Mergers and acquisition (M&A) activity in Spain will have a healthy outlook if the southern European country can stay out of the sovereign debt crisis that began in Greece. Deal activity flourished in Spain in the first half of the year, despite fears over the sluggish economy and a surprising lack of initial public offerings (IPOs). Deals so far have included a large number of mergers between savings banks; restructuring-led M&A by companies like media specialist Prisa; and a return to aggressive overseas buying by large-cap companies such as Telefonica. While the consolidation of the savings banks will end this month, there are still more deals in the pipeline, including Banco Santander's position as the last remaining buyer for a series of branches that Royal Bank of Scotland (RBS) is selling in the UK. Among other deals in the pipeline, Endesa is looking for a financial partner to invest some EUR 800m in return for 80% of its gas network. Oil company Repsol YPF is considering an IPO of its Brazilian unit to raise funds to help develop a number of upstream oil discoveries off the shore of Brazil. A secondary listing of YPF in Argentina is also possible. Repsol will also be impacted by a new law ending a corporate bylaw restricting the voting rights of shareholders to 10%. Repsol’s 20% shareholder Sacyr Vallehermoso, a property and construction company, has been pushing for bigger dividends. Construction company ACS wants to raise its stake in Iberdola to 20% and is seeking a greater say in how the electricity company is run. ACS has also said that it is in talks with a number of possible bidders who want to invest in its infrastructure affiliate Abertis. One property source said that there will be further concentration in the sector in the second half of the year. Once this month's deadline for savings bank mergers passes, these entities are likely to continue to restructure their property holdings through M&A activity, the source said. Several private equity executives also said that their companies have a great opportunity to acquire assets of industrial conglomerates. They said that these conglomerates must focus on their core businesses and will have to sell some very attractive assets. In the longer term, there is also likely to be activity among Spain’s builders and infrastructure companies. Public Works Minister Jose Blanco told a conference in Santander that six of the ten largest companies in the world are Spanish. He said that the privatisation of 30% of airports operator AENA has been discussed, but would not comment further. One infrastructure expert called on the government to privatize the company, as well as rail companies Renfe and ADIF. Although the M&A pipeline is looking healthy, the main risk facing Spain in the months ahead comes from faltering market confidence in the country’s future, according to experts who are studying the situation. One economist close to the opposition Popular Party (PP) said that the combination of weak public finances and panicking markets could lead to a “vicious cycle.” In this scenario, Spanish public debt would be progressively sold, which could the cost of financing for the state. It could reach a point where the debt can´t be financed, leading to a bailout, the economist said. Even so, the economist said that the ruling Socialist party, led by Jose Luis Rodriguez Zapatero, has finally bitten the bullet and is taking the right steps to ward off this scenario. The government has announced deep budget cuts and is negotiating labour market flexibility measures with trade unions despite the threat of strikes from its erstwhile allies. Treasury Secretary Carlos Ocaña said that an incipient recovery is now under way, even though the economy is unlikely to grow this year. Despite his underlying confidence, he said that Spain has three main problems: an unemployment rate of more than 20%; a high public deficit; and lack of credit from banks. In order to cut unemployment, the government is in talks to reduce labour costs. It has also announced an austerity plan to cut its 11% deficit, compared to a euro-zone average of 6%. The aim is to bring the deficit to 3% of gross domestic product (GDP) by 2013 from a forecast 9.3% this year. Finally, the government has also set up the Orderly Bank Restructuring Fund (FROB) to encourage mergers among unlisted savings banks and clean up their balance sheets. The savings banks were more exposed to the property boom than the listed banks. Both the economist who is close to the PP and Ocaña said that the underlying challenge for the Spanish economy is to return to competitiveness. The country has higher labour costs per hour than its European peers. The first economist and a former Socialist minister both said that Spain has come through other crises in the past and return to growth in the future. The economist forecast growth returning in 2011 and hitting 2.7% in 2013. Meanwhile, Juan Maria Nin, CEO of savings bank La Caixa, said that Spain’s unemployment rate, which is much higher than elsewhere in Europe, is the main problem facing the country. He said that “it will be a question of time” before the underlying difficulties in the construction sector work themselves out. The labour-intensive industry collapsed in the early days of the credit crunch. While the government tries to sell its austerity plan and labour reforms to reluctant unions, it continues to insist that the risk of a bail-out is minimal. “It is false that Spain is negotiating or plans to negotiate a financial package with any European or international institution,” Ocaña said. He added that Spain is working to avoid using an emergency fund that has been created by Ecofin. Pedro Solbes, who was Zapatero´s finance minister until last year, said that the risk of tapping into European bail-out funds is “minimal.” However, he also said: “The problem is not the level of indebtedness but how fast it has increased and how to achieve the stability of the deficit”. According to figures from the Bank of Spain, corporate debt in 2009 was equivalent to 138.6% of GBP, while household debt was 85% of GDP. This was largely due to a credit boom between 2003 and 2007. During this time, credit to developers rose 300%, credit to builders went up 130% and household mortgages grew 125%. The country’s unlisted savings banks (cajas de ahorro), which are run by regional politicians, were at the forefront of lending to developers and offering mortgages on new houses. The government’s FROB has EUR 90bn to encourage a series of mergers by the end of this month to cut the number of 45 cajas in half. So far, two savings banks have had to be rescued by the Bank of Spain, while many in the sector are opting to set up “virtual mergers,” where they become shareholders in new banking entities. Rodrigo Rato, the former PP finance minister who now chairs savings bank Caja Madrid, said that there are an unsustainable number of branches. Meanwhile, Francisco Gonzalez, chairman of large listed bank BBVA, said that the credit markets remain closed for most small businesses. The Bank of Spain is currently running stress tests for the sector as a whole. Analysts at BPI ran an aggressive stimulation, which supposed losses of 50% in real estate and construction loans and 70% losses in terms of real estate assets. The analysts found that the cajas would face collective losses of EUR 26.5bn (40% of their equity), which is within the capacity of the FROB. The analysts also found that BBVA and Banco Santander could cope with these losses without any major hurdles. By Virginia Garcia Martinez in Santander and Rupert Cocke and Iñaki Miguel in Madrid
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