By James Williams – "As an Eads board member, I am deeply disappointed the politicians were not persuaded by the industrial logic of this merger which would have created a world-class leader.” These were the words of Sir John Parker, a non-executive director of Eads, being quoted in the London Evening Standard last week following the collapsed GBP28billion merger of Europe’s leading defense and civil aviation behemoths.
Recently, Hedgeweek interviewed Omar Sayed (pictured), the London-based portfolio manager for Asian and European Equity at leading US hedge fund P Schoenfeld Asset Management (PSAM), on M&A opportunities in 2012. At the time the above deal was still pending.
Following its collapse, Sayed echoes a similarly disappointed tone to Parker: “It’s disappointing to see governments interfere with commercial decisions and advertises the lack of consensus at the top-most levels of the EU. However, when politics intersect with M&A, outcomes can be uncertain, especially this one that involves a large number of politically sensitive jobs, so I cannot say this is a surprise.”
Established by Peter Schoenfeld, a pioneer in risk arbitrage, in 1997, PSAM is one of the industry’s best-known event-driven hedge funds. Including Sayed, there are four portfolio managers overseeing the USD1.9billion strategy, one running US equities in New York, and two other portfolio managers co-heading credit and distressed.
Risk arbitrage and hard catalyst events – principally M&A activity – are key sub-strategies in the fund, along with event-driven opportunities in the credit and distressed debt space, but just as important is special situation investing. This, says Sayed, can range from restructuring, spin-offs and changes in management through to shareholder activism “and ‘falling knife’ events where companies have been tremendously oversold because of market misperception”.
Despite what would have been a transformational deal had BAE and Eads overcome the political hurdle, there are signs that within the European M&A space the deal-flow glacier is beginning to thaw. Something that Sayed largely ascribes to the European Central Bank President, Mario Draghi’s speech last month to confirm its bond-buying program, which has helped settle markets and reassure corporate CEOs that an EU break-up is less likely.
“If you’d talked to me in early September I would have been a bit more bearish. Until Draghi’s speech M&A activity in Europe was very weak but last month we suddenly saw a sharp pick-up in deal flow,” says Sayed, noting that five M&A deals were seen across Europe and Asia.
“A good example is Publicis who just acquired LBi. This was a deal that had been talked about for six months but no triggers had been pulled. All of a sudden, two weeks after Draghi’s speech Publicis comes out and buys them.”
The EUR416million deal, which was announced Friday 20 September 2012, went through, opines Sayed, because Publicis’s CEO (Maurice Levy) probably felt more confident that EU dissolution was less of a tail risk.
“I think as long as tail risk continues to go down and becomes a bit less prevalent the back half of this year could prove to be good for M&A activity. A lot of our investors are asking ‘Where’s the activity, we thought it would have come?’ and I think the main reason for the sluggishness this year has been a feeling by CEOs that if they do a deal and the EU breaks apart, that would be disastrous.
“I think six months of low tail risk will see CEOs start using the balance sheet and become more aggressive at looking to do deals,” comments Sayed.
Another deal that went through last month, tracked by Sayed, was Liberty Global’s USD2.5billion acquisition of Belgian cable TV provider, Telenet Group Holding.
The fact that macro headwinds, prior to September, had blown away the confidence of company CEOs to seek out deals in Europe and sit on their balance sheets was not something that sat comfortably, either with investment banks or investors. With investors under so much pressure to find yield, they’re not interested in receiving dividends or share buy-backs; there just aren’t enough opportunities to put cash to work. Notes Sayed: “There is some pressure now from shareholders for CEOs to look at M&A as a way to grow the company.”
Malaysia scores hat trick
Asia has thrown up some interesting opportunities in recent times, particularly in Malaysia. A hat trick of multi-billion ringgit IPOs have been concluded, the latest earlier this month being the USD1.5billion IPO for Astro Malaysia Holdings: Felda Global Ventures Holdings (USD3.1billion – this year’s second largest IPO after Facebook) and IHH Healthcare (USD2.1billion) being the other two.
“Since April 2011 when I joined PSAM we’ve always had some exposure to Malaysia. It trades within the proper rules, the market exchange has been good at regulating disclosure so this creates a bit more of a level playing field for hedge funds to make alpha.
“On the M&A side we’ve invested in PLUS Expressways, the Proton Holdings deal, KFC’s privatisation and SP Setia (leading property development company): three out of those four have now closed. KFC is still an active deal.”
Whilst the average size of transactions in Asia is slightly smaller than last year, Sayed says that the number of transactions has gone up: “There are more situations than last year, particularly in markets like Malaysia, Thailand, Taiwan. But the market caps are smaller.”
Japan is a core market for the PSAM fund, where they have been quite a few opportunities in the non-M&A space – Olympus being a good example. The portfolio team has moved, from a credit opportunity perspective, to snap up bonds in the firm after they went from trading at par to trading in the 70s following an admission last year that it had used acquisition fees to conceal losses on securities investments.
Olympus has now officially accepted a capital infusion from Sony, with both companies entering into a joint venture although Sayed thinks there could yet be further deals done: “We believed Olympus could do a deal with Sony, Terumo or Fujifilm for a capital infusion. They entered into a transaction with Sony but there is still more to do in terms of improving the company’s credit position and an additional capital infusion from Terumo is possible.”
Upstream M&A activity in oil and gas has been prevalent and a key sector, with Sayed confirming that they’ve been involved in a number of opportunities including Cove Energy. “We were long Petrohawk credit (which was bought last summer by BHP Biliton) and hold loans in ATP, a bankrupt oil and gas company.”
One of Asia’s major M&A deals this year, which is still on the negotiating table, is the planned USD15.1billion takeover by China’s national offshore oil corporation (CNOOC) for Canadian energy company Nexen Inc. Like the BAE Eads deal, there’s a lot of politics surrounding this deal. “We think Canada will clear the deal but it may take some time. Canadian public opinion has been challenging of late,” says Sayed.
Another China deal that PSAM is monitoring closely is Chinese firm’s Haier’s potential purchase of New Zealand home and kitchen appliance firm Fisher & Paykel. Although a relatively small deal – NZD900million – Sayed says that the bigger interest lies in the potential competitive threat the takeover could have. “Haier is one of the largest companies of white goods. It uses compressor technology that will go into the next generation of white good products and save up to 30 per cent on fuel and energy because the washing machine engine is much smaller.
“They’ve made a takeover bid and there’s been a lot of angst from Bosch in Germany and Whirlpool regarding it because it will really move Haier up the technology ladder.”
With Asia’s M&A pipeline looking good and Europe showing early signs of settling, Q4 could prove to be a strong end to the year.
“The one risk that has inhibited deal flows in 2012 has been the European crisis. Previously, there wasn’t a consistency in policy but perhaps following Draghi’s speech there’s now a more unified Keynesian approach to fixing the problem.”