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When it all falls down: the collapse of the Asda, Commerzbank and EDP deals and what it means for M&A

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When it all falls down: the collapse of the Asda, Commerzbank and EDP deals and what it means for M&A 1

By William Cain, Senior Analyst, Acuris 

To lose one deal may be considered unfortunate. But for three to collapse on one day that would have been worth a combined EUR 31bn in equity value, appears closer to calamity than bad luck.

Yet by lunchtime on 25 April,Sainsbury’s and AsdaDeutsche Bank and Commerzbank; and Three Gorges and EDP had all effectively become scrapped deals.

While each fell apart for different reasons, it will come as yet another blow for an M&A market in Europe which is already under pressure.

European M&A figures have been falling the past 12 months. Year-to-date, 2019 has secured the lowest value of dealmaking since 2013, according to Mergermarket data.

The number of large deals being struck by corporates is also softening and CEOs up and down the FTSE, CAC and DAX, for example, may begin questioning the viability of large-scale takeovers and instead turn attention elsewhere to find growth.

So far, just one deal priced above EUR 10bn has been announced – Novartis’ Alcon spin off – whereas each of the four years prior to this, an average of five such deals had already been announced, according to Mergermarket data.

The collapse of the Asda, Deutsche Bank and EDP deals also represented the first time three separate deals had lapsed during a single trading session in Europe since 23 May 2008, according to public deals tracked by Dealreporter.The previous biggest day for multiple deal failures in terms of implied equity value (IEV) was even further back, on 24 March 2006, when the acquisition of Darty plc by an undisclosed bidder and Prudential by Aviva worth a combined EUR 26.5bn, both failed.

YTD-2019
From the start, a Sainsbury’s and Asda tie-up looked fraught. Together, the supermarkets would have held an approximate 30% share of the UK supermarket industry, which on reflection made the CMA’s decision, announced this morning, not unexpected.

Focus will likely now turn to what lies ahead for each of the retail giants. Asda’s owner, Walmart, has already stated it will “[continue] to position Asda as a strong UK retailer delivering for customers”, suggesting it has no immediate plans to exit. But that does not mean some would-be suitors won’t be casting admiring glances towards the GBP 22.2bn turnover supermarket.

KKR was named last year as a potential interested party for Asda, as was Marks & Spencer, yet that was before it struck its own partnership deal with Ocado.

The deal may be remembered as much for Sainsbury’s CEO, Mike Coupe, unwittingly caught on camera merrily singing ‘We’re in the money’, as for the intricacies of the transaction. But Sainsbury’s saw 5%, or close to GBP 250m wiped off its share price when the deal collapsed. That took its stock price close to five-year lows and not far above levels in the late 1980s.

The deal had the misfortune of joining a growing list of scuppered deals. Deutsche and Commerzbank was another transaction which could at best be described as touch-and-go: the deal has been talked about for years. When the two finally entered talks it soon became clear there was little merit to a transaction.

The two banks called off their proposed tie-up because the benefits from a potential merger failed to outweigh associated risks in the form of executing, restructuring and capitalising the enlarged entity, according to a statement at the time.

Elsewhere, Three Gorges’ proposed EUR 12.5bn takeover of EDP hit the skids over a lack of support from shareholders.

The three deals were different types of deals, abandoned for different reasons but they all had one thing in common: they were very large. Already a tough year for M&A, their collapse represents a further disappointment for dealmaking in Europe. Already, there has been evidence that the volume of deals being completed is declining in the region. If large transactions also begin to dry up or existing deals fail, deal values have the potential to decline precipitously. Year-to-date transaction value in Europe is little over half the level hit in the same period during 2018. At its current run-rate, deal flow is on course for its worst year since 2013, in the midst of the eurozone crisis. Deal count is also down for the first time since 2015.

The bottom line is that 25 April 2019 marks one of Europe’s worst days in dealmaking since the onset of the financial crisis.

