Subdued outlook for 2008 as M&A activity hits plateau, claims KPMG’s Global M&A Predictor
• Yet strong balance sheets mean that capacity remains for “intelligent” deals to be struck
• Europe and U.S. bear the brunt of falling deal activity but Asia Pacific remains strong
• Consumer services to be worst hit sector; basic materials to remain resilient
After calling the top of the M&A market six months ago, the latest version of KPMG’s Global M&A Predictor provides further evidence that M&A activity has now reached a plateau and could even be in decline in some areas. The Predictor suggests that 2008 deal levels may just about hold steady compared to 2007 but deal values are expected to fall away. However, with corporate balance sheets generally looking strong, the capacity for “intelligent” deals to be struck does still remain.
The latest Predictor - a forward looking index of 1,000 leading companies’ net debt to EBITDA ratios and Price Earnings ratios – shows that global forward PE ratios have now dropped from 17.1x to 17.0x; helping to confirm the plateau period which KPMG expects to characterize M&A activity in 2008.
Sharad Bhandari, Head of Financial Advisory Services at KPMG in the Lower Gulf, commented: “There was no satisfaction in accurately forecasting the top of the market six months ago. However, if there is some consolation to be taken, it is in the fact that – also as predicted - any slowdown will be a fairly gentle, gradual one".
"There are definite winners and losers though; look closely and you see that the forward PE ratios are down 0.7 and 0.5 in Europe and the U.S. respectively. It is mainly the Asia Pacific region – where forward ratios moved forward strongly from 17.0 to 19.0 – which is bolstering the overall numbers. This leaves us with a real mixed outlook. Where there is appetite and confidence, there are constraints such as a lack of funds or suitable targets. Where there is cash, there is nervousness, caution and a slight loss of appetite”.
A brief glance at the historical data bears out what KPMG’s Predictor suggested six months ago:
Time period No. of deals Total deals value
First half of 2007 17,535 US$2,718 bn
Five months up to end of November 2007 15,654 US$1,787.9 bn
Source: Dealogic
The table above suggests that while the complete second half figures may eventually compare favorably on deal volumes, deal values look set to be well down on the first half. In fact, it is only the presence of a large number of low value Asia Pacific deals, which seem to be keeping the second half numbers within touching distance of the first half.
Forecast M&A activity by world region
The Predictor indicates a clear split in appetite for deals among the different regions, as highlighted in the table below:
Region / Previous PE Current PE
Europe 16.2x 15.5x
North America 17.9x 17.4x
Africa/ Middle East 13.7x 15.5x
Asia Pacific 17.0x 19.0x
Source: KPMG’s Global M&A Predictor
The table above suggests that increased M&A activity will be seen in the emerging markets over the next six months, compared to decrease levels of activity in the mature regions.
Balance sheets globally remain strong with a Net Debt/EBITDA ratio of 0.81 times, with Africa/Middle East and Asia Pacific the strongest indicating that together with increased appetite for deals, these regions also possess the greatest financial capacity for deals. Europe, the U.S. and Latin America have seen no material change in their balance sheet capacities.
In the European market, the second half of 2007 witnessed a significant decline in the average value of deals, compared to H1 which saw record deal values due to several mega deals being completed in the mining, consumer and utility sectors. We expect ongoing market turmoil to continue to limit the capacity to drive deals. Furthermore, our Predictor shows a fall in valuations for the region, dampening down prospects for the period ahead.
In the Americas region, 2007 was another strong year, with deal volumes and values similar to the previous record year in 2006 for the Americas, as evidenced by Dealogic’s recent data. However, our Predictor’s declining forward-looking North American valuation trend indicates that the region is beginning to lose appetite for deals, perhaps driven by the issues in U.S. sub-prime lending. In terms of balance sheet capacity, our analysis shows that North America remains strong, with an improvement in Net debt to EBITDA ratios – but clearly the credit crunch could limit the ability to leverage this.
Outside of the region’s mature markets, many of Asia Pacific’s national economies are buoyant, enjoying a minimum of five percent GDP growth. We can therefore expect the largely untapped potential of regional and sector consolidation to continue to drive healthy corporate deal-flow, particularly in financial and consumer services, and in industrials where we expect several medium sized as well as some mega-deals to be done.
Forecast M&A Activity by Global Sector
KPMG’s forward PE valuation analysis of global sectors highlights Basic Materials, Telecoms and Industrials as exhibiting the most positive forward looking valuation trends, suggesting that this is where the M&A activity is likely to be over the next six months. The weakest are Consumer Services (down from 19.6x to 18.1x) and Healthcare (down from 17.9x to 16.8x).
Sector Range of PE value
Basic Materials 13.7x to 15.1x
Telecoms 15.9x to 16.9x
Industrials 17.4x to 17.6x
Source: KPMG’s Global M&A Predictor
In terms of balance sheet capacity, Utilities and Industrials have the least capacity, while Technology and Healthcare continue to show net cash, reflecting traditional balance sheet structures. However, Industrials have shown a significant improvement with Net Debt/EBITDA strengthening from 2.07 times to 1.71 times.
Within this, Asia Pacific Oil & Gas and Utilities have shown the strongest valuation development of all region/sectors, with Africa/Middle East Basic Materials and Consumer Services also very strong. The weakest region/sector development is identified as Latin America Utilities and Industrials, and Africa/Middle East Technology and Consumer Goods, with North America Telecoms also weak.
