European Companies Stockpile $475 Billion as Outlook Dims
European companies are hoarding more than three times the cash they held a decade ago as the region heads for a second year of recession, putting them at risk of losing out to U.S. rivals boosting acquisitions and investment.
Cash holdings at the 265 European companies in the Stoxx Europe 600 Index, excluding banks and insurers, to have reported 2012 results totalled $475 billion at the end of last year, according to data compiled by Bloomberg. That compares with $136 billion in 2002 and is 14 percent more than in 2011. Siemens AG (SIE), Vodafone Group Plc (VOD) and Total SA (FP) are among nine companies that each held more than $10 billion.
“Many European companies are taking a conservative view with respect to their capital structure and keeping meaningful cash positions,” said Francois-Xavier de Mallmann, head of European investment banking services at Goldman Sachs Group Inc. in London. “They find it challenging to predict the combined impact of higher unemployment, higher taxes and lower public spending on consumer demand and on their top line.”
The euro area will shrink for two straight years for the first time since the common currency was introduced, the European Commission predicted on Feb. 22, scrapping an earlier growth forecast. Western European companies have announced $50 billion of acquisitions so far this year, almost half the total of the year-ago period, while purchases by U.S. companies almost doubled to $184 billion, Bloomberg data show.
Daimler AG (DAI), whose cash and cash equivalents rose by 15 percent last year to 11 billion euros ($15 billion) at the end of December, encapsulated the mood in European boardrooms.
While the company will roll out 13 new models with no predecessor in the next eight years, the maker of Mercedes-Benz vehicles doesn’t plan any “major” acquisitions, according to Chief Financial Officer Bodo Uebber.
“The liquidity is a sedative,” Uebber said Feb. 7. “We want to be prepared for uncertain times.”
To preserve cash, European companies are also limiting payouts to shareholders. The dividend yield of companies in the Stoxx Europe 600, excluding financials, will probably stagnate at 3.45 percent this year, according to analyst estimates compiled by Bloomberg.
Deutsche Lufthansa AG (LHA) on Feb. 19 said it plans to suspend its dividend for the first time since 2010 to save cash as the German airline rejuvenates the fleet and pushes ahead with its most ambitious cost-savings program to date. Nokia Oyj last month said it will omit a dividend for the first time in at least 143 years.
Other firms that cancelled or reduced dividends in recent months include phone companies Telecom Italia SpA, Royal KPN NV and Telefonica SA (TEF) as well as car companies PSA Peugeot Citroen and Faurecia.
“Companies are wary,” said Nils Ernst, a Frankfurt-based fund manager at DWS Investments, which oversees $335 billion in assets. “If you raise the dividend you have to be certain that in the next five to 10 years you don’t have to cut it.”
Switzerland’s Nestle SA (NESN), the world’s largest food company, plans to maintain capital expenditure in 2013 at the same level as in 2012, Chief Financial Officer Wan Ling Martello said this month. The operating cash flow of the maker of Moevenpick ice cream, which last year agreed to buy Pfizer Inc.’s infant-nutrition business for $11.9 billion to expand in markets such as China, surged 55 percent in 2012 to 15.8 billion Swiss francs ($17 billion).
With many of Europe’s biggest companies reluctant to spend their cash on deals this year, U.S. companies may choose to pounce instead. John Malone’s Liberty Global Inc. (LBTYA), based in Englewood, Colorado, took advantage of low financing costs and this month agreed to buy U.K. cable-TV provider Virgin Media Inc. for $16 billion.
“There are a lot of acquisition targets out there,” said Matthias Born, a Frankfurt-based fund manager at Allianz Global Investors in Frankfurt, which manages about 300 billion euros. “Consumer, chemicals and parts of industrials are areas where there should be attractive targets in Europe.”
Deutsche Bank AG analysts Fadi Chamsy and Sascha Levitt in a Feb. 14 note identified Dutch cable company Ziggo NV (ZIGGO), British airport-security scanner company Smiths Group Plc, German fragrance maker Symrise AG, French car-parts manufacturer Faurecia, Belgian retailer Delhaize Group SA, Switzerland’s Nobel Biocare Holding AG (NOBN) and U.K. fashion brand Burberry Group Plc (BRBY) as potential acquisition targets.
The economic outlook, though, may make them wary. Carlos Slim’s investments in Europe highlight the risks for foreign companies seizing on cheap prey in the region.
America Movil (AMXL) SAB, the Mexico City-based mobile-phone operator backed by billionaire Slim, last year built up a 28 percent stake in KPN. Since then, the investment has lost more than half its value and KPN is selling stock to raise cash.
While Europe’s biggest companies are reluctant to buy local rivals, some of them are spending money on acquisitions to tap growth in emerging markets.
Unilever NV (UNA), the world’s second-largest consumer-goods maker, will look for acquisitions between 1 billion euros and 2 billion euros, Chief Financial Officer Jean-Marc Huet said last month. Recent deals of the maker of Dove soap include the 2011 pickup of Russian skincare maker OAO Concern Kalina, and the $3.7 billion purchase of U.S. haircare company Alberto Culver the previous year.
While Unilever’s free cash flow rose to 4.33 billion euros last year, the most since 1999, the company is still cautious to spend big. Unilever is looking for “bolt-on” acquisitions to expand existing operations and a larger purchase would only be “fine as long as it’s not distracting,” Huet said.
The build-up of cash also makes European companies more attractive for leveraged buy-outs, according to DWS’s Ernst.
“In terms of targeting companies which are cash-generating and have big cash piles on the balance sheet: I am quite confident that over the next twelve months we will see more deals in that direction,” he said.
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