Telecom Italia SpA (ADR) (TI), America Movil SAB de CV (ADR) (AMX): European M&A Targets: Top Picks

Published on August 5, 2013 at 1:52 pm by The Motley Fool in News

Merger & Acquisition (M&A) activity has been consistently improving in the US.

On the other hand, in Europe (including the UK), deal-making activity has been extremely sluggish. That said, right now, the outlook seems to be improving for the best as economic confidence ameliorates in the old continent.

America Movil SAB de CV (ADR) (NYSE:AMX)

As a matter of fact, deal activity is picking up alongside significant deals such as the ones involving the likes of KPN and Invensys. During the first half of this year European deal activity amounted to $637 billion, up by 18% year-over-year. Let’s see three companies that have a reasonable probability of being acquired.

European luxury is still consolidating

After LVMH Moet Hennessy Louis Vuitton acquired Italian cashmere champion Loro Piana for an Enterprise Value (EV) of $2.7 billion during July this year, its clear that consolidation in the luxury business is more alive than ever. I think a very attractive target for any well capitalized luxury group is the high-growth British luxury group Burberry. The company should be one of

the winning luxury brands in growing markets such as China. Meanwhile, the group continues to perform exceedingly well in developed markets such as the US or Europe.

I would specially stress the following points regarding Burberry’s story as an M&A target:

The company is improving retail execution (rising conversion rates) and maximizing on-line opportunities
Burberry is accelerating growth through its own initiatives such as festive programs and up-grading stores in Asia, where the brand is extremely strong among younger consumers,
A strong balance sheet with no debt and strong free cash flow conversion,
An attractive valuation at 2014 17 times P/E.

I think Burberry remains one of the mos attractive large independent luxury groups in Europe. My bet is that it will not continue in its independent state for much longer.

Telecom Italia SpA (ADR) (NYSE:TI) consolidation must go on

With Brussels pushing for increased consolidation in the troubled European telecom sector, I think there is a long way to go after Telefonica’s recent acquisition of E-Plus, KPN’s German subsidiary. I expect two deals to be completed rather sooner than later.

Telecom deal one

I think Telecom Italia SpA (ADR) (NYSE:TI) will finally be acquired either by Telefonica or an outside investor. Telecom Italia SpA (ADR) (NYSE:TI)’s main shareholder is Telco S.p.A. which is owned by Intesa San Paolo (10.6%), Mediobanca (10.6%), Sintonia (8.4%), the Generali Group (28.1%) and Telefónica (42.3%).

Two facts make me think that a deal might be coming:

First, Mediobanca, Intensa San Paolo and Generali could use the cash proceeds coming from a sale of Telecom Italia SpA (ADR) (NYSE:TI) to strengthen their own businesses. Mediobanca has indicated that it intends to sell its stake. For Telefonica there are two options left: Either sell its entire stake or buy-out its partners. Telefonica is rationalizing its geographical footprint and it does not make sense for the company to own a minority stake in Italy’s main telecom operator.

Since Telefonica’s management has explained on its last conference call that it would consider to de-lever well beyond the current $62 billion target, I think Telefonica might also be a seller.

Second, there is valuation. Telecom Italia SpA (ADR) (NYSE:TI) is one of the cheapest telecom companies in the world. The company produces a 20% free cash flow yield (well above the sector’s average at 10%) and trades at 2014 5.4 times Price/Earnings (P/E) multiple. The company does have a $35 billion dollar debt but it looks manageable at this point.

Telecom deal two

I believe America Movil SAB de CV (ADR) (NYSE:AMX) might significantly increase its stake in KPN. America Movil SAB de CV (ADR) (NYSE:AMX) is currently losing money on its KPN investment but I consider that the Latin American telecom conglomerate controlled by Carlos Slim is a long term shareholder. Besides, I am sure America Movil SAB de CV (ADR) (NYSE:AMX) has firmly decided to get into the European telecom business. Given that the former Mexican telecom monopoly now controls 29% of KPN, any further investment, under Dutch takeover rules, would trigger an offer for the whole company.

According to JPMorgan analysts, buying 100% of KPN at a 25% premium to current market prices would take America Movil SAB de CV (ADR) (NYSE:AMX)’s leverage from 1.7 to 2.25 times Earninngs Before Interest, Taxes Depreciation and Amoritzation (EBITDA). This might trigger an unwanted rating cut to America Movil SAB de CV (ADR) (NYSE:AMX)’s credit rating. That said, the company could protect its rating through lower buybacks or dividends. I don’t think Carlos Slim got into Netherlands’s main cellphone operator (+45% market share) to be just another silent shareholder.

Foolish conclusion

Europe is slowly awakening. Investor confidence is improving, and industrial production is growing, so deals should start to flow more easily. There are many companies with strong balance sheets that might see the opportunity to get into profitable deals before everyone else wants them. We should all keep our eyes wide open.

The article European M&A Targets: Top Picks originally appeared on Fool.com and is written by Federico Zaldua.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

NYSE:TI NYSE:AMX Telecom Italia S P A New (TI)America Movil S A B De C V (AMX)

Telecom Italia SpA (ADR) (TI), America Movil SAB de CV (ADR) (AMX): European M&A Targets: Top Picks

Published on August 5, 2013 at 1:52 pm by The Motley Fool in News

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