JPMorgan Anticipates Fewer Mega Deals as Political Hurdles Rise

(Bloomberg) -- Large cross-border deals, which fueled the mergers and acquisitions boom for the last five years, will be harder to come by in the future due to the impact of trade wars and regulatory risks, according to JPMorgan Chase & Co.

“Larger deals are harder and harder to get over the line due to increased regulatory hurdles and prolonged trade wars,” said David Lomer, co-head of M&A for Europe, the Middle East and Africa at the bank.

Still, as buyers from Asia redirect their attention from the U.S., “EMEA has become the epicenter of cross-border M&A,” Lomer said at the sidelines of JPMorgan’s European High Yield & Leveraged Finance Conference in London. Domestic consolidation is also boosting M&A in Europe, he said.

Companies announced $2.1 trillion of transactions in the first half of 2018, putting this year on track to beat 2007’s $4.1 trillion total, according to data compiled by Bloomberg. Mega deals included Takeda Pharmaceutical Co.’s $62 billion purchase of Shire Plc and T-Mobile US Inc.’s $26.5 billion takeover of Sprint Corp., both of which JPMorgan advised on.

Spending on European deals is up about 25 percent this year, aided by large takeovers such as EON SE’s acquisition of Innogy SE and Melrose Industries Plc’s hostile takeover of British aerospace and defense contractor GKN Plc.

Debt Binge

It’s proving to be an epic year for debt providers as companies and private equity firms look for ways to fund the global acquisition spree. Bankers in the U.S. and Europe are marketing the biggest leveraged-loan deal of 2018 to fund Blackstone Group LP’s buyout of Thomson Reuters Corp.’s financial-and-risk operations. M&A funding is poised to keep fueling supply through year-end, according to Stefan Povaly, JPMorgan’s head of corporate leveraged finance for EMEA.

“We have seen a meaningful increase in M&A-related deal volumes this year which is a key change from last year where a wave of refinancings was the key driver for leverage finance activity,” Povaly said. More lenders are also tapping the U.S. debt market, especially in sectors such as energy, he said.

So far, bankers have been finding ample demand, particularly in the loan market, where investors have flocked to floating-rate products as a hedge against Federal Reserve interest-rate hikes.

European family firms are also providing opportunities to offer debt as they review business strategies, he said.

While most M&A funding has been for investment-grade debt -- such as Cigna Corp.’s $20 billion bond sale to finance its takeover of pharmacy benefits manager Express Scripts Holding Co. -- companies rated junk will likely start to do more deals funded with high-yield debt, Povaly said.

“As the cycle continues, we do expect to see more companies looking at the leverage finance market increasingly to fund acquisitions,” he said.

To contact the reporters on this story: Dinesh Nair in London at dnair5@bloomberg.net;Ruth David in London at rdavid9@bloomberg.net

To contact the editors responsible for this story: Aaron Kirchfeld at akirchfeld@bloomberg.net, ;Daniel Hauck at dhauck1@bloomberg.net, Amy Thomson, Elizabeth Fournier

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