Dealmakers Get Brexit Blues in ‘Biggest Demerger in History’

  • ‘It is likely we will see a significant slowdown in M&A.’
  • Takeovers, share sales in Europe at lowest level since 2012

European dealmakers hoping today would open the floodgates for mergers and share sales are bracing for a longer drought.

Britain’s decision to leave the European Union “will be the biggest demerger in history,” Richard Cranfield, a corporate partner at Allen & Overy LLP, said. “A healthy M&A market is strongly driven by confidence. Given the period of uncertainty we’ve just entered following the leave vote, it is likely we will see a significant slowdown in M&A.”

Takeovers of European companies declined 27 percent to $251 billion through the Thursday vote, according to data compiled by Bloomberg. The drop-off was echoed by a decline in fundraising, with the value of share sales and initial public offerings in Europe less than half what they were this time last year. Both mergers and share sales are at the lowest level since 2012, according to the data.

The first signs are already appearing. Telefonica SA is weighing a delay of IPOs in its infrastructure unit Telxius, as well as U.K. mobile operator O2 after the vote, people familiar with the matter said. Telxius had planned to file for a listing to raise as much as 1.5 billion euros ($1.7 billion) as early as next week while O2 had considered an IPO as soon as the fourth quarter, people said. A representative for Telefonica declined to comment.

Steinhoff International Holdings NV said Friday it’s reconsidering an approach to U.K. discount retailer Poundland Group Plc, which had rejected its takeover proposal, following the referendum results.

The U.K. voted to quit the EU Thursday after more than four decades, sending the pound to its lowest level in more than 30 years and European shares toward the biggest drop since 2008. Economists’ and world leaders’ warnings of dire economic and political consequences lost out to arguments that membership in the bloc prevented the country from fully controlling its borders, laws and finances.

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Delayed IPOs

Companies had been holding off on share sales and IPOs in the weeks leading up to the vote in case the U.K. opted to leave. Now that it has, billions of dollars in transactions are in limbo.

Telefonica was considering an IPO or sale of its business after a 10.3 billion-pound ($14.1 billion) deal to combine O2 with CK Hutchison Holdings Ltd.’s Three fell apart. Britain leaving the EU could reduce O2’s value by 20 percent, said Javier Borrachero, head of telecommunications services at Kepler Cheuvreux, in a note Friday.

U.K. discount fitness center Pure Gym Ltd. had also planned to file for a listing as early as next week, in the event of a remain vote, that would have valued the company at about 700 million pounds including debt, according to people familiar with the matter. A representative for Pure Gym declined to comment.

As much as $25 billion in potential share sales for European companies may also be on ice, according to a survey of advisers, who asked not to be named because the numbers aren’t public. That figure includes shareholders who have held off selling in the weeks leading up to the vote and those whose lock-up periods expire through September, the people said.

European Contagion

Companies in the U.K. aren’t the only ones that will feel the impact of the vote.

In a survey of M&A professionals earlier this month, Intralinks Holdings Inc. said a Brexit would lead to “chaos” in the industry. About two-thirds of M&A professionals expected the value of European assets to deteriorate, the survey showed. That could have wider implications on the European economy, particularly in countries such as Germany, which rely heavily on cross-border deals from China, the firm said.

Banks were some of the worst losers in the stock market rout Friday. Deutsche Bank AG fell as much as 18 percent in Frankfurt trading. Zurich-based Credit Suisse Group AG declined as much as 15 percent and London-based Barclays Plc plummeted as much as 30 percent, its biggest intraday decline since 2009.

“We see the uncertainty created by the outcome today weighing on capital markets activities,” hurting earnings at U.K. and European banks, JPMorgan Chase & Co. analyst Kian Abouhossein, said in a note to clients. The uncertainty could lead to lower issuance activity in the primary markets, widening of credit spreads and equity market volatility, he wrote.

Carlyle Group LP-backed China Logistics Property Holdings Co. has delayed its $400 million IPO in Hong Kong after the U.K. vote caused volatility in markets around the world, people with knowledge of the matter said.

Cheaper Assets

Still, the vote hasn’t stopped all M&A.

Germany’s Henkel AG said it agreed to buy Wilton, Connecticut-based laundry-detergent maker Sun Products Corp