TMT, once again, was the most active sector for M&A in 2016, generating more deal volume and value than any other industry. There were 1,114 TMT deals in the US in 2016 worth US$363 billion. Value was boosted by a series of megadeals in the sector, including AT&T’s US$105 billion bid for Time Warner, Microsoft’s US$25.5 billion acquisition of LinkedIn and CenturyLink’s US$34.5 billion purchase of Level 3 Communications. Activity in the industry has been underpinned by a variety of drivers, including convergence between mobile telephony, broadband and content; appetite to acquire spectrum in order to service demand for wireless connectivity; and buying in social media technology. Industrials and chemicals recorded the second-highest deal volume, with 832 deals worth US$207.12 billion, including Bayer’s US$63.4 billion move for Monsanto. Corporates in the sector have been pursuing M&A in order to consolidate an industry characterized by thin margins and low growth. Indeed, figures from the World Bank suggest that the percentage growth of value-added agriculture fell to under 3 percent in 2015 compared with 4.8 percent two years previously. Although it didn’t match volumes in industrials and chemicals, the energy, mining and utilities industry posted the second-highest deal value by sector, with 451 deals worth US$338.6 billion. The energy infrastructure sector was particularly active. Indeed, Sunoco Logistics Partners buying Energy Transfer Partners for US$51.4 billion, Canada’s Enbridge acquiring Spectra Energy for US$41.4 billion and NextEra Energy announcing a US$18.4 billion deal for Energy Future Holdings accounted for three of the 10 largest deals in the US in 2016.
Low commodity prices and falling margins have driven consolidation, spin-offs of non-core assets and businesses, as well as opportunities in distressed situations. While oil prices appear to be on the road to recovery for now, these pressures have reshaped the industry as we enter 2017. White & Case partner Greg Pryor notes that restructuring and consolidation has continued to be a primary driver of M&A in the oil and gas sector. “If you look back to 2012 and 2013, the price of oil has halved, upstream oil and gas companies have been in retrenchment mode, as have oilfield services businesses. Companies have had to cut costs and there hasn’t been much investment as a result,” Pryor says. “When there have been large deals, they have not been driven by growth, but more by defensive necessity.” GE’s US$31.7 billion merger of its oil and gas business with Baker Hughes also ranked among the 10 biggest US deals in 2016. The deal, seen by some market commentators as a transaction that will create the first energy services company operating across the supply chain in upstream exploration and production, mainstream transportation and downstream refining, could point the way to what other deals in the sector might look like in the future.
Although pharmaceuticals, medical and biotechnology dealmaking was down on 2015, with volume for 2016 coming in at 533 deals and value at US$176.77 billion, the sector still delivered some significant deals. These included Abbott Laboratories announcing a US$29.9 billion transaction to buy cardiovascular medical devices group St. Jude Medical and Irish pharma group Shire paying US$35.2 billion for US counterpart Baxalta.
Tax inversions, a driver of pharma M&A interest in 2015, may be less appealing after new rules restricting their use were drafted, but pharmaceutical companies still need to consider M&A seriously in order to replenish drug pipelines and buy new drugs to fill revenue gaps left by products about to go off-patent. For instance, AbbVie’s acquisition of drug startup StemCentRx for US$5.8 billion in April was done to expand AbbVie’s pipeline of oncology drugs.
“In pharma there’s always a sense that companies need to be bigger to support R&D and fund the discovery of the next big blockbuster drug,” says White & Case partner Mort Pierce. “It makes sense to combine, so I think you’ll still see deals. Even before tax inversions became a driver of pharma deals there were a number of large deals in the pharma space. There is always that strategic imperative.”
Sector watch: Industries seek M&A to fend off pressure
TMT continues to drive more deals than any other sector, but industrials and chemicals and energy, mining and utilities also performed strongly through 2016
Infrastructure opportunities Dealmakers in the infrastructure sector enjoyed a bumper year of M&A in 2016, with the energy infrastructure subsector especially busy.
