Europe - Plentiful Opportunities
by Lance Kawaguchi, Managing Director, Global Head - Corporates, Global Liquidity and Cash Management, HSBC
The Natural Resources and Utilities (NRU) sector in Europe is approaching a tipping point. Conditions for certain buyers appear ideal and there is no shortage of distressed assets looking for a new home. Yet a variety of factors have so far delayed what seemed to many an inevitable rush of M&A activity. It seems increasingly likely that this situation will change in the coming year and M&A levels will rise substantially . This in turn will create an intense period of activity for corporate treasuries. Many of these will find that while some of the treasury consequences of European M&A activity are similar to those applying elsewhere, others are rather different.
From a macro economic standpoint, Europe currently looks particularly attractive to those from outside the region seeking to acquire Natural Resources and Utilities (NRU) assets. This is especially true of US buyers, who have benefited from the euro's slide against the US dollar since early 2014. At the start of that period, EUR / USD stood at ~1.40, while for much of the past two years it has oscillated around ~1.10. The recent rise in US interest rates has more recently provided additional USD support. Therefore, EUR-denominated NRU assets appear relatively cheap to US buyers.
Elsewhere, while the EUR / RMB exchange rate has been less favourable to Chinese buyers, this does not appear to be damping China's outbound M&A activity. Total Chinese outbound M&A by value in the first six months of 2016 almost exceeded total M&A for the whole of 2015. By the end of August 2016, China had completed 173 global outbound deals totalling USD128.7bn. While these figures relate to M&A across all sectors, leading Chinese oil companies CNPC, Sinopec and CNOOC have all publicly indicated that they are considering global M&A  and .
...but not yet taken
Yet despite these favourable conditions, actual European M&A activity has been far below the levels many predicted for 2014 and 2015, with several factors likely to be influencing this situation . Continued weakness in commodity prices appears to have created a situation where buyers are waiting for the bottom of the market, but there is ongoing uncertainty as to whether that point has yet been reached. At the same time, sellers seem to have been basing their desired sale prices more on internal expectations rather than external realities. However, as pressure continues to mount, it seems credible that this gap between buyers and sellers will close and that perhaps just one major European acquisition will be sufficient to trigger a cascade of others.
Nevertheless, despite no shortage of private equity and other investors looking to acquire inexpensive European assets, debt financing of such assets has become more challenging. Several banks have reduced or stopped providing financing for businesses in the oil and gas sector. In addition, a major focus across the sector at present is the reduction of debt ratios. This is partly being driven by the current emphasis of rating agencies on ensuring that companies are well balanced from a debt standpoint.