Canadians already at the forefront of capitalizing on increasing tensions in Europe
TORONTO, May 26, 2011 /CNW/ - In its latest Capital Markets Flash report, PwC discusses the potential
impacts of continued political and economic divergence in Europe on
Canadian capital markets and Canadian enterprises.
The report sets out a contrarian view that Europe may be an attractive
destination for investment: "For those with a long term view, rapidly
changing conditions in Europe may be an opportunity for investment,"
says Kristian Knibutat, PwC's Canadian deals leader. "In fact, many
Canadian entities have already capitalized on political and economic
challenges on the Continent by pursuing acquisitions using a country or
bottom-up approach," Knibutat adds.
Dealmaking in politically volatile markets is not, however, without
risk. Identifying, understanding and planning for all the contingencies
is a critical exercise. "If the 2008 credit crisis has taught us
anything, it's that planning for the worst is also an important
undertaking and not always a wasted effort," Knibutat says.
The four outcomes highlighted in the report include:
Outcome # 1 - Prolonged slow economic growth in Europe
The report surmises that the most likely by-product of the European
crisis is prolonged slow growth in developed Europe, mainly as a result
of broad based austerity measures. Canada would be negatively impacted
by less demand for goods and services and increased competition from
surplus European capacity. On the flipside, there would be buying
opportunities, adding to what Canadian entities have already pursued in
Last year, Canadian firms were involved in 102 European acquisitions
worth $15.8 billion - higher than the Europe-bound deal tally at the
2007 market peak. 60% of activity involved a large pension fund or
private equity firm.
The average deal value of Canadian acquisitions in Europe was $255
million, well above the 2010 Canadian deal average ($93 million)
2011 looks to be nearly as strong, with 38 deals worth $2.7 billion
announced year to date.
The report says there are three approaches to acquisitions in Europe in
today's environment: either 1) bottom up—focusing on the analysis of individual companies or assets with
long-term value propositions that can be acquired at attractive
valuations 2) distressed investing—this can be, but is not limited to, companies sold through
court-governed creditor protection, or 3) a country approach—buying in pockets of relative strength such as the UK, Germany or
In the distressed arena, opportunities are expected in the following
capital intensive firms unable to access sufficient financing within
battered European debt capital markets;
consumer - oriented entities suffering under the weight of domestic
government assets / service businesses that may be monetized to generate
non-core assets, non-core lines of service and intellectual property,
which can be monetized to generate cash (this may be common in the
financial services sector, ahead of tough financial sector regulation).
"Canadian buyers in Europe have already demonstrated a strong country
bias. Deals in 2010 were largely in the UK and within the safer
European countries, like Germany. We did not observe a high volume of
distressed acquisitions," Knibutat says.
Outcome # 2: Currency Volatility
The report also explores currency volatility (specifically an
appreciation of the Canadian dollar versus the euro) which is a second
potential outcome that Canadian entities should be prepared for.
Currency fluctuations can reduce margins which impacts one's ability to
pursue M&A and raise capital. However, appreciation also provides an
opportunity for capital investment because a strong Canadian dollar
makes European capital investment more affordable, the report says.
Outcome #3: Cross Asset Contagion
History has shown that euro currency weakness happens to coincide with
weakness across a number of financial markets. So even if you don't
have a dollar invested in Europe, weakness on the Continent has a high
probability of negatively impacting the value of your other, apparently
unrelated investments or interfering with M&A and/or capital raising
processes. On the flipside, coordinated market weakness may present
some buyers with a window of opportunity to pursue deals in temporarily
depressed domestic markets. The best way to take advantage is to have a
short list of acquisition targets and strong understanding of their
true long-term value propositions.
Outcome # 4: Euro zone breakup and/or political contagion
The report says this is the most unlikely outcome. However, should the
political backdrop in Europe deteriorate to the point of forcing a
eurozone breakup, there is a risk that there will be similar "pushback"
to bailouts and financial and monetary intervention in North America or
elsewhere in the world.
"Overall, the message we leave with deal makers is to be prepared for
market and political volatility in Europe and look for buy-side
opportunities. The challenge will be in finding the right targets with
long term value propositions while assessing and mitigating risks,"
The full report can be accessed at: http://www.pwc.com/ca/cmf
About PwC's Deal Team
PwC's Deal Team (www.pwc.com/ca/deals) helps clients to achieve deal success—from concept to close and
beyond. As part of the world's largest Transaction Advisory practice1, and with our global Corporate Finance group being 2010 Upper Mid
Market M&A Advisor of the Year2, the PwC Canada Deals Team is your gateway to an exciting new world of
emerging M&A opportunities.
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1 Source: Kennedy;"Business Advisory Services Marketplace 2009-2011" ©BNA
Subsidiaries, LLC. Reproduced under license.
2 Source: Acquisitions Monthly Awards 2010
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