Canadian pipeline business Enbridge’s aforementioned acquisition of Spectra Energy Group for US$41.4 billion and Great Plains Energy’s US$12.1 billion takeover of Westar Energy were both among the 10 largest transactions in the US in 2016. Other notable infrastructure deals included Fortis’ US$11.3 billion deal for electricity transmission company ITC, Canada’s Algonquin Power & Utilities Corp’s US$2.4 billion purchase of Empire District Electric Company and Legal & General’s public-private partnership with the University of California to expand its Merced campus. The latter deal is Legal & General’s first infrastructure deal in the US and the first public-private partnership (PPP) in the education sector in the US.
The recovery of real estate M&A
Despite flat construction levels and tight lending, M&A activity in the real estate and hospitality sector has held steady during the last year.
Landmark projects, such as the multi-use Hudson Yards development in New York, and continued interest in US real estate from investors abroad, sustained activity levels and offset low growth expectations for real estate investments. Analysis by investment bank Lazard shows that although almost two-thirds of real estate companies reduced 2017 earnings guidance, net operating income (NOI) growth in core real estate sectors such as apartments and hotels is still outpacing inflation. Lazard is forecasting 3.6 percent growth for the sector in 2017 and 3.2 percent in 2018.
White & Case partner Steven Lutt says foreign investment was one of the key drivers of the steady performance of the real estate M&A market. Indeed, some of the biggest real estate US deals in 2016 included China’s Anbang Insurance Group acquiring Strategic Hotels & Resorts for US$5.5 billion and Brookfield Property Partners sale of a 49 percent stake in 1 New York Plaza to China Investment Corp.
Willingness from investors to take minority stakes in assets or enter into joint ventures has also helped to keep deals flowing. This has helped to bring sellers, especially those reluctant to sell out of landmark properties altogether, to the table.
Looking forward to 2017, Lutt expects more of the same. Rising interest rates may squeeze real estate returns, which could widen price expectations between buyers and sellers. There are also signs that some markets may be softening. New President Donald Trump, however, should be supportive of the industry, especially if he follows through on promises to reduce banking regulation. This could help to free up financing for smaller real estate projects, which have found it difficult to source bank funding because of regulatory restrictions.
“Deals will still get done. There are buyers out there and there is still inventory of good projects to invest in,” Lutt says.
Jason Webber, a partner at White & Case, believes that the sector is in for an even busier year in 2017.
“It is a very good time to be an infrastructure dealmaker in the US. Investment in midstream oil and gas and power infrastructure is really going to take off and the outlook for investment in public infrastructure, like airports and toll roads, is also very positive,” he says.
Webber says it is important to make a distinction between energy infrastructure and public infrastructure, as they have different drivers and are financed in different ways. Both infrastructure groupings, however, stand to benefit from policies outlined by new President Donald Trump.
With regards to energy infrastructure, Webber says the new administration is noticeably “pro oil and gas, pro coal and pro energy, and anti-regulation of those markets”, which makes it much more likely that projects such as Keystone XL and the Dakota Access Pipeline will be built.
“I think that there will be a significant uptick in oil and gas infrastructure investment, and it will dovetail with the stabilization of the price of oil. You are going to see a lot of activity involving these kinds of assets,” Webber says.
Public infrastructure, meanwhile, should receive a boost from Trump’s plans to secure US$1 trillion of new investment in infrastructure and support PPPs through tax breaks.
“As a businessman, and as someone who is involved in real estate and construction, I think President Trump sees PPPs and similar structures as a compelling way to follow through on his promise to increase investment in infrastructure,” Webber says. “I think that there are reasons for being very, very optimistic that Trump will be able to invigorate the PPP market in the US and to really take it to the next level.”
In addition to a supportive administration, infrastructure M&A will also be driven by the substantial sums raised by infrastructure funds. In a low interest rate environment, investors have been desperate for yield, which has seen investment in infrastructure soar. According to Preqin, investors committed US$57.5 billion to infrastructure funds in 2016, which pushed up the amount of dry powder available for infrastructure deals to US$140 billion. “Interest rates have been so low, especially in Europe where a lot of the capital comes from. As a result, institutional investors are looking at infrastructure as part of their ‘real assets pool’ very favorably and putting a lot of capital to work,” Webber says. “What that means is a large amount of M&A activity in infrastructure. Everybody needs to deploy, because you have to get those funds to work and you have a limited time period to invest.” With a new administration in place and large pools of capital seeking deals, the outlook for infrastructure transactions is very bright indeed.
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