More M&A Records in Sight for Europe After $1.8 Trillion Spree

(Bloomberg) -- If 2021 was a big year for European dealmaking, 2022 could be even better, with potential buyers seeking to put increasing amounts of cash to use.

M&A in the region is on course for its best year since 2007, with the value of all pending and completed deals standing at $1.8 trillion, according to data compiled by Bloomberg. That represents “almost two years in one,” according to Philipp Beck, EMEA head of M&A at UBS Group AG.

For 2022, Citi strategists led by Beata Manthey forecast growth of 15% in deal making. Morgan Stanley’s event-driven desk is also optimistic, noting that financial sponsors hold record firepower of more than $900 billion for potential deals and continue to raise funds.

The U.K. is western Europe’s M&A hotbed right now, accounting for more than 32% of deals in 2021. Bidders are being attracted by valuations that have been depressed by factors including the impact of Brexit on supply chains. British equities trade at a discount to global peers of about 40% in terms of forward price-to-earnings ratio and 45% if you look at the price-to-book.

“There’s still so many listed companies that are extremely cheap” in the U.K., said Toby Clothier, head of the global thematic and strategy team at Mirabaud Securities, adding that he doesn’t expect private equity M&A to slow.

In terms of industries, grocers and food delivery platforms are likely to remain firmly on M&A radars following this year’s takeover of Wm Morrison Supermarkets Plc and speculation of a bid for France’s Carrefour SA.

“Quick commerce will definitely remain a hot topic in 2022,” said Bryan Garnier analyst Clement Genelot, who expects M&A activity among traditional food retailers to be more active in the second half of next year once France’s presidential election has taken place. And according to JPMorgan Chase & Co.’s Marcus Diebel, “food delivery needs consolidation.”

Telecoms is another area to watch, with KKR’s preliminary bid for Telecom Italia SpA being the latest in a wave of deals across the sector. JPMorgan analyst Akhil Dattani expects 2022 to deliver “record levels” of telecoms M&A, based on favorable regulatory change.

READ: Europe Telecom M&A Frenzy Seen as $1 Trillion Stimulus Lifts EPS

In terms of individual stocks, Societe Generale SA strategists led by Roland Kaloyan have identified a number of potential targets in Europe based on valuation criteria. Their basket -- including Nokia Oyj, ITV Plc, Klepierre SA, Worldline SA and Weir Group Plc -- is a way to get some “value exposure,” benefiting from rising U.S. bond yields, with an optionality on M&A, they said.

“Corporate balance sheets are full of cash,” and still low interest rates are supporting the extension of a new M&A cycle, the SocGen strategists said in their equity outlook for 2022.

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