Report from Europe: M&A May Save the Day

Markets seem to be finding the going a little heavier in recent days with the S&P 500 closing down for a third consecutive session on Friday. Importantly, the previously reliable diet of upside economic surprises seems to have come to end. In the longer run Wednesday of last week may turn out to be one of the days that you look back on as a turning point and remember for a long while. The price action in US equities indicated that a reversal in the rally is at hand. The S&P made a new high for the move, but then a lower low than the day before and a lower close, which is a classic reversal pattern.

In the short term a fresh bout of M&A activity is likely to be the key driver today with companies as diverse as Xerox (XRX), Johnson & Johnson (JNJ) and Abbott Labs (ABT) all get in the acquisitions business.

Today’s Market Moving Stories

• Japan’s Nikkei average fell below the 10,000 mark to its weakest level in two months as a sharply stronger yen hit shares of exporters. The US dollar slid to an eight-month low of 88.23 yen in trading, as investors unwound short yen positions and as expectations that Japan will intervene at these levels receded. Market players said the stronger yen is putting heavy pressure on the exporter-heavy Nikkei, as it eats into exporters’ overseas profits when they are repatriated.
• The annual drop in house prices in England and Wales eased to 5.6% in September from 6.7% in August, the slowest annual pace of decline since August 2008, Hometrack said. Estate agents surveyed reported that property prices rose by 0.2% in September to an average of £156,100, the fastest monthly increase since June 2007. “While a lack of housing for sale is providing a support to prices, talk of a general improvement in property and equities is leading to increased market confidence,” said Hometrack’s director of research, Richard Donnell. But Hometrack was cautious about how sustainable price rises would be, given that the British housing market faces a seasonal slowdown during the autumn and winter months ahead.
• In marked contrast, an Irish Department of the Environment commissioned report estimates that the surplus housing inventory is circa 136K units, equivalent to circa 4 years supply based of current demand. This figure is much much higher than anything I’ve seem before, for the reason that it included the second hand market.
• Back in the UK, this week’s Labour Party conference should highlight the painful policy choices now confronting the UK government as it seeks to control the deficit. There is also scope for further inconvenient comments from the Bank of England (BoE) with the briefings on quantitative easing (QE) it has organised for economists and the media.
• There have been denials by various UK officials that there is no formal policy to weaken GBP. Whether it is policy or not, the net impact of BoE Governor King’s recent comments has actually weakened GBP. It is possible that it is not deliberate but a man of his experience and stature must realise the implications of his comments. The Old Lady doth protest too much. Since August when the MPC announced extra insurance by expanding the QE program, GBP has fallen by roughly 6% on a trade-weighted basis. Does Governor King believe extra insurance is needed via a weaker GBP?
• The pace of GBP’s appreciation earlier this year appears relatively fast compared to previous GBP strengthening cycles. This was partially a function of the belief we were coming to an end as far as unconventional policies were concerned. Governor King, in particular, has gone to great lengths to illustrate it is too soon to start thinking this way. This is of course having a detrimental impact on GBP. With this in mind I reiterate my stance that GBP will only start to make decent headway against the USD and the EUR in 2010.

German Election Result
In Germany the Grand Coalition is over, and both Angela Merkel’s Christian Democrats, including their Bavarian siblings, and the SPD, suffered the worst federal election results since 1949. But Merkel’s party suffered less, and she gets to stay as chancellor, now in a coalition with an FDP that scored its best result ever. As CDU/CSU/FDP also have a majority in the Bundesrat, the upper house of parliament, they are actually in a position to implement their programme – income tax cuts and a pro-nuclear energy policy. Also expect changes in foreign policy in respect to Russia, and health policy. In terms of policy changes this election is likely to be more significant even than 1998, perhaps on par with 1982. And, as an aside, we will have the last of Peer Steinbruck, Germany’s finance minister (their version of Calamity Coughlan), at least in federal politics.

The election result was greeted with relief by the German utilities RWE, E.ON , Vattenfall and EnBW as it is likely to lead to a repeal of the law requiring German nuclear plants to close by 2021 and lead to an extension of nuclear plant lives.

