Big deals have dried up and may not return for a while

It has been a rotten year for bid rumours and a rotten year for bids.

Global merger and acquisition deal volume nearly halved year-on-year in the first six months of 2020 to $1.1tn, according to Dealogic data. That is the lowest haul in at least 15 years. Reasons for the slump are obvious enough. Covid has erased revenues and played havoc with profit forecasts, while market volatility has outfoxed even the most predatory of buyers.

Lockdowns have also had a chilling effect on the free flow of speculation. With bars closed and international travel rationed, the peripatetic types who trade stock market ideas found themselves with nowhere to go. And though chat continued over the encrypted messaging services, there was suddenly a lot less to talk about.

Life always finds a way, however, and the second half has already thrown up its first unlikely bid rumour: Apache, the Houston-based oil and gas company, was said to have been working with advisers on putting together a bid for UK peer Premier Oil. Both companies declined to comment.

Why unlikely? Debt, mostly. Apache ended 2019 burdened by $8.5bn of long-term borrowings and has spent recent months working on ways to reduce its leverage in case oil prices fail to recover. Premier carries an estimated $2.4bn of debt following two refinancings in three years. In a world where investors have been forced to appreciate the benefits of strong balance sheets, a combination of the companies appears to solve neither’s biggest problem.

So where has the rumour come from? It is probably no coincidence that Premier is halfway through buying North Sea oilfields from BP, an agreement that will require a share issue. Premier also needs to pacify an activist short seller, the Hong Kong hedge fund Asia Research & Capital Management, which last month called off legal action to block the purchase. The truce came after Premier and BP amended terms for the acquisition to cut the headline price and spread payments over several years.

Premier’s creditors this week approved these revised terms and have until July 8 to sign off debt covenant waivers. It is certain that they will have explored other options. In similar circumstances, creditors will often elect an adviser to figure out whether it is worth agitating for alternatives such as a disposal or a stake sale, as well as to sound out potential buyers for a full takeover.

To that end, Apache would be one of the first names on any adviser’s list. The North Sea contributes about 15 per cent of Apache’s annual production and, while the fields are likely past their peak, they still deliver steady cash on relatively low operating costs with negligible political risk attached.

Buying Premier would approximately double Apache’s North Sea production, according to Jefferies analysts. Operational overlap would deliver cost savings as well as some huge potential tax benefits, with Premier carrying tax losses well in excess of $4bn versus a market value of less than $600m.

Apache’s commitment to the North Sea has been in doubt for years. A local merger that cut costs and lowered the tax bill might help convince it to stick around. It would be a proposal worth considering, particularly if debtholders were known to be provisionally onside. Support from shareholders would be the much bigger hurdle to clear.

As sketchy as it is, the Apache/Premier combination will probably not be the last merger rumour investors hear before the year is out.

After all, it is an annual ritual for analysts to name takeover candidates for the year ahead. Perennial picks include medical device maker Smith & Nephew, tobacco company Imperial Brands and broadcaster ITV. The logic is usually that, with sterling weak and credit cheap, predators will seize the moment to make transformational deals.

Reality never quite lives up to those expectations. Buying any of these companies would represent a banner deal for an ambitious chief executive, yet even in busy times M&A is more commonly about finding ways to fix over-levered or mismanaged companies riven by competing interests.

This is no time for frenzied dealmaking. So far just two UK companies outside the microcaps have agreed bids, and early in the year — Anglo American bought Sirius Minerals, the cash-strapped Yorkshire mining project owner, and property group Daejan was taken private by its majority shareholder. There has been nothing like it since February.

Though stocks have rebounded on central bank support, the outlook for corporate earnings remains murky. But while credit keeps getting cheaper for companies that do not need it, there are still some easy pickings for buyers among those companies that do. What little M&A there is, will probably be confined to the bargain bin.


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