Even more M&A activity in 2018?

This year has been an impressive year for global stock markets, some indices reached multi-year highs while others went on to rack-up fresh record highs consistently. The improved economic sentiment, and the prospect of even better economic growth in the coming years triggered a wave of buying this year, according to David Madden, Market Analyst at CMC Markets UK.

Rock bottom rates

Interest rates are at record lows, and the cost of borrowing is likely to creep higher next year, giving another traders another reason to jump on the buying bandwagon. It is not just investors and dealers who are caught up in the bullish sentiment, companies are too, and we are seeing firms snapping up other organisations, or merging with them to form a more powerful company. Some M&A deals are funded using debt, and companies are keen to borrow to fund these transactions. 2018 could bring about three or perhaps four interest rate hikes from the Federal Reserve, and we may even see a rate hike from the Bank of England. The prospect of higher borrowing costs could be attributed to the flurry of M&A deals this year. Negative interest rates in Japan and the eurozone discourages saving, so going down the takeover route using borrowed money might could be seen as an efficient way of expansion. 

Consolidation in the sector 

The tie up between Paddy Power and Betfair is paying off as synergies are kicking in. The larger pool of clients, from different sections of the gambling industry, now come under one group – which is beefing up its investment in its technology. The success of the deal presumably prompted Ladbrokes Coral to renew takeover talks with GVC. The merger between Ladbrokes and Coral was completed last year and they clearly have wider ambitions.

The real estate investment trust sector had an interesting start to December.  At the start of the month Hammerson approached Intu with a £3.4 billion offer. If the deal goes ahead it would create the largest commercial property company in the UK. Less than a week later, France’s Unibail-Rodamco declared it will become the world largest shopping operator when it acquires Westfield for $25 billion.

The commercial property sector is feeling the pinch from online shopping, and the industry reaction has been to grab the most prized real estate assets. If this mentality continues we could see further consolidation in commercial property market as online retail sales is likely to keep rising.

Pivoting within a sector

Lidl and Aldi have taken a big bite out the UK supermarket sector, and the ‘big four’, Tesco, Sainsburys, Morrisons and Asda have suffered for it. In 2016, Sainsburys acquired Home Retail Group, the owner of Argos, Habitat and Homebase. The deal created one of the biggest food and non-food retail companies in the UK. Tesco’s takeover of Booker Group was approved in December 2017. The £3.7 billion deal needed approval from the competition and Markets Authority (CMA) as Booker group acts as a wholesaler to supermarkets and convenience store which are in competition with Tesco. The British supermarkets are reacting to the growing German firms, and in turn they are now altering their positioning in the UK retail space.