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Singing the blues

by Suzanne Miller  |  Published December 7, 2012 at 4:14 PM
If there's anyone still hoping for an M&A revival in these waning weeks of 2012, it's probably time to relax and reach for a holiday drink. Even traditionally optimistic forecasters are starting to sound downbeat. In a new report last week, Ernst & Young LLP called for a "tempered" flow of deals in 2013. This rather somber outlook -- shared by plenty of others and in stark contrast to last year's much rosier predictions -- comes as deal activity is sloshing around 10-year lows.

There are of course always those who try to pump up expectations, even when the odds are stacked. Last week for example one financial industry accounting firm e-mailed around a forecast note with this assertion in the subject line: "Imminent Capital Gains Tax Increase Boosts Dealmaking in 2012." The fiscal cliff conundrum this refers to is, of course, one of the reasons so many deals have been packed away in ice. No matter what the outcome of Washington talks, few observers genuinely think a deal comeback is just around the corner.

That said, last week offered up developments typical of recent activity and suggestive of events to come -- whether it's more divestitures, shareholder activists stirring the pot, or companies consolidating around core strategies. In the middle of all that, Freeport-McMoRan Copper & Gold Inc., managed to spring one of this year's biggest deals yet.

Last week saw a batch of divestitures, the biggest from HSBC Holdings plc, which will sell its entire 15.6% stake for $9.4 billion in China's no. 2 insurer Ping An Insurance. The stake is being bought by Charoen Pokphand Group, which is controlled by the Thai billionaire Dhanin Chearavanont. The sale is part of the London-based bank's stated strategy to par assets and raise money to shore up its balance sheet to deal with rising capital costs.

In the telecom sector, the U.K.'s Cable & Wireless Communications plc will sell a range of island telecom units to Bahrain Telecommunications for $680 million. The businesses span the Maldives, the Channel Islands, the Isle of Man, the Seychelles, the South Atlantic and Diego Garcia. In the consumer sector, Britain's Tesco plc said it was putting its five-year-old Fresh & Easy venture under review for a full or partial sale or closure. The U.S. business has failed to gain traction in the competitive California market and has been burning through money that analysts have insisted should be spent elsewhere.

Others are revisiting their divestiture plans. London-based BP plc said last week it was essentially drawing a line under a period of big-ticket disposals as it prepares to increase its asset base by investing in existing projects, with a preference toward deepwater black-oil. This change in strategy comes after shareholders in its soon-to-be-sold Russian operation TNK-BP Holdings have dropped claims for $3.2 billion of damages. BP, which has been working through $65 billion of asset sales since 2010, said it will reduce its pace to some $2 billion to $3 billion a year.

Still others continue to streamline operations. Barclays plc said Thursday it had agreed to pool most of its African operations with affiliate Absa Group Ltd. in exchange for a larger stake in the South African lender. Absa will issue Barclays 18.3 billion rand ($2.1 billion) in shares, lifting Barclays' stake in Absa to 62.3%, from 55.5%.

As many companies consolidated and sold off assets, the biggest deal of the week by far, and one of the biggest yet this year, went against the general grain of consolidation and core strategic focus deals. Freeport-McMoRan Copper & Gold, said it will buy both Plains Exploration & Production Co. and McMoRan Exploration Co. for $20 billion to diversify its business into oil and gas resources, taking it back to its roots as an energy producer. At least one major shareholder slammed the move. On a conference call after the announcement, a joint chief investment officer of the natural resources team at BlackRock Inc., one of Freeport-McMoRan's largest shareholders, slammed management, saying "These types of deals [involving diversification] in the past haven't worked," he said. "Why is it going to be different this time?" Investors will be looking to see how the deal plays out in the weeks ahead.

In the healthcare sector, medical technology giant Baxter International splashed out the equivalent of $4 billion for privately held Gambro AB after years of doing buyouts in the middle market. The deal is the biggest in Baxter's history and the most significant medtech buyout of 2012.

In Canada, Montreal food distributor Saputo Inc. agreed to buy the U.S.-based Morningstar Foods LLC from dairy products distributor Dean Foods Co. for $1.45 billion in a deal that will expand its U.S. dairy presence. The target produces dairy products such as coffee creamers and ice cream mixes under the Friendship brand that is sold through retailers and restaurants.

Also last week, two hostile deals hit the headlines, a somewhat interesting development considering the number of unsolicited bids has been notably declining the past few years. In Canada, a consortium led by KingSett Capital launched a hostile C$4.4 billion ($4.4 billion) bid for Canada's Primaris Retail Real Estate Investment Trust in an attempt to break up the owner of indoor malls. The group, which also includes Ontario Pension Board, is offering C$26 per share in cash for Primaris, a premium of 12.8% to the REIT's C$23.04 Tuesday close on the Toronto Stock Exchange.

In another hostile-deal development over in the U.S., Archer Daniels Midland Co. sweetened an unsolicited offer for Australia's GrainCorp Ltd. to about $2.9 billion and said it had amassed a 19.9% stake in its target.

Speaking of uninvited "guests," sometimes even iconic shareholder activists like Carl Icahn get the message when they're not wanted. The sharp-tongued activist investor has waged more than a few battles to control companies in recent months. But last week, he announced that one of those fights appeared to be over. After failing to collect at least 25% of the Oshkosh Corp., Icahn said he would call off his tender offer of $32.50 a share, a level the company's stock has not hit since last year.

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Tags: Archer Daniels Midland Co. | Barclays plc | Baxter International | BP plc | Cable & Wireless Communications plc | capital gains tax | Ernst & Young LLP | Freeport-McMoRan Copper & Gold Inc. | HSBC Holdings plc | KingSett Capital | Oshkosh Corp. | Saputo Inc.

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