* Many bond-like European companies are discounted vs. US peers
Many European companies are discounted compared with their American competitors due to two
distinct factors: a suboptimal capital structure and a higher country-specific risk.
* A new economic environment that favours increased leverage
To monetize a circa zero real interest rate environment, companies with steady free cash flow have
the opportunity to optimize their funding, and their valuation multiples. ALM optimization reduces
the level of risk borne by investors and reduces the cost of capital accordingly. Delaying capital
structure optimization weakens the competitiveness of the company compared with an optimized
competitor. It consumes more economic capital, reduces the solvability of any investment and
offers a lower risk adjusted return to its shareholders, and, consequently, becomes a prey for
hostile buyers. Managing the capital structure is a major competitive advantage as demonstrated
by Berkshire Hathaway and 3G with Heinz and Kraft or by Patrick Drahi’s successes on SFR.
* The “Privilège exorbitant du dollar”
In the Eurozone, companies also have to face a country risk premium over the US reflecting the
monetary and political instability. The US country risk premium is roughly nil and the risk of funding
reduced by a central bank acting as a lender of last resort. American companies pay a lower cost
of capital and accordingly gain a competitive advantage.
*“Best-in-class” Companies
We present a list of companies able to improve their valuation through ALM optimization.