• Settlements with activists on the rise

A “Who’s Who” of global industrial conglomerates is being targeted by shareholder activists this year. The heightened activism, among other factors, raises the specter of a host of divestitures or even outright sales of these companies in the months to come, industry sources told Mergermarket.

Activity tends to heat up ahead of the spring annual meeting season in the US. “It’s like buds coming out on your trees in your garden. So do activist investors,” said Christopher Chase, managing director of Morgan Joseph TriArtisan.

New activists are being spawned by pioneer activists, a Chicago-based banker said. For instance, “two or three” activist funds were launched by investors who started their career with Carl Icahn, he said, such as Corvex Management.

Activists also include large institutional investors such as the California Public Employee pension funds, mutual funds, hedge funds and private equity groups.

The corporate raiders of the 1980s have evolved into shareholder activists, said Gregg Feinstein, head of the activism practice for middle-market companies at Houlihan Lokey. Speaking during the firm’s recent industrials conference, he said today’s activists don’t want to acquire companies but want to change them, by getting them to sell assets or spin off divisions. This is often achieved by threatening proxy contests to replace members of the board. “That’s currently the biggest threat to most of our clients,” he said. Activist hedge funds have USD 80bn in assets, a fivefold increase in the last five years, he said.

Feinstein said corporations are increasingly trying to appease activists by giving them one or two seats on the board, but even without a control position, the activists make more of a mark on the company than management might expect.

Sometimes an appeasement strategy works. Ingersoll-Rand (NYSE: IR) compromised with activist Nelson Peltz so that the industrial conglomerate would not be broken up. Peltz joined the Ingersoll board last year after taking a 7% stake in the company, and his addition averted a potential proxy fight, according to media reports.

Institutional investors have historically voted with management. “They’re not doing that anymore,” Feinstein said. “Lately, institutional investors have supported activists in three-quarters of cases.” As a result, the number of settlements has increased.

The payoff for activists can be substantial. This year, activist investors are targeting higher returns than last year, with just under half stating an expected range of 20% to 30%, according to a survey early this year by Mergermarket and Schulte Roth & Zabel.

While activists have always been a part of the M&A landscape, Chase noted that toward the end of 2012 “the economy and stock market got a little soft” and industrial company valuations came down a bit. This created an entry point for activists who “saw an opportunity to jump in.”

Most of the boat-rocking is happening at US-based companies, though recently Sony (NYSE:SNE) found itself the target of hedge fund Third Point, which is calling for the Japanese electronics giant to spin off its entertainment division.

Here are other examples of global industrial companies that have recently been targeted by activists:

* Ferro (NYSE: FOE) reached a deal with activist shareholders ahead of the Ohio-based company’s annual meeting on 22 May. Two members of the activist group, FrontFour-Quinpario, will stand for election as Ferro nominees. In exchange, the FrontFour-Quinpario Group has agreed to abide by certain “standstill” restrictions. The group collectively owned 4.3% of Ferro as of 26 March. On 4 March, Ferro received an unsolicited cash and stock offer from A. Schulman for USD 6.50 per share that valued the company at approximately USD 850m, which it rejected.

*Quinpario has also targeted Zoltek Companies (NASDAQ:ZOLT). As a result, the carbon fiber producer pursued a strategic review which is seen as likely to result in a sale, according to a report by this news service. Quinpario has signaled its interest in assuming control of Missouri-based Zoltek. In November, it sent a letter to the company offering to acquire all the outstanding shares at a price per share in the mid-teens or to recapitalize the company. An industry lawyer speculated that while in the case of Ferro Quinpario was trying to shake things up, in the case of Zoltek the activist is more interested in a takeover.

*In December 2012, Illinois Tool Works (NYSE: ITW) reiterated its intent to divest up to 25% of its portfolio over the next few years following pressure from activist shareholder Relational Investors, which acquired its stake in late 2011, according to media reports. For example, it is expected to launch a sale process for its industrial packaging segment in the second half, according to this news service.

*In April, Ashland (NYSE: ASH) shareholder Jana Partners disclosed a 7.4% stake in the Kentucky-based company and called the shares undervalued in an SEC filing. The filing came days after Jana lost its bid for board representation at Agrium (NYSE: AGU). In the case of Ashland, “I don’t think it’s going to go anyplace. They just lost Agrium and now they’re turning to Ashland,” the industry lawyer said. The lawyer added that Ashland has “had a very good run,” transforming itself into a specialty chemical company and turning around its earnings and revenues.