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Battling Covid collateral damage, Renault says 2021 will be volatile

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Battling Covid collateral damage, Renault says 2021 will be volatile 2

By Gilles Guillaume

PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19 pandemic, including a shortage of semiconductor chips, that could make for another rough year for the French carmaker.

Renault reported an 8 billion euro ($9.7 billion) loss for 2020 which, combined with gloomy take on the market, sent its shares down more than 5% in late morning trading.

“We are in the midst of a battle to try to manage a difficult year in terms of supply chains, of components,” Chief Executive Luca de Meo told reporters. “This is all the collateral damage of the Covid pandemic… we will have a fairly volatile year.”

De Meo, who took over last July, is looking at ways to boost profitability and sales at Renault while pushing ahead with cost cuts. There were early signs of improving momentum as margins inched up in the second half of 2020.

The group gave no financial guidance for this year, although it said it might reach a target of achieving 2 billion euros in costs cuts by 2023 ahead of time, possibly by December.

Executives said they were confident the carmaker could be profitable in the second half of 2021, but that they lacked sufficient market visibility to provide a forecast.

Renault struck a cautious note, saying it was focused on its recovery but warned orders had faltered in early 2021 as pandemic restrictions continued in some countries.

The group is facing new challenges as the European Union tightens emissions regulations and after rivals PSA and Fiat Chrysler joined forces to create Stellantis, the world’s fourth-biggest automaker.

The auto industry endured a tough 2020 but a swift rebound in premium car sales in China helped companies such as Volkswagen and Daimler to weather the storm.

Auto companies globally have since been hit by a shortage of semiconductors that has forced production cuts worldwide.

“The beginning of the year has shown some signs of weakness,” De Meo told analysts, but added the chip shortage should be resolved by the second half of 2021. “We have taken the necessary measures to anticipate and overcome challenges.”

Renault estimated the chip shortage could reduce its production by about 100,000 vehicles this year.

SHARP HIT

The group was already loss-making in 2019, but took a sharp hit in 2020 during lockdowns to fight the pandemic, which also hurt its Japanese partner Nissan.

Analysts polled by Refinitiv had expected a 7.4 billion euro loss for 2020. The group posted negative free cash flow for 2020.

The 2018 arrest of Carlos Ghosn, who formerly lead the alliance between Renault and Nissan, plunged the automakers into turmoil.

In a further sign that the companies have been working to repair the alliance, De Meo told journalists that Renault and Nissan will announce new joint products together in the coming weeks or months.

Renault has begun to raise prices on some car models, and group operating profit, which was negative for 2020 as a whole, improved in the last six months of the year, reaching 866 million euros or 3.5% of revenue.

Analysts at Jefferies said the operating performance was better than expected. Sales were still falling in the second half, but less sharply.

Renault is slashing jobs and trimming its range of cars, allowing it to slice spending in areas like research and development as it focuses on redressing its finances. It is also pivoting more towards electric cars as part of its revamp.

It was already struggling more than some rivals with sliding sales before the pandemic, after years of a vast expansion drive it is now trying to rein in, focusing on profitable markets.

De Meo told journalists on Friday that the French carmaker will make three new higher-margin models at its Palencia plant in Spain, where manufacturing costs are lower, between 2022 and 2024.

($1 = 0.8269 euros)

(Reporting by Gilles Guillaume and Sarah White in Paris, Nick Carey in London; Editing by Christopher Cushing, David Evans and Jan Harvey)

 

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UK delays review of business rates tax until autumn

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UK delays review of business rates tax until autumn 3

LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.

Many companies are demanding reductions in their business rates to help them compete with online retailers.

“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.

Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.

($1 = 0.7152 pounds)

(Writing by William Schomberg, editing by David Milliken)

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Discounter Pepco has all of Europe in its sights

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Discounter Pepco has all of Europe in its sights 4

By James Davey

LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.

The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.

Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.

“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.

To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.

The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.

Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.

Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.

That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.

“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.

Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.

Sales rose 3% to 3.5 billion euros, reflecting new store openings.

($1 = 0.8279 euros)

(Reporting by James Davey; Editing by David Goodman)

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