A new buyer on the block, a new tailwind for corporate refinancing
A new buyer on the block & the makings of an M&A revival
As the ECB’s corporate sector purchase program approaches, we assess
which companies have the most to gain from the further contraction in
European debt financing costs. We highlight firms with significant nearterm
debt refinancing needs as well as those that can take advantage of
lower cost financing to roll-up smaller competitors. With Bayer’s
unsolicited bid for Monsanto marking something of a revival in M&A
activity after several months of declining deal-making in Europe, we also
ask which companies are the most attractive targets if the lower cost of
financing prompted by the CSPP kicks off another wave of deals.
Refinancing tailwinds: Marking-to-market on lower yields
The announced participation of the ECB in corporate bond purchases has
already helped to push borrowing costs to near record low levels. But it is
important not to see the CSPP in isolation. It is the combined package of
negative rates, the depressed government yield curve, LTROs and now the
direct purchases of bonds which together offer corporates relief on
refinancing costs. See ECB clarifies details on the CSPP: Positive for our
compression vie (April 22, 2015) for more. We highlight companies likely to
take advantage of currently depressed yields to refinance maturing debt at
favorable rates. Assuming companies can refinance debt maturing in the
next 3 years at their current 10yr yield, FCA, TI, TEF & E.ON stand out.
Identifying the deal targets and the roll-up beneficiaries
Should incrementally lower debt costs encourage a sustained revival in
deal-making, our list of potential targets is captured in the Bloomberg
basket GSTRACQN. This basket contains companies where our analysts
apply >15% probability of acquisition & includes CL-Buy names: Vestas,
TDC, Ocado and Lundin Petroleum. The falling cost of credit also
increases the opportunity for industry roll-ups, particularly where
companies can issue credit to buy bank-financed peers. Here, Randstad