Bring your M&A Game

Michael Van Dulken  |

Last month saw the announcement of one the biggest UK M&A (mergers and acquisitions) deals in a while, with Royal Dutch Shell ($RDS.A) set to gobble up BG Group plc (BG)  for £47bn. That the news came from the oil and gas sector was little surprise, with low oil prices leading to some huge share price moves among major and minor players. We look at this and a handful of other sectors for what could pop up on the M&A radar in 2015.

While shares of many oil and gas minors, like Tullow Oil plc ($TLW), Putnam Municipal Opportunities Trust (PMO) , Power Finance Corporation Limited ($PFC) have given up significant ground (20-65%) the majors (Shell, British Petroleum, BP plc (BP) ) have on the whole held up well (-10%) thanks to their maturity, varied operations and thus ability to weather the ups and downs. This has resulted in an accentuation of the predator versus prey situation. While all have announced investment cutbacks to conserve capital and ensure both business longevity and dividend payments, the majors are still in a position to secure cheap financing via low interest rates to make the most of depressed valuations and acquire the sectors’ smaller exploration and production players.

After a wave of oil major transactions in the 1990s, could a new one be breaking and further sector consolidation be on the cards? Which other depressed names could be targets? Could the recent oil price bounce throw a spanner in the works? What about persistent talk and threats of interest rates seeing their first rise in years following global monetary policy stimulus? With the RDS-BG deal currently worth 1300p (0.4454 RDSB shares + 383p cash) and BG trading at 1178p, this suggests available arbitrage of 122p, but also implies a combination of

a) Fear the deal may collapse

b) Potential oil price volatility

c) Time value to completion for a deal that will surely require regulatory approval and possible divestments

Other Sectors:


The oil and gas news has also sparked renewed hopes of deals elsewhere, such as perennial tech target ARM Holdings plc (ARMH) whose microchip architecture is used in most hand-held devices - meaning the company is attractive to large-cap tech names like Apple Inc. (AAPL) , LG Electronics Inc. ($KRX:066570) and Samsung Electronics Co Ltd (KRX:005930), which uses its chip designs and have pinned hopes on wearable devices and Chinese growth. Chip manufacturers such as Intel Corporation (INTC)  are also possible buyers, using the deal to reduce competition. NXP Semiconductors NV (NXPI)  have already acquired Freescale for $11.5bn. What about speculation of Intel buying Altera Corporation (ALTR)  for $10bn?


Within retail, and more specifically the UK-listed grocers, J Sainsbury plc ($SBRY) has been the subject of persistent takeover speculation ever since the Qatari Sovereign Wealth fund (QIA) took a 26% stake and made an unsuccessful £10bn offer for the whole company in 2007. Tesco Corporation (TESO)  troubles were so plentiful last year that it was considered potential prey, but the new CEO has boosted sentiment to the point where it is seen as back in a strong position thanks to scale, divestments and an ability to invest to fend off the smaller rival discounters which continue to take market share.


Healthcare has been a major source of M&A news over the last 12 months, with big pharma’s war chests being bolstered by cheap borrowings in order to capitalize on low valuations and ensure product pipelines are stocked full to maintain growth in the face of expiring patents. Shire PLC (SHPG)  was close to being bought by AbbVie Inc. (ABBV)  for £32bn before a change in US tax inversion laws saw the deal scuppered. UK Pharma major AstraZeneca plc (AZN)  was courted by US major Pfizer (PFE)  with several offers all rejected. Both SHP and AZN have regained lost ground. Is this on hopes of new predators pouncing or the prior suitors returning to the table with better offers?


In media, Sky Network Television Ltd (SKT)  and Vodafone Group Plc (VOD)  are in no way small. The former was thought recently to be of interest from French giant Vivendi SA (VIV) while the latter is both a more manageable target, since it sold its stake in US Verizon Communications Inc. (VZ) Wireless, and also flush with cash even after making a significant return of capital to shareholders last year. That's why it could be interested in Sky enabling it to offer a real quad-play service. With BT Group plc (BT)  recently buying mobile telephone EE for £12bn, the appetite for sector consolidation is evidently there.

Wherever deals emerge, premiums of an average 20-30% are quite normal to secure shareholder acceptance, meaning interesting upside potential for those investing in the right prey.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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