UK and industrials prominent in Goldman strategists' M&A target reshuffle

Last Updated: Thu, Jun 29, 2017 17:24 hrs
FILE PHOTO: The logo of Dow Jones Industrial Average stock market index listed company Goldman Sachs (GS) is seen on the clothing of a trader working at the Goldman Sachs stall on the floor of the New York Stock Exchange

LONDON (Reuters) - With merger and acquisition activity front and centre of investors' minds in Europe, Goldman Sachs analysts rejigged their basket of stocks they see as most likely acquisition targets, with the unloved UK region and the industrials sector among areas they reckon are ripest for deal-making.

The blockbuster deal from Amazon and Whole Foods, and high-profile takeover attempts from Akzo Nobel and PPG, and most significantly Unilever and Kraft, have thrust European M&A activity into the spotlight this year.

"After a fairly subdued 2016, European M&A volumes have been strong so far in 2017, with deal activity supported by fairly robust macro data and a reduction in policy uncertainty, along with low market volatility and still-low financing costs," say Goldman analysts.

Goldman analysts added 16 new names to their basket of potential European M&A candidates, which has outperformed the STOXX 600 by 9 percent since its inception two years ago.

The basket is heavily exposed to UK-listed stocks, with more than one third of the targets listed in the UK.

Political uncertainty has not yet dented appetite for UK companies which are significantly cheaper for a foreign buyer due to a weaker sterling.

So far this year, M&A with UK involvement has totalled more than double the $80.2 billion announced during the same period in 2016, and the second highest year-to-date total in the last nine years, Thomson Reuters data shows.

Following Kraft's ill-fated approach to take over consumer goods mammoth Unilever, analysts upgraded their ranking for Unilever to 2 from 3, where 1 represents a 30-50 percent probability of being involved in M&A activity and 2 represents medium probability (15 to 30 percent).

Besides Unilever, the UK companies on Goldman's target list are mostly domestics with large international exposure, with a heavy weighting towards cyclicals.

"The UK capital goods sector could see a pick-up in M&A activity in the coming years, in particular for flow control companies, where challenging end markets have seen a pick-up in related M&A activity, as companies aim to unlock cost savings from vertical or horizontal integration," they wrote.

Among flow control companies Goldman highlighted IMI and Rotork. "With leading positions and "approved vendor" status these may be considered "must-have" assets for acquirers, they said.

Goldman analysts moved their rank on Italian eyewear company, Luxottica, to 1 from 3 following its agreement to merge with Essilor, the culmination of years of speculation over a takeover.

Elsewhere, despite the Akzo Nobel rebuffing multiple advances from PPG, analysts assigned the Dutch paint maker the highest likelihood of acquisition, saying it could become a more attractive target following the announced separation of its speciality chemicals business.

Technology, media and telecoms was also highlighted as likely to see some activity. The bank's tech analysts initiated coverage of Simcorp with a rank of 1, seeing it as an attractive strategic asset in a consolidating financial software industry.

Telecoms analysts upgraded the rank for Spanish firm Cellnex, saying it offers a potential acquirer "a route to a scale European telco tower portfolio."

(Reporting by Helen Reid, Editing by Vikram Subhedar)

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