Corporate confidence to undertake M&A activity

19 January 2010 MEDIA RELEASE

Corporates will be more confident to undertake M&A activity, forecasts KPMG Global M&A Predictor

Corporates will have increased merger and acquisition (M&A) appetite and capacity this year, according to KPMG.

Commenting on the results, Tony McNaught, Corporate Finance Partner at KPMG NZ says, “Most major M&A players took a wait and see approach in 2009 due to lack of confidence in forecast earnings. But these recent results bear all the hallmarks of a market that has been reset for a slow but steady growth.”

He says that as New Zealand businesses have operated in the recessionary environment over the last 12 months they now have a better understanding of how businesses are faring in the post-recessionary economy. Hence they are now able to place more confidence on their own and targets forecasts and look at possible M&A opportunities.

The KPMG Global M&A Predictor

forecasts (1) corporate deal-making appetite by comparing forward PE ratios from a year ago to forward PE ratios currently and (2) corporate deal-making capacity by comparing next year’s forecast net debt to EBITDA ratios with current levels.

Following the extraordinary volatility of the last 12 months, forward private equity (PE) ratios are now seven percent higher (at 14.0x for 2010 versus 13.1x for 2009) while net debt to EBITDA ratios are expected to decline by 18 percent from 1.5x to 1.2x.

Looking at the regional numbers within the latest Predictor, all of the geographical regions exhibit the ‘preferred’ combination of improving PE ratios (increasing appetite) and declining net debt ratios (increasing capacity). Latin America shows the highest increases in PE ratios, moving up 62 percent from 8.9x to 14.5x. It is followed by AsPac (exc. Japan) at 35 percent, Africa & the Middle East at 13 percent, Europe at seven percent and North America at four percent.

Asia-Pacific economic giant Japan was a rare negative, in an otherwise positive set of global figures. It registered a 41 percent fall in its forward PE ratio - figures – although it’s forecast net debt to EBITDA ratio does follow the trend with a more reassuring decline of 12 percent.

.On the net debt to EBITDA ratios, Africa & the Middle East forecasts a 37 percent decline (down from 0.8x to 0.5x), followed by North America at 24 percent, AsPac (exc. Japan) at 20 percent, Latin America at 18 percent and Europe at 15 percent.

At a sector level, Basic Materials posts an excellent combination of results with forward PE up by 17 percent and net debt down by 32 percent. We can also expect M&A in Technology and Non-Cyclical Consumer Goods to perform well with 20 percent and 16 percent increases in PE ratios respectively. Healthcare and Cyclical Consumer Goods look very good on the debt front, posting 41 percent and 23 percent falls respectively.

“It is important to note that our Global M&A Predictor is principally focused on corporate activity. Even though we have seen some resurgence in private equity deals that sector of the market will continue to be hampered by a shortage of debt, putting it at a comparative disadvantage to corporates. The Predictor shows that corporate appetite and capacity are expected to increase - so we may confidently expect that corporate M&A will lead the way in 2010,”
says Tony.

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