Company News

• Toyota (TM) has raised its global sales forecast for the year to March 2010 by 3% to 6.7 million cars in the latest sign of a nascent recovery in auto demand. Toyota, the world’s largest automaker, is also raising its global production by 8 percent to 6.45 million vehicles for 2009/10, thanks to the impact of government subsidies and tax incentives on new fuel efficient cars, the paper said. Japan in April began offering up to 250k yen ($2,789) in subsidies on each purchase of a low-emission car, part of the country’s largest-ever economic stimulus package. Toyota has asked the new government to extend the deadline for these subsidies by two years to the end of March 2012.
• Xerox said it’s reached a deal to buy Dallas-based Affiliated Computer Services (ACS) for $6.4 billion, or $63.11 a share, in a deal Xerox said will boost its presence in business process outsourcing.
• Johnson & Johnson said it’s bought 18.1% of Crucell (CRXL) for €301.8m, a 30% premium to Friday’s closing price, and will pay development milestones and royalty payments if flu vaccines that the two firms will develop make it to the market.
• Abbott Laboratories has struck a deal to acquire the pharmaceutical unit of Belgian conglomerate Solvay (SVYSY.PK) for roughly €4.8 billion, in another sign of the consolidation of the drug industry. Drug companies are rich in cash and looking for new products to offset those losing patent protection and sales to generic copies. Analysts think Umicore and Arkema may soon be in play as takeover targets.
• AstraZeneca (AZN) is up 2.7% on speculation Novartis (NVS) will make a takeover offer for Britain’s second-largest drugmaker.
• Among today’s star performers is Wolseley [LON:WOS], up 15%, despite disappointing profits as net debt, at £959m, was better much better than expected, largely due to £846m in working capital inflow. In terms of outlook, management expects new residential construction markets to show increased signs of stabilisation. Overall, management does not expect to see an improvement in profits until H2 2010.
• Churchill Mining [LON:CHL] is up 16% after it said that it has received three separate and unconnected non-binding approaches, but said that there is no basis in speculation linking it to mining giant BHP Billiton.
• According to The Observer, Kraft (KFT) is set to make a hostile 850p bid for Cadbury (CBY), half in cash (i.e. 425p) and half in shares. This compares with the indicative 745p bid, of which 300p was in cash. The Takeover Panel is expected this week to give Kraft a deadline of between 4 to 6 weeks to bid for Cadbury. The ongoing fall in sterling is assisting Kraft by enhancing the value of its bid.
• A newspaper report over the weekend is saying that in advance of AIB’s new CEO being appointed, the Irish government (whether under pressure from the EC or not) will have Allied Irish Banks (AIB) sell its 23% stake in M&T bank. Worth about €1.1bn, it was this stake which I reckon was behind the vague rumours of a Canadian bank interested in AIB a month or so ago. Not life changing and would only form half the required minimum recap for AIB. I think we can consider the sale a done deal, but there is much more to go. That said selling its majority (around €1bn) Zachodni stake is less likely near-term.

And Finally… The Elephant In The Room

Disclosures = None

Comments

[Wizler:]

bulls are running in NJ too

www.sfgate.com/cgi-bin...

Sep 28 04:28 PM

[The Recusant:]

Yes, indeed. M&A activity will take off as large corporations, desperate to increase sales, gobble up their less financed, smaller competition. Foreign companies wanting to rid themselves of U.S. dollars will purchase anything they buy in the country before the dollar becomes worthless. The ensuing gluttony of M&As will add even more to unemployment as the consuming companies rob their acquisitions of the customer bases, strip the assets, and layoff the employees. The result, great for stock holders initially, will end badly with the next leg down for the entire market.

There is something terribly wrong with our country. End it...buy gold.

Sep 28 10:29 PM

[spald_fr:]

[AstraZeneca (AZN) is up 2.7% on speculation Novartis (NVS) will make a takeover offer for Britain’s second-largest drugmaker.]

Wow, hard to believe that one, mole.

Sep 29 12:00 AM