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You may not have thought it possible, but the merger fever gripping the City has stepped up a notch
After the excitement of the Alliance Boots takeover – the first FTSE 100 company to succumb to private equity – we’re now reading breathless descriptions of the battle for ABN Amro all across the papers.
The language used is similar to that in fairytales – all white knights and crafty heroes making last minute epic leaps to prevent their rivals from carrying off the prize.
The difference between M&A and fairytales of course, is that very often, these glorious mergers don’t have happy endings…
Royal Bank of Scotland has stepped in to spoil the Barclays / ABN Amro party, just as it looked as though Barclays had clinched the deal. RBS has teamed up with Belgian bank Fortis, and Spain’s Santander, with an indicative offer of e39 a share, around 13% more than Barclays is offering.
There are plenty of hurdles to clear, including the fact that RBS wants ABN Amro’s US bank LaSalle, which it has already agreed to sell to Bank of America. But one hurdle that doesn’t look likely to be a problem in the current environment is the massive amount of cash that will need to be raised for the bid to go ahead.
RBS will have to raise “about £35bn in cash to deliver his £50bn bid”, says Damian Reece in The Telegraph. “But in a week when Goldman Sachs can raise £10bn for a private equity fund, I suspect the world’s banks can supply three and a half times that in debt for Sir Fred.”
He’s probably right. If a deal does come out of this, it will be the third-biggest in history, after the AOL-Time Warner merger, and Vodafone’s takeover of Mannesman. Interestingly enough, if you were to compile a top 10 of M&A disasters, it’s not inconceivable that both of those deals would also make an appearance somewhere on the list – which is perhaps why RBS shares fell yesterday, as investors fretted that just maybe the bank is set to pay too much.
Of course, Sir Fred Goodwin might simply be aiming to force Barclays to overpay for its Dutch counterpart. But if the deal does go through, let’s hope it’s more successful than its larger predecessors.
Meanwhile, as the M&A party moves into full swing, The Telegraph reports that the Bank of England is set to warn that the “surge in cheap corporate lending with looser credit standards” has made the global financial system more vulnerable.
The BoE isn’t the only central bank worrying about these things – official bodies around the world have been fretting about loose credit standards for quite some time now. But still the M&A merry-go-round spins – and as always happens in these situations, it will just spin faster and faster until it tears off its axle and somebody gets hurt.
Take that buyout of Alliance Boots earlier this week. The £11.1bn deal was the first big private equity deal in Europe do be done under a ‘covenant-lite’ structure. What this basically means is that the people who lend the money don’t have the same level of monitoring or control over how their money is spent, or how their investment is performing.
Now, usually, when you lend that sort of money – according to The Telegraph‘s James Quinn, analysts reckon there could be more than £8bn involved – you would think you’d want more control, not less. After all, “the potential downside here is far more serious” than in other, smaller deals, where the ’covenant-lite’ structure has also been used.
But it seems that in the desperate search for yield, and the lust for the returns promised by private equity, banks will agree to anything to get on board – not unlike UK consumers, who in their desperation to get on the property ladder, are now taking up banks on their offers of six-times salary mortgages.
But the property merry-go-round simply can’t go any faster – and more and more of the passengers are being thrown off. Credit agency Experian reckons that just one more quarter point hike could result in 42,700 homes being repossessed in 1998. That’s three times last year’s level, and about halfway to the peak of 76,000 seen in 1992.
In 1992, when all those repossessions took place, interest rates spent most of the year around the 8-9% mark. A quarter point hike next month would only take rates to 5.5%. Markets expect at least 5.75% by the year end, while figures of well over 6% are now being bandied about by the bolder mainstream commentators. We hate to think how bad things could get if rates reach those sorts of levels.
Turning to the stock markets…
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In London, stocks ended the day in the blue as the likes of drug stock Shire and mortgage lender HBOS reported strong trading and the good start on Wall Street boosted sentiment. The blue-chip FTSE 100 added 32 points to end the day at 6,461. Supermarket Sainsbury’s was the day’s best performer with gains of over 7% as a large block of the company’s shares changed hands. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 hit a six-year closing high of 5,947, having added 61 points. In Frankfurt, the DAX-30 closed 72 points higher, at 7,343.
Across the Atlantic, the Dow Jones notched up triple-digit gains and went on to close above 13,000 for the first time ever. At the bell, the industrials index was 135 points higher at 13,089. The Nasdaq added 23 points to end the day at 2,547. And the S&P 500 also closed in positive territory – at 1,495 – having gained 15 points.
In Asia, investor sentiment was also boosted by the gains on Wall Street. The Nikkei rose 193 points to close at 17,429. And in Hong Kong, the Hang Seng jumped 274 points to close at 20,749.
Having climbed by over a dollar in New York yesterday, crude oil futures had fallen slightly to $65.67 a barrel today, whilst Brent spot was down to $67.86 in London.
Spot gold rose to $686.40 overnight, from $684.50 late in New York, as the higher oil price prompted buying. Silver had climbed to $13.81.
Turning to currencies, the pound had risen to 2.0031 against the dollar this morning and 1.4688 against the euro, whilst the euro had climbed to 1.3642 against the dollar. Meanwhile, the dollar was up to 118.96 against the Japanese yen.
And in London this morning, a survey by Nationwide revealed that UK house prices had risen at their fastest pace in four months in April, putting fresh pressure on the Bank of England to hike interest rates next month. The price of the average home had risen 0.9% to £180.314, beating economists’ forecasts.
And our two recommended articles for today…
What will slow the soaring cost of living?
– As past Price Revolutions have shown, it is human nature to react to rising prices by searching for fresh supplies of cash. But modern central banking counteracts that effect. Doesn’t it? To read Adrian Ash’s arguments as to whether rate hikes really can counteract galloping inflation – plus the defensive investment to buy now – read: What will slow the soaring cost of living?
Five shares to help you retire rich
– If you take a long-term view, and could hold just five shares, which should they be? We asked five Moneyweek experts – including the likes of Paul Hill, James Ferguson and Tim Price – to choose one each. Buy them, hold them for at least five years, reinvest the dividends, and you could retire rich. To read their recommendations, now available to non-subscribers, click here: Five shares to help you retire rich