Mergers & acquisitions: FIG M&A volumes slide, but hope springs eternal
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BANKING

Mergers & acquisitions: FIG M&A volumes slide, but hope springs eternal

Bleak economic outlook hampering activity; bank deleveraging main driver of supply.

Lloyds Banking Group’s failure to sell hundreds of UK branches to the Co-operative Group, leaving it hoping to publicly list the assets, is a blow to the bank. It is also a blow to the confidence of financial institution advisory bankers. Global financial institution targeted mergers and acquisitions volume plummeted26% to $48.3 billion in 2013 to April 24 compared with the same period in 2012, marking the lowest volume since 2003, according to Dealogic.

Activity levels have also dropped over the same period and to the lowest levels since 2006, says Dealogic, underlining that deal-making remains hostage to the bleak economic outlook and the burdens and uncertainty surrounding new banking regulation.

“Against the backdrop of the current economic environment, the worsened outlook for economic growth and the increasing regulatory requirements on the financial services sector in general, the Verde transaction would not currently deliver a suitable return for our members within a reasonable timeframe and with an acceptable level of risk,” said Peter Marks, group chief executive of the Co-operative Group, which announced on April 24 it was withdrawing its bid for Lloyds’ 630 branches, an operation collectively dubbed ‘Verde’.

The collapse of the deal comes just months after Royal Bank of Scotland’s sale of over 300 branches to Santander fell through last September. Santander blamed the European Union’s tight deadline to complete the deal for its collapse.

Lloyds is now planning an initial public offering of shares in a separate entity, branded TSB, which will hold the branches.

The partly state-owned bank is also understood to be considering the sale of its £142 billion ($220 billion) AuM asset management business, Scottish Widows Investment Partnership and in late April agreed to sell its Spanish retail banking business to Banco Sabadell.

Not alone

Lloyds is far from alone in its need to raise capital.

The IMF reckons that European banks are likely to try to offload some $2.8 trillion of assets – equivalent to more than 7% of total assets – in the next two years, according to its October 2012 Global Financial Stability Report.

However, consultancy Deloitte expects deleveraging in the European banking sector to be more modest, and equivalent to less than 7.5% of total assets over the next five years.

What is certain is that bank deleveraging in its various forms will likely provide the primary supply of deal flow for financial institution group M&A bankers, even though volumes so far haven’t quite met their expectations.

“Deleveraging remains a theme. We continue to see banks bolstering their capital bases and believe there will be significant non-equity capital raising over the next couple of years. The trend of banks attempting to sell and de-lever assets is also likely to continue,” says Tadhg Flood, who in April was appointed co-head of global FIG investment banking coverage alongside Richard Gibb as part of organizational changes in Deutsche Bank’s global FIG business.

Flood adds: “Activity remains high in what I would call tactical areas, so institutions selling assets because of state aid conditions, financing and capital issues. On the other side, institutions are buying these assets because of diversity, yield pick-up and surplus liquidity. This is likely to continue, but as it is more reactive M&A than progressive it does not necessarily make the headlines.”

FIG M&A volumes in Europe, the Middle East and Africa have bucked the global downward trend in the year to April 24, with volumes up 12% to $23.5 billion, according to Dealogic. But those numbers are not especially earth-shattering, and the deals that have been done are not classic big-ticket M&A.




According to Dealogic, the largest FIG M&A transaction so far this year is French bank Natixis’s sale of a 20% stake – valued at around €12 billion – to Banque Fédérale des Banques Populaires and Caisse Nationale des Caisses d’Épargne et de Prévoyance. Both banks form Natixis’s parent, Group BPCE.

The sale of the stake, held in the form of cooperative investment certificates, simplified BPCE’s structure and helped boost Natixis’s capital base.

Bright spots

Outside of the banking sector, deal-making in the fund management industry has been a bright spot, and particularly in the UK during the first quarter of the year.

According to M&A research boutique IMAS Corporate Finance, UK financial services sector deal volumes rose 42% to £4.4 billion in the first quarter compared with a year earlier, largely driven by fund manager M&A.

“March ended a quarter when we saw more deal activity in the investment management space than in any previous quarter for the last two years,” said IMAS Corporate Finance in a research note. “Transaction values exceeded the aggregate for the previous four quarters combined and included some landmark deals.”

The standout was Schroders’ £424 million acquisition in March of Cazenove Capital Management, the largest acquisition in the history of Schroders. Cazenove’s £17.2 billion in assets under management will be added to the £229.2 billion that Schroders reported at the end of 2012.

There was also Royal London’s acquisition of the Co-operative Group’slife assurance and asset management business, a deal worth up to £219 million.

Although of decent size, these deals and the others among financial institutions globally this year remain dwarfed by some of the jumbo transactions in other industries, and that might not change soon.

“Unlike what we have witnessed in other industries, we do not expect to see blockbuster deals in the financial institutions area in the short term,” says Flood.

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