Activists are “without question” becoming more aggressive, especially over the last six to nine months, said the Chicago-based investment banker. For instance, Indiana-based Accuride (NYSE: ACW) adopted a shareholders’ rights plan about 18 months ago, the banker said, in response to activists. Chad Monroe, the director of IR for Accuride, said that the shareholders’ rights plan or “poison pill” was adopted because the company experienced a drop in stock price. The board wanted to prevent someone from coming in and generating a control position in the company, he said. In sum, it was a preventive measure, he said.

Meanwhile, Ohio-based Timken (NYSE:TKR) may face challenges from at least one proxy advisory firm at next year’s annual meeting if it does not act on a shareholder-supported spinoff proposal, according to a report by sister publication Dealreporter. Earlier this month, Timken shareholders voted in support of a nonbinding proposal by Relational Investors and the California State Teachers’ Retirement System to spin off the company’s steel business from its bearings business. In response, Timken announced it would “carefully evaluate the views of our shareholders” and announce its next steps within 45 days.

Relational Investors is also pushing North Carolina-based SPX(NYSE: SPW), in which it owns a 9.9% stake, to increase operating margins by, among other things, divesting underperforming assets. SPX unsuccessfully attempted to buy Pennsylvania-based Gardner Denver (NYSE: GDI) for USD 4 bn in December 2012.

“With the economy that’s at least steady and the M&A market in recovery, activist investors can feel pretty confident if they take a stake in an undervalued company that they will be likely to respond,” said Morgan Joseph’s Chase.

Looking ahead, the trend toward more activists could grow stronger, the banker said. They will be seeking spinoffs, splitting companies in parts, increasing divestitures and returning cash to shareholders.

The beneficiary of the trend is “presumably” all shareholders, the Chicago banker said. But he added: “Management hates it like hell and fights it like crazy.”

There is more shareholder activism today than just a few years ago, said Jeffrey Golman, head of the investment banking practice of Mesirow Financial, specializing in industrial companies as well as other types of businesses.

One reason is that the practice of greenmail — the purchase of enough shares in a company to threaten a takeover, thereby forcing the target firm to buy those shares back at a premium to suspend the takeover — has gone away because of legal requirements in some jurisdictions and tax treatment of greenmail gains, he said. In 2005, Section 5881 of the US Internal Revenue Code imposed a tax equal to 50% of the gain or other income realized by any person on the receipt of greenmail, whether or not the gain or other income is recognized.

The rise of hedge funds is another factor, Golman said. He pointed to Warren Lichtenstein’s Steel Partners, Bill Ackman’s Pershing Square Capital Management and Carl Icahn’s eponymous firm. Steel Partners, which is a USD 4bn fund, takes positions in companies to squeeze out shareholder value regardless of how long it takes. Such techniques as implementing lean manufacturing, creating a purchasing council and combining management functions make companies in Steel Partners’ portfolio more competitive, according to the organization’s website.

In terms of future activist activity, there’s no sign of a slowdown for industrials. The sector was second only to financial services in terms of where the most activist activity is expected next year, according to the survey by Mergermarket and Schulte Roth & Zabel. The survey also found that the middle market is the most attractive place to execute such strategies.

by Marlene Givant Star in New York and Craig Barner in Chicago

Write to Marlene Givant Star at marlene.star@mergermarket.com

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In 1Q13, Europe saw EUR 89.5bn worth of deals, down 27.2% when compared to the same period last year and contributing only 28.8% to the global deal value. These latest figures only confirm the continued direction of Europe’s share of global M&A since 2008, when Europe contributed 42% of the global value of EUR 1,623bn. In 2011 this figure was 32.2% with deals worth EUR 518.6bn and 30.9% in 2012 with deals worth EUR 542bn.

Judging by the Iberian figures, requesting a bailout is not the surest way to boost deal making, with the region totaling EUR 48.4bn at the end of 2012, down 23.1% compared to 2011 (EUR 62.9bn). That said, last year, Greece recorded its highest level since 2008 with EUR 6.9bn worth of deals up from EUR 1.6bn the previous year. But this was a result of the country’s largest company Coca-Cola Hellenic Bottling Company pulling out of debt-ridden Greece via a EUR 6.2bn tender offer from its larger shareholder.

Traditional strongholds of European M&A have also struggled in recent years. In 2008, the UK and the Germanic region comprising Germany, Switzerland and Austria accounted for just over 50% of overall European M&A with EUR 344.5bn in deals. Only 31.8% of European deals took place in these two regions in 2011 (EUR 164.7bn) and 38.5% in 2012 (EUR 208.4bn) thanks to a strong recovery from the Germanic area, where 922 deals took place for EUR 111bn, up an impressive 146.1% compared to 2011.

UK vs. CEE

Looking for growth and access to developing markets, dealmakers and acquirers increasingly target riskier but potentially more rewarding regions such as Central & Eastern Europe and Russia, as shown by Mergermarket’s data.

For the first time last year, with EUR 98.6bn, the value of deals concluded in the CEE area (which includes the CIS) overtook the UK with EUR 97.5bn in deals.

The shift began in 2010 when the UK’s contribution to total European M&A dropped down to 19.6% from 27.4% a year earlier while the CEE’s share went from 10.7% to 16%. The UK’s market share has pivoted around the 18% mark ever since while the CEE’s weight has steadily increased.

A true measure of the game change between these two areas is the inbound activity they have witnessed since 2008. The CEE region has consistently seen more than 20% of its total deal value derived from inbound deals. The UK has not passed the 14.3% mark achieved in 2008.

So far in 2013, UK inbound deals are valued at USD 24.8bn, a figure somewhat distorted by Liberty Global’s USD 22bn bid for Virgin Media. Minus this deal, inbound UK activity would be valued at EUR 2.8bn compared to the CEE’s EUR 3.6bn. But domestic activity has also played an important role in the CEE, as exemplified by the USD 3.6bn acquisition of a 37.75% stake in Polyus Gold International by two private investors, a deal that features in this years’ top 20 deals to date.

The CEE is renowned for its energy, mining and utilities companies. However, bellwether countries such as Russia are producing other avenues for consolidation. Last month, in the technology, media and telecommunications (TMT) sector the Russian banking group VTB completed the acquisition of listed Swedish telecom operator Tele2’s Russian business for USD 3.5bn.

European strongholds in the West will continue to play an important role in European M&A but new countries are emerging. Take Turkey for example. Despite its slowing economic growth last year at 2.2%, M&A activity reached its highest level since a peak of 2006 at EUR 13.4bn. Belgium recorded EUR 12.9bn.

By Kirsty Wilson and Beranger Guille

UK PRIVATE equity activity has tumbled by more than 50 per cent since last year, amid a fall in the fundraising power of London based firms, new figures show.

Despite a booming deal environment in the US and Asia, figures show the amount of money spent by private equity executives on British companies since the start of this year has plunged to £3.23bn, down from £7.57bn for the same period a year earlier.

The value of British companies being sold has also fallen by 52 per cent, according to the figures from Mergermarket.

The figures come alongside an annual list showing UK private equity firms are losing market share to US and Asian houses.

Five-year fundraising totals for London-based firms in the biggest 50 private equity companies in the world have fallen to $41.6bn (£26.8bn), down from $80.4bn last year.

The list, compiled by Private Equity International, shows Texas based TPG with the biggest fundraising total for the third year in a row at $35.7bn. Nine out of the top ten biggest firms are US based, with CVC Capital Partners the only UK firm in the top ten.

Please see here for the online article.

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Few midstream deals are being announced without an accompanying plan to expand capacity, noted an industry source. Only two weeks ago, Atlas Pipeline Partners said it would acquire TEAK Midstream for USD 1bn and also announced plans to add a third cryogenic processing plant and build additional gas gathering pipelines onto TEAK’s existing facilities.

Pure organic growth provides better returns over the long run, said panelists at the Mergermarket Energy M&A and Financing Forum in Houston this month. The “buy in order to build” strategy allows companies to take advantage of these returns while mitigating some of the construction and contracting risk of organic projects, they said.

Expectations and plans for organic expansion post-acquisition will continue to drive multiples going forward, said the panelists.

Midstream Master Limited Partnerships (MLPs) had historically paid around 8x EBITDA, but buyers are now analyzing synergies, strategic fit and “future cash flow opportunities” in order to justify much higher valuations, noted Steven Dougherty, Interim Chief Financial Officer, Crestwood Midstream Partners. Deals are being done at 12x EBITDA or higher, said an industry banker.

Midstream MLPs such as Boardwalk Pipeline Partners constantly engage in the “buy vs. build” conversation internally, resulting in some greenfield growth and some acquisitions for cash flow, said Jonathan Nathanson, SVP, Corporate Development for Boardwalk. But increasingly, deals are done on the premise of both.

Low interest rates and wide-open capital markets have contributed to buyers’ ability to pay high multiples and fund subsequent construction, said Robert Myers, Vice President of M&A, Spectra Energy Corp.

While one banker called rising multiples a sign of an “overheated” market, the industry source pointed out that there are fundamental infrastructure needs in many places, including the Eagle Ford and the Permian Basin, where producers in some areas are having a hard time getting the oil and gas they produce to market.

Other areas that lack infrastructure, according to Boardwalk’s Nathanson, are the Marcellus, with the Utica, Bakken and Eagle Ford following. Boardwalk recently announced an organic project in partnership with Williams Partners, to develop a pipeline system to move liquids from Appalachia to the Gulf Coast.

Many developing shale plays need upgrades as well as new gathering, storage and processing, with around USD 200bn to be spent over the next five years, said Ray Strong, senior managing director, Evercore Partners. A shift to liquids in the low gas price environment has made these needs even more pressing as infrastructure built to transport gas cannot always accommodate liquids, he explained. The liquids shift means either that gas-focused infrastructure needs to be upgraded or that new systems need to be built.

Upstream crown jewels and PE holdings

There is no shortage of targets for these MLPs to buy and build up, said Strong.

Traditionally, the MLP was simply a vehicle for distributing cash flow, noted the industry banker. But its emergence as a growth vehicle has made space for private equity firms such as Encap Flatrock and Energy Spectrum Partners to begin building needed infrastructure and sell it, partially-built or partially-contracted, for a premium valuation.

Upstream companies that own midstream infrastructure are not seeing their value reflected in their stock and are thinking about selling into the hot MLP market – “We are seeing things moving away from vertical integration,” said Strong. Long term contracts make it possible for exploration and production (E&P) companies to divest these assets while continuing to utilize them, he explained. “It’s a good seller’s market – we’re having a bunch of those conversations.”

Southwestern Energy and Penn Virginia Corp are two upstream companies that could sell midstream assets, while Chesapeake Energy is actively selling midstream assets, according to previous reports by this news service.

On the other hand, upstream E&Ps that own large assets or entire midstream systems will likely elect to spin off these “crown jewels” into their own MLPs, said Boardwalk’s Nathanson. He pointed to EQT, Phillips 66, and Marathon as examples of companies that have recently done this type of transaction. Instead of these assets coming to market as potential acquisitions for companies like Boardwalk, “they become MLPs, competing with us,” he said.

Strong noted that this strategy only works if the parent has a lot of good assets to drop down and continue growing its MLP.

Now, the proliferation of independent MLPs has meant that there are many more buyers for embedded upstream assets, partially built or partially contracted assets, and other infrastructure that could benefit from the massive amount of capital flowing into the MLP space, added the industry source. And multiples should continue to stay high as long as buyers can bake “a lot of future expectations” into the price.

by Hana Askren

Write to Hana Askren at hana.askren@mergermarket.com

NEW DELHI: The Asia Pacific region, including India, has seen a total of $ 21 billion-worth of energy, mining and utilities deals since the beginning of this year, global deal tracking firm Mergermarket said.

According to Mergermarket, Asia-Pacific has seen $ 21 billion-worth of energy, mining and utilities deals since the beginning of the year, accounting for 24.3 per cent of the total M&A transactions in the region.

Please see here for the online article.

The first quarter of 2013 saw a nine day-period whereby four deals totalling USD 87.7bn took place. But despite this, global M&A deal values were 7.6% lower than the corresponding period last year.

A total of USD 418bn changed hands over 2,621 deals in the first three months versus USD 452.2bn and 3,262 deals a year earlier. While the appetite for a mega-deal or four surfaced in 1Q13, the overall volume failed to keep pace.

The quarter also failed to live up to the preceding three months, which saw the highest value of M&A in five years – USD 737bn across 3,565 deals. Q1 was the largest drop in deal values seen between consecutive quarters in more than a decade falling 76.3%. 2Q02 dropped 73.6% from the first quarter.

TMT was the busiest sector, accounting for 24.5%, or USD 102.6bn, of the overall value of deals during the quarter. The sector also accounted for four of the quarter’s six largest deals. Liberty Global’s USD 21.9bn bid for Virgin Media and NBCUniversal’s 49.9% stake sale to Comcast for USD 16.7bn made up a substantial chunk of that total.

Silver Lake’s USD 20.2bn lunge for Dell and Orascom’s sale to Altimo for USD 6.4bn also contributed towards TMT making up for almost a quarter of the three month’s entire deal value.

Second to TMT in terms of sector value came energy, mining & utilities, which had an accumulative value of USD 90.9bn worth of deals versus USD 161.1bn one year earlier. This 43.6% dip was largely due to last year’s USD 46bn Glencore and Xstrata deal penned in February 2012.

Transport saw the largest comparative year-to-year difference between deal values with USD 21.2bn worth of transactions take place this year against USD 10.3bn during 1Q12. The USD 4.5bn merger betweenAmerican Airlines and US Airways struck in February was the sector’s stand-out deal.

Boom and boon

Private equity proved a boon with USD 83.6bn worth of global buyouts being undertaken. This led to its highest quarterly total since 4Q10, and accounted for 20% of M&A activity. While Warren Buffett’s USD 27.4bnHeinz acquisition bolstered buyout value figures, the number of deals conducted slipped to 375 – the lowest number of transactions since the second quarter of 2009.

The US spearheaded the surge in private equity buying activity accounting for 68.8% of global buyout deals – the highest of any region on Mergermarket record. Silver Lake and Buffett made up 82.6% of US buyout deals alone, highlighting the impact those mega deals in February had on the overall quarter.

Country feedback

Geographically, only the US saw an increase in terms of deal value over that of last year’s first quarter. At least one side of each of February’s mega-deal mayhem involved a US company, which contributed to the 38% rise.

Conversely, Japan toppled to its lowest overall level of M&A since 4Q10 after successive see-saw quarters of rises and falls. The USD 8.3bn worth of deals over 107 transactions paled in comparison to the fourth quarter, which saw 87 deals take place amounting to USD 17.1bn. A crumbling yen did little to whet the appetite of Japanese companies looking to acquire outside of their homeland. Just USD 4.4bn worth of outbound acquisitions took place during the quarter – the lowest value since 2Q10.

Europe saw a 28.1% fall in deal value when compared to the first quarter last year with USD 116.3bn worth of deals being made over 1,1037 takeovers. The first quarter of 2012 saw 1,355 deals amounting to USD 161.7bn. Despite the overall slim figures coming from Europe, it did record 13 deals priced at more than USD 2bn.

Regardless of billion-plus deals, Europe still saw each sector experience a lower deal count than a year earlier. Similarly, values also swung slightly in favour of 2012 with only business services, pharma, TMT and transport edging higher overall values this year over last.

Japan aside, the rest of Asia-Pacific followed the trend set by the majority of other regions and saw a stuttering start to the year. The first quarter fell short of the same period last year striking 453 deals worth USD 64.5bn versus 484 deals totalling USD 83.8bn – its slowest start to any year since 2009.

From here knows where

For all the hullaballoo that accompanied a frenzied February fortnight, which saw four deals take place in nine days worth a collective USD 87.7bn, figures were overall lower than last year. The flurry of large deals could give rise to the belief that confidence may well be returning to a market otherwise in the shadow of deepening European recession and crisis.

At the moment, a lot of the coverage surrounding the Bank of Japan’s big, aggressive, new monetary move on Thursday is on currencies and the bonds and the economic stuff.

What I haven’t seen yet is much of the corporate stuff, so it might be worth considering what sort of effect the BoJ’s “quantitative and qualitative monetary easing” might have on the corporate landscape.

Before all the heavy policy jaw-boning began about six months ago, the yen was trading at a post-war high against the US dollar. It was killing the exporters, but on the flipside, we noted it had also prompted Japanese companies to go on an outbound mergers & acquisitions binge.

The numbers might change depending on which source I quote, but the trends are pretty clear.

Outbound deals hit a record high $US110.8 billion in 2012, a 59.2 per cent increase from the previous year, according to data provider Mergermarket. Even factoring out the monster $US35.5 billion deal between US telco Sprint Nextel and Japan’s Softbank, outbound deal value was still up 8.1 per cent on 2011.

Deal volume was up by 47 deals on the previous year, with the greatest number of deals being done in Asia.

Source: Mergermarket

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