A quest for margin growth and revenue will stimulate M&A activity in the EMEA region over the next 12 to 18 months, according to a 13 July opinion from Moody’s.
The rating agency expects European chemicals firms to increasingly mull acquisitions that will provide access to high-demand products, with the aim of boosting future earnings growth.
Meanwhile, revenue streams among European packaged goods firms will continue to suffer from weak consumer sentiment and pressure from retailers – particularly food outlets – in the next year and a half.
Rapidly changing consumer behaviour is already pushing packaged goods firms to purchase small, fast-growing start-ups with successful ideas.
As a result, Moody’s predicts, larger companies in the sector will continue to see M&A as a route to external growth, or improved profitability.
At present, the agency does not expect any transactions in the automotive sector – or large deals in the retail industry – because there are already high levels of consolidation in those business areas.
However, the organisation notes, in steel and shipping, overcapacity and the need for rationalisation will drive efforts to consolidate.
“In the highly fragmented and competitive shipping sector,” it says, “years of depressed freight rates as a result of oversupply have led to consolidation in recent years, especially in the containership sectors.
“In the European steel industry, ongoing overcapacity will probably lead to more M&A aimed at further market rationalisation.”
Turning to telecommunications, Moody’s points out that competition is driving sector integration and convergence, or the provision of a range of services by one company.
“Cross-border deals are unlikely,” it says, “because of i) a lack of significant synergies; ii) companies’ limited financial flexibility to execute large deals; [and] iii) governments’ continued desire to protect their incumbent telecoms providers.”
Overall, Moody’s notes: “EMEA corporates have robust liquidity, access to cheap financing and healthy balance sheets, which also support M&A.
“Although the tapering of quantitative easing (QE) programmes will probably result in higher borrowing rates, the cost of debt for EMEA companies will probably remain low for the next 12 to 18 months, and well below historic standards, unless there is a major shock.
“Companies’ ability to absorb additional debt to fund M&A without significantly eroding credit quality varies by sector and ultimately by company.”
The agency says that a number of firms will probably continue to make small, bolt-on acquisitions, which may erode their credit quality – but not enough for it to revise down its ratings or outlooks.
However, it adds, “medium or large transactions of 10% or more of the acquirer's enterprise value will probably cause prolonged deterioration of financial leverage, or cash-flow coverage ratios.”
Moody’s subscribers can access the agency’s full report on these forecasts here.