M&A appetite in the UK continues to outpace that in the rest of Europe and the US, research by KPMG finds. According to the firm’s survey, global confidence and capacity for M&A deals is up 11% and 7% respectively for the coming 12 months, with especially the Asian region projected to enjoy strong M&A activity. Globally, deal volume and the value of deals are however down on the six months previous, with 8% and 30% respectively.
Since 2007, KPMG releases a biannual forecast for M&A appetite across various regions and markets. To determine trends in the market and make relevant forecasts, the consulting firm maps the rise or fall of forward P/E (price/earnings) to gauge the confidence of the market, while using the net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratios to determine the future capacity of companies to fund acquisitions. The prediction uses information from 1,000 of the world’s largest companies by market capitalisation.
Global appetite and capacity
Global appetite for M&A deals is expected to be on the increase across all markets and industries over the coming year as global confidence increases by 11% (as forward P/E ratios) and deal capacity by 7% (as net debt/EBITDA).
Although the global picture is projected to improve, considerable regional differences remain. China is by far the biggest mover in terms of P/E ratio, up 71% in the coming 12 months. For Africa and the Middle East, the researchers foresee 12% increases in ratio and for Latin America 25%. The US and Europe are expected to see below average appetite for M&A, with 6% and 8% forward P/E ratios respectively. The appetite for deals in the UK continues to outstrip those of the US and the rest of Europe according to the survey; the largest corporates in the UK are expected to improve their forward P/E ratios by 13%, 5% above the European average and 7% above that of the US.
In terms of capacity, Asian corporations will likely play a considerable role in M&A with their capacity for deals well above average. Japan’s corporate capacity is forecasted to rise 26% in its capacity to enact deals, while China sees a 15% rise in capacity. In Europe, capacity increases remain relatively stable with Germany and Switzerland increasing their capacity slightly as many paid down debt, while France sees a marginal decline on barely budging debt and EBITA figures and the UK is expected to see a 7% decline.
Confidence in the energy sector remains low as oil prices particularly remain subdued. The 19% decline in market capitalisation of largest corporates in the sector reflects the continued difficulties faced by the industry – dropping from $4.8 billion in June 2014 to $3.9 billion, while profits plunged 37% in the same timeframe.
The healthcare sector on the other hand is doing well according to the analysis, with 18% increase in market capitalisation, 10% increase in profits and appetites for M&A up 7%. Telecommunications is also looking relatively strong and sees its capacity up 5% and appetites 8% in the projection for the coming 12 months. Consumer discretionary appetites is expected to increase by 9%, however capacity in the sector will grow strongly by 29%.
According to the analysis, while the year started off well in terms of deal value and volume, M&A activity has since decreased on both fronts. The volume of deals is down from 24,477 in February to 22,492 in June, an 8% decrease. The value of the deals also fell, by 30% in the same period, from $2.2 billion to slightly over $1.5 billion. The divergence between announced deal values and completed deal values also increased markedly since the end of last year when announced deals were generally of lesser value than today but actual deals came in considerably higher in value.
Regionally, the drop off was the most marked in the AsPac – which is regarded as the global barometer of M&A activity – with completed deals down 14% between January and June, even as the number of announced deals rose. Completed deals in Europe, the Middle East and Africa all declined 7% in the past six months – while the UK saw an 8% decline.
Phil Isom, Global Head of M&A and Partner at KPMG in the US, comments: “With oil prices continuing to experience new multi-year lows and credit tightening in the sector, we expect opportunistic buying, forced selling and the resetting of capital structures. If global supply and demand forces stabilise, healthy deal activity may pick up.”