The Urge To Merge And Beat The Clock
Rarely have London's investment bankers been so busy. On Feb. 15, Granada Group--fresh from its $5.7 billion takeover of hotel-chain Forte--upped its stake in Yorkshire-Tyne Tees Television to just under 25%, in a step toward a possible takeover. Next day, drug distributor Unichem raised its offer to buy Lloyd's Chemists to $950 million, countering an $899 million bid from Germany's GEHE. And Rentokil Group, an environmental-services outfit, began a $2.9 billion hostile takeover for rival BET. Soon after, National Westminster Bank snapped up fund manager Gartmore for $726 million.
The frenetic dealmaking comes right after a record-breaking 1995, when British companies participated in almost 1,700 acquisitions worth $104 billion. "Don't assume it will go on forever," warns John Dear, head of corporate finance at Lazard Brothers & Co. in London. True, but several factors, from politics to deregulation, will keep the merger movement hot for much of the year. And when it's over, British industries from media to utilities will look dramatically different.
One reason the merger rush will continue is the good chance of an early election and a Labor victory. Labor's Prime Minister-in-waiting, Tony Blair, has proposed a change in the public-interest criterion for takeovers. To block a deal now, target companies must show that the takeover actively hurts the public interest--a tough charge to prove. Blair wants the burden shifted so that the acquiring company must prove the public benefits of the takeover. This shift could spell the end of hostile bids in Britain.
Hence, many companies want to snap up rivals fast, especially in politically sensitive industries. After the government released its controlling shares in utilities last March, opening the way for takeovers, a frenzy ensued. Already, 8 of Britain's 12 regional electricity companies have been involved in takeover bids worth a combined $22 billion.
GREEN LIGHTS. Other government moves are shaking up the media. A new broadcasting bill, expected to be enacted midyear, will lift some restraints on cross ownership and the number of broadcast licenses any one company can hold. Some companies are already finding ways to do deals. Granada Group PLC, with interests in hotels and broadcasting, paid $80 million for a higher stake in Yorkshire Television. MAI recently agreed to a $4.6 billion merger with United News & Media. The Labor Party is not opposed to such concentration, but it wants to create a superagency with a lot of clout to root out anticompetitive practices.
Economic fundamentals are also fueling the boom. Kevin Gardiner, an economist at Morgan Stanley & Co. in London, predicts this will be Britain's most profitable business cycle since the 1960s. Balance sheets are brimming with cash, banks are eager to lend, and interest rates remain low. In industries such as pharmaceuticals that must cut costs, it can make sense to buy companies with hot new products rather than sink more funds into research that could take years to bear fruit. That explains Glaxo Holdings PLC's $14 billion takeover of Wellcome PLC last year. Zeneca Group PLC, with its rich pipeline of cancer and other drugs, could go into play next.
While British companies go their merry way, the threat of European intervention increases. The European Commission wants to expand its power to review bids involving large corporations. "For the big companies, that's more of a worry than the possibility of a Labor government," says Christiian Marriott, deputy editor of Acquisitions Monthly. It's just another reason for British chief executives to keep their acquisition specialists busy.