Emma Wall: Hello and welcome to the Morningstar series ‘Ask the Expert’. I’m Emma Wall and I’m joined today Philippe Lecoq, Co-Head of European Equities for Edmond de Rothschild Asset Management.
Hello, Philippe.
Philippe Lecoq: Hello.
Wall: So your specialty is M&A, I thought perhaps we could start by explaining to investors why they should care about M&A. M&A has been pretty rife over the last couple of years, hasn’t it? And partly due to the fact that obviously the economy is getting better globally, but also money has been very easy to get because debt has been very cheap, hasn’t it? Low interest rates have helped.
Lecoq: Yes, of course, and the environment is still very favorable to the M&A development, especially in Europe we are convinced because we live in a low inflation and low GDP growth situation. So it’s a big incentive for the corporates to get and to take some transformation decision. And also in terms of financing, there is a huge opportunity to finance acquisition because it will probably remain easy for a long time.
Wall: And perhaps you could talk us through some of the big deals that have been beneficial to investors. I’m thinking things like the Vodafone (VOD) acquisition or rather that was part of Vodafone being sold off to Verizon, which saw shareholders have an incredible special dividend payout. These things are good for shareholders, aren’t they?
Lecoq: Yes, absolutely. And last year especially, we have seen a lot of big deals with also very industrial logics in the project of the companies. And you mentioned Vodafone that sold a big asset in the U.S., but we have also seen some big takeovers on U.K. stocks, for example, SABMiller (SAB) taken over by InBev and also the merger between Shell (RDSB) and BG Group. But recently we have seen some slowdown in the M&A activity in the U.K., probably due to the uncertainty around the referendum. So that’s why there is less pronounced mount recently, but our conviction is that it will recover during the second part of the year.
Wall: And is it a stock-by-stock basis that you’re looking for M&A opportunities to benefit from? Or are there particular sectors at the moment where you think actually they are poised for takeovers?
Lecoq: Yes, it’s essentially a stock picking approach, but of course, we have some sector consideration in our analysis. And today we see a lot of opportunities, for example, in the healthcare sector because you know as big laboratories are still looking for new growth drivers. And also in the consumer related sectors, we see a lot of things happening, like in the mid-year in the hotels.
Of course a lot of deals recently in the U.S., interest from Chinese players, so that’s why InterContinental Hotel (IHG), so I think is an opportunity. And may be also the utilities in the U.K. are a good sector, especially the water companies because you know they have a safe dividend yield, regular cash flows. So in a low interest rates environment, I think they are very, very attractive.
Wall: What are the benefits for the shareholders in either a sort of a takeover target company or indeed in that company that’s looking to make some acquisitions?
Lecoq: Yes, you know for a fund manager, there is a lot of value-added from that process, because if you are successful in your selection, you can benefit from the premium that is paid by an acquirer and it’s helping the alpha generation. But also if you are a shareholder of the acquirer, you can also benefit from the synergies that are coming from the merger.
Wall: So there is both share price appreciation and potential for long-term growth?
Lecoq: Yes, that’s what we think.
Wall: Philippe, thank you very much.
Lecoq: You’re welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
