Financial Times: Biggest M&A boom since 2000 coming: “Cairn Energy (with a market value of £2.7bn) has been the subject of speculation, and punters also follow bigger rumours surrounding Royal Dutch Shell. The Anglo-Dutch oil and gas group has been linked with Canada’s Encana as well as with the UK’s BG Group.”: Posted Wednesday 16 November 2005

By Lina Saigol

Published: November 15 2005

If 2005 is to prove a return to the mergers and acquisitions boom during 2000, then it must see takeovers across a wide range of sectors. And if one were to judge by the spread of bid rumours alone, it could be time to wind the clock back five years.

Telecoms and Media

O2 has been bid for by Spanish telecoms giant Telefónica in a deal that values the UK mobile phone group at £17.7bn. With Deutsche Telekom having ruled itself out of the running, most analysts think the Spanish group will win the day.

Kingston Communications, the fixed-line telecoms operator, has been approached by US buy-out firm Carlyle. Kingston, 31 per cent owned by Hull city council, could attract interest from other private equity houses.

The Caudwell telecoms group, which owns Phones 4 U, is up for sale with a price tag of more than £1bn after founded John Caudwell opted against a stock market floatation.

The weakness in the share price of Cable and Wireless (£2.8bn), despite its recent acquisition of Energis, has also made the UK’s second-biggest telecommunications network operator look vulnerable.

Aegis, the media buying and research group with a market capitalisation of £1.4bn, has been a takeover target since the last boom.

In 2000 US marketing services group Omnicom tried to buy Aegis. It has taken until recently to revive bid interest.

But now the Takeover Panel has given WPP, the marketing group, and Hellman & Friedman, the private equity concern, until November 25 to declare a firm intention to bid.

Vincent Bolloré, the chairman and single largest shareholder in rival marketing group Havas of France, has been building his stake in Aegis and holds more than 20.8 per cent.

Publicis, the biggest French rival to Havas, expressed an interest in Aegis and has reserved the right to come back with a bid in the event of an offer from another company or an invitation from Aegis.

Private equity firms are circling other UK media and technology groups with a view to spoiling their merger or takeover plans.

Private equity firms are believed to have run their slide rules over GCap Media (valued at £550m), the radio group formed from the merger of Capital Radio and GWR.

Cable companies NTL and Telewest (£5.2bn) have agreed a merger, but it could be rudely interrupted by a private equity consortium.

Worries over the performance of ITV, formed from the merger of Carlton and Granada, have lent substance to rumours of a bid. Richard Desmond, owner of Express Newspapers, and the private equity firm Apax Partners have been among the potential bidders named in reports.

Retail

Woolworths (£473m) and WH Smith (£668m) have long been considered targets, though pension deficits at both companies have proved to be deterrents.

Weak interim figures from Matalan (£695m) recently sent shares in Britain’s largest discount clothing retailer to their lowest close in 19 months. It is likely to join the list of retailers on “bid watch” lists.

Kingfisher (£5bn), the home improvement retailer that owns B&Q and Castorama in France, has featured as a potential target for more than 18 months now. US giant Home Depot is the rumoured favoured buyer.

Arbitrageurs are also closely watching Kesa Electricals (£1.3bn), the Anglo-French retailer that owns the Comet chain. In September it reported a 38 per cent slide in first-half profits. In this sector, that makes it vulnerable. DSG International, formerly called Dixons, is seen as a possible bidder.

Financials

Bidders in this sector are attracted by strength as much as weakness. After Royal Bank of Scotland won its hostile bid for NatWest in 2000, attention turned to other banking groups.

From Bank of America looking at Barclays (£36.4bn) to Deutsche Bank dancing around LloydsTSB (£26.3bn), there is no shortage of putative combinations.

Investors are also focused on Standard Chartered (£5.9bn), which specialises in emerging markets. The company is a potentially attractive target because of the recent performance of Asian stock markets, where Standard Chartered is estimated to earn about 90 per cent of its profits. Rumours abound that the Khoo family of Singapore wants to sell its 13 per cent stake, paving the way for a full-blown bid.

Traders also keep an eye on Amvescap, the Anglo-American fund manager. It saw shares fall more than 10 per cent in August after CI Financial, a Canadian rival, said it would not be bidding for the company. Now punters are looking to Janus Capital of the US as a potential bidder.

Takeover interest in Royal & Sun Alliance (£2.9bn), the UK’s second-largest general insurer, has been discussed since 2000. AIG of the US is the most likely buyer.

Support services

Where banking mergers are a long-term favourite of M&A speculation, the support services sector is a newcomer to the limelight. Deutsche Post’s recent takeover of Exel has fired the sector. Investors believe Compass (£4.1bn) could be next. The catering group is looking for a new chief executive. Could it be vulnerable to a break-up bid by private equity?

Following Sir Gerry Robinson’s failed approach at Rentokil Initial (£2.7bn), hopes of a private equity bid for the support services group have risen.

Others look to Bunzl (£2bn): the group has completed the demerger of its Filtrona business, making it easier for a predator to swallow.

Industrials

The sector spent the past three years repairing balance sheets and restructuring. Invensys (£782m), for example, has been selling non-core assets for the past three years. The strategy could tempt a buyer, probably from overseas.

Private equity groups are understood to be circling IMI now that the group, which produces valves for the oil and gas industry, has sold Polypipe, its plastic pipes subsidiary.

Speculation continues to surround Corus (£2.2bn), the Anglo-Dutch steelmaker. ThyssenKrupp of Germany is the most named bidder.

BOC (£5.5bn), one of the world’s leading gases companies, has long been viewed as a potential merger partner for Germany’s Linde. German chemicals company BASF had also been seen as a credible buyer, until it ruled itself out.

Construction

Given the speed of consolidation in the building materials and construction sector, there are very few companies in this field which have not been considered possible targets.

At the start of the year there were three big aggregates companies in the UK. Now Hanson (£4.2bn) stands alone. RMC fell to Cemex, the Mexican cement giant, and Aggregate Industries succumbed to the Alpine charms of Holcim. Rumours around Hanson have intensified, particularly since it has its asbestos liability under control. Lafarge is seen as the stalker.

Further down, construction group Mowlem had an approached by its rival Carillion, while bid speculation has also surrounded project management group Amec.

Alfred McAlpine (£345m) is another similar-sized company with a similar portfolio of private finance initiative projects.

Construction companies in the UK have long look undervalued on price-earnings ratios compared with their European or US counterparts, and it is Mowlem’s portfolio of long-term PFI work that appears to have been the lure Carillion.

Real Estate

Hammerson (£2.6bn) and Slough Estates (£2.2bn) are picked by analysts as sufficiently undervalued to spur a bid. Bid speculation around Hammerson follows the company’s decision two months ago to sell off its flagship head office at 100 Park Lane in London on the basis that the location would make a better home for a Russian tycoon.

Leisure

There is talk of a £3.6bn deal between Hilton Hotels Corporation of the US and Hilton Group of the UK. That has cued talk that Intercontinental Hotels (£3.2bn) may be the next UK leisure group to receive a bid from a US hotel operator. With a growing franchise and management business, IHG would be a natural fit with Starwood, the world’s biggest hotel group by market capitalisation.

Whitbread (£2.4bn) owns a portfolio of disparate businesses. Private equity firms are known to be eyeing Premier Travel Inn, its profitable budget hotel brand, its David Lloyd Leisure clubs and its underperforming pub restaurant portfolio, which includes the Beefeater brand. Alan Parker, chief executive, insists the businesses are not for sale. But the company may receive an offer it cannot refuse.

Rank (£2.9bn) is another break-up story waiting to happen, according to analysts and bankers. The gaming and leisure group owns the Hard Rock Cafe chain, Mecca bingo clubs, a chain of casinos, and Deluxe, a film processing business. Rank is trying to sell Deluxe but has struggled to find a buyer. Stripped of Deluxe, Rank could fit with William Hill (£2.1bn). The latter has seen its rival Coral Eurobet combine with Gala, the bingo and casino operator, to form a UK gaming powerhouse. Who would bet against Rank arriving at a similar strategy?

Both companies may also prove attractive to the US gaming groups that missed out on UK gaming deregulation. With the relaxation of laws not as great as expected, Harrah’s Entertainment and MGM Mirage of Las Vegas may seek alternative ways into the UK market. Rank and William Hill would fit the bill.

Internet gaming has started to see the beginnings of consolidation, with Empire Online a target for FTSE 100 online poker group PartyGaming. Sportingbet, another UK-quoted online gaming stock, tried to buy Empire earlier this year, but those talks were abandoned..

Pharmaceuticals

UK investors also look to the US in this sector. Having witnessed big pharma deals in the US two years ago, UK shareholders hope they are next. All eyes are on AstraZeneca (£40.5bn), the Anglo-Swedish group, which has long been rumoured as a target for larger rival GlaxoSmithKline. Shire Pharmaceuticals (£3.3bn) is also mentioned on the City rumour mill.

Utilities

Investment bankers have been hovering around Centrica (£8.8bn) since the beginning of the year, looking to find clients to take out the owner of British Gas.

Favoured potential bidders include Petronas of Malaysia, Norsk Hydro, Gaz de France and Gazprom of Russia. No firm bid has yet materialised, however. Scottish Power (£10.4bn) has also been marked as a takeover target since Eon, the German group that is Europe’s largest listed power company, said it was considering a possible takeover of Britain’s fifth-biggest utility.

Oil & Gas

Cairn Energy (with a market value of £2.7bn) has been the subject of speculation, and punters also follow bigger rumours surrounding Royal Dutch Shell.

The Anglo-Dutch oil and gas group has been linked with Canada’s Encana as well as with the UK’s BG Group.

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