Estelle Ménard : "The cycle of mergers and acquisitions is far from over"

HOW WOULD YOU ASSESS THE FIRST MONTHS OF 2017 IN RELATION TO YOUR STRATEGY?

As we had foreseen, 2017 has been a good year for mergers and acquisitions.
By the end of May, the volume of domestic and cross-border transactions in Europe had exceeded $200 billion.
This area of activity was mainly boosted by cross-border transactions, up 268% in a year.
Yet the environment is different to that observed in 2016.

In 2016, Chinese firms stood out as the main driving force behind both European and worldwide business activity in this field (second-largest buyer in Europe with 21% of transactions and a record €50 billion invested in M&A transactions in Europe in 2016). On the other hand, in 2017, for regulatory reasons relating to the outflow of capital from the country, Chinese companies have played a lesser role in this sphere.

Another interesting observation concerns France, which has become Europe’s driver of consolidation, not just for target stocks, with 26.2% of transactions, but as a consolidator too, accounting for 40% of the zone’s transactions.

WHAT WERE THE MAIN EVENTS THAT MARKED THE FIRST THREE QUARTERS OF 2017?

The year 2017 got off to a flying start, with many transactions effecting different sectors. The largest bids included that by US firm J&J for Swiss company Actelion in healthcare; Safran’s takeover of Zodiac in aerospace in France; the merger between Essilor and Luxottica, two leading eyewear giants; Reckitt Benckiser’s acquisition of Mead Johnson in the consumer goods segment; Albertis’ takeover bid for Atlantia in infrastructure; and Elis’ buyout of Berendsen in industrial laundry.

WHAT IS YOUR INVESTMENT STRATEGY?

In a market environment that lends itself to mergers and acquisitions, we are maintaining our preference for this trend, which currently accounts for 65% of the portfolio.

With this in mind, we are favouring speciality chemicals stocks that provide bright prospects in terms of mergers and acquisitions. Although the sector has already enjoyed major consolidation operations in 2016 and 2017 (ChemChina and Syngenta; Bayer and Monsanto; Dow Chemical Company and DuPont), the sub-sector of speciality chemicals is still highly fragmented and could be a hotspot for M&As in 2018.

We are also continuing allocation in telecommunications stocks, mainly French ones. While this sector failed to consolidate in 2016, it is only a matter of time before we see deals back on the table in this segment. It is another sector where consolidation is structurally necessary. A convergent offering is needed required, as it reduces is reduced competition, hence easing that eases structural pressure on prices and margins. This will encourage companies boost their investments which is that is vital at this stage of the cycle. These are both factors that support mergers and acquisitions in this sector.

Lastly, the healthcare sector remains an interesting segment regarding consolidation. M&A transactions are structurally necessary against a backdrop of moderate economic growth and intense competition. In 2017, we enjoyed a slight catch-up effect (particularly thanks to J&J’s bid for Actelion). We believe we will carry on making the most of this trend in 2018.

35% of our portfolio is still invested in economic restructuring operations. This dynamic will remain relevant: a rise in mergers and acquisitions prompts inefficient firms to reorganise their activities and implement wide-ranging economic restructuring programmes so as to avoid becoming part of the long list of target stocks.

Lastly, in an improving economic environment, value stocks’ return to favour will support the trend of economic restructuring operations, whose stocks very often provide good value.

Since the start of the year, this portfolio profile has also enabled us to outperform our reference index, the MSCI Europe 15 NR, by 1.58%, with an absolute net performance of 11.14% at the end of September.

DOES THE CONTEXT STILL ENCOURAGE GROWTH?

More than ever, the environment is conducive to an upswing in mergers and acquisitions. The M&A cycle is far from over.

Beyond the usual factors that we already highlighted last March (financing conditions that are still favourable; record cash-flows to be invested; weak inflation), the field is enjoying new boosts.

Macroeconomic uncertainties continue to be one of the best long-term lead indicators for M&A activity. The strength of macroeconomic data in Europe and the US is a real support for worldwide consolidation transactions. Since Donald Trump was elected president, US economic policy has become more protectionist. This has prompted North American firms to look for external growth among their European counterparts. US fiscal policy might change too. This could similarly boost financial transactions through likely tax cuts on business’ profits and their overseas cash-flow.

Moreover, election results in France and Germany have reassured investors. These political outcomes have restored faith in Europe’s viability. Diminished geopolitical uncertainty in Europe and a less volatile market environment are both supportive factors for the M&A cycle.

We believe that an environment of long-term moderate growth is a strong driver for boosting both economic and financial restructuring operations.

Growth can be found by looking for either revenue growth (external growth, or mergers and acquisitions) or profit growth (economic restructuring). Predatory companies also enjoy an accretive impact on their profits through the synergies of M&A transactions they have carried out.