sep'12 Oct'12- Dec'12 Jan'13- Mar'13 Apr'13- Jun'13 Jul'13- Sep'13 Oct'13- Dec' Notes: Figures are based on announce dates and on a trailing three months basis through December 31, Includes both closed and pending transactions as well as those without transaction values. Transactions North America and Europe S&P Capital IQ Market Observations 2013 Recap Page 13

14 M&A Activity by Quarter Transactions North America Median Enterprise Value / EBITDA 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Jan'10- Mar'10 Apr'10- Jun'10 Jul'10- Sep'10 Oct'10- Dec'10 Jan'11- Mar'11 Apr'11- Jun'11 Jul'11- Sep'11 Oct'11- Dec'11 Jan'12- Mar'12 Apr'12- Jun'12 Jul'12- Sep'12 Oct'12- Dec'12 Jan'13- Mar'13 Apr'13- Jun'13 Jul'13- Sep'13 LBO Strategic Oct'13- Dec'13 Source: S&P Capital IQ Median Enterprise Value / LTM Net Income 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Jan'10- Mar'10 Apr'10- Jun'10 Jul'10- Sep'10 Oct'10- Dec'10 Jan'11- Mar'11 Apr'11- Jun'11 Jul'11- Sep'11 Oct'11- Dec'11 Jan'12- Mar'12 Apr'12- Jun'12 Jul'12- Sep'12 Oct'12- Dec'12 Jan'13- Mar'13 Apr'13- Jun'13 Jul'13- Sep'13 LBO Strategic Oct'13- Dec'13 Source: S&P Capital IQ Notes: Includes M&A transactions involving US and Canadian targets where relevant financials were available to calculate EBITDA and Net Income valuation multiples. Figures are based on announce dates on a trailing three months basis through December 31, Includes both closed and pending transactions. Transactions North America and Europe S&P Capital IQ Market Observations 2013 Recap Page 14

15 M&A Activity by Quarter Transactions Europe Median Enterprise Value / EBITDA 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Jan'10- Mar'10 Apr'10- Jun'10 Jul'10- Sep'10 Oct'10- Dec'10 Jan'11- Mar'11 Apr'11- Jun'11 Jul'11- Sep'11 Oct'11- Dec'11 LBO Strategic Jan'12- Mar'12 Apr'12- Jun'12 Jul'12- Sep'12 Oct'12- Dec'12 Jan'13- Mar'13 Apr'13- Jun'13 Jul'13- Sep'13 Oct'13- Dec'13 Source: S&P Capital IQ Median Enterprise Value / LTM Net Income 45.0x 40.0x 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Jan'10- Mar'10 Apr'10- Jun'10 Jul'10- Sep'10 Oct'10- Dec'10 Jan'11- Mar'11 Apr'11- Jun'11 Jul'11- Sep'11 Oct'11- Dec'11 LBO Strategic Jan'12- Mar'12 Apr'12- Jun'12 Jul'12- Sep'12 Oct'12- Dec'12 Jan'13- Mar'13 Apr'13- Jun'13 Jul'13- Sep'13 Oct'13- Dec'13 Source: S&P Capital IQ Notes: Includes M&A transactions involving US and Canadian targets where relevant financials were available to calculate EBITDA and Net Income valuation multiples. Figures are based on announce dates on a trailing three months basis through December 31, Includes both closed and pending transactions. Transactions North America and Europe S&P Capital IQ Market Observations 2013 Recap Page 15

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