RWC’s Rumble – European companies may look to M&A as record low rates come to an end

European markets could experience a boom in M&A over the next 12 months as companies take advantage of record low rates before they start to climb, RWC Partners has said.
Companies in Europe have been raising debt at levels unseen since the financial crisis as they take advantage of current low interest rates to increase their war chests.
Against this backdrop, M&A has climbed globally, with $1.2trn of acquisitions seen in the first quarter – the fastest start to a year ever[1].
Rumble, co-manager of the RWC Continental European Equity fund alongside Graham Clapp and Russell Champion, says with company balance sheets looking healthy, much of the excess cash raised on the debt markets could be used to fund acquisitions.
“A lot of companies have used low rates as an ‘opportunistic moment’ to raise debt,” he said.
“Companies have strong balance sheets having rebuilt them post the financial crisis. Now we are later in the cycle management teams see the end of cheap money approaching, which may create a higher desire to look at M&A.”
Rumble welcomed such a switch in mind-set and noted a number of core holdings are in a position to take advantage of this environment.
“We would like to see companies put money to work now on M&A to deliver higher returns – rather than carry out share buybacks which many have already done. We are starting to see that higher risk appetite and desire to go out and buy other companies.”
Rumble said Danish transport and logistics firm DSV and Bunzl, the London-based distribution company, could both target further M&A this year.
“We hope DSV does another deal given it has a track record of achieving value-accretive M&A,” he said.
“Meanwhile Bunzl, a supplier of goods not for resell to businesses such as Costa Coffee, also buys businesses from which it can create purchasing synergies.  Given the typically low multiples they pay, this has been very accretive to shareholder returns over the long term.”
M&A can also be very value destructive.  “Picking the winners with the good deals, from the losers that have overpaid or miscalculated the benefits is going to be an important consideration.”
[1] According to the Financial Times article titled “Record mega-deal surge pushes global takeovers beyond $1.2trn” published on 29 March 2018, citing Thomson Reuters data. https://www.ft.com/content/a0b4c0ce-327c-11e8-ac48-10c6fdc22f03