MARKETS SPECTATOR: M&A drumbeat

Following the acquisitions of Heinz and Virgin Media, investment banks have added to the M&A momentum by naming their top targets.

In a report looking into their thematic trade ideas for first quarter, Credit Suisse have highlighted their structural and tactical themes and looked at the ones that have been performing the best so far.

Thus far, US and European merger and acquisitions have been the best performing ideas and the investment bank believes this is likely to feature for some time to come.

So far in 2013, there has been a global resurgence in M&A activity, especially in the US. Currently, deal activity in the US totals $US258 billion compared to $US86 billion at the same time last year. Yet, at the same time M&A activity is still 36 per cent and 64 per cent below its 10-year average in the US and Europe, respectively.

Some of the global deals to make headlines are the recent Heinz purchase by Berkshire-Hathaway, Dell’s privatisation and Liberty Global’s purchase of Virgin Media.

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There are five main reasons Credit Suisse see this thematic continuing:

1) M&A typically lags the stock market by approximately 12 months and CEO business confidence by roughly 18 months.

2) M&A has never been this earnings accretive.

3) Globally, leverage is 15 per cent below its normal levels.

4) Specifically, 28 per cent of the European market trades below replacement value, meaning it is cheaper to acquire businesses than build them.

5) Credit Suisse believes the main macro uncertainties are now behind us.

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The chart above shows the lag that typically exists between stock market returns and a pick-up in global M&A activity.

So while a lot of the above uses European and US examples, the bulk of it stands true for M&A activity across the globe, including Australia.

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The above chart shows that, like the rest of the world, M&A activity in the developed Asia Pacific region is roughly half that of the 10-year average. Many in the industry are predicting a big pick-up in M&A activity Down Under.

In its ‘Top Australian M&A picks’ report, JPMorgan said copper and gold miner PanAust topped its list for 2013, saying resources names will make up a big component of the acquisition targets.

"Our no.1 pick for 2013 will be PanAust. Copper consolidation continues globally, and PanAust is one of the largest listed players left. It will only be a matter of time before it get acquired," JPMorgan said in the report.

The global investment bank also said Royal Dutch Shell could bid for oil and gas producer Santos, or Senex Energy.

"Acquiring Santos makes strategic sense for Shell. This should lead to a four train LNG project which is more in line with the scale that Shell would like for a high cost LNG project," the report said.

Elsewhere, Citigroup also came up with a list of its top M&A targets which include the likes of Echo Entertainment Group, Regis Resources, Medusa Mining, Commonwealth Property Office Fund, Sandfire Resources and Virgin Australia.

So all in all, it looks like the stage is set for a pick-up in corporate activity as predators use cheap funding to drive growth via acquisitions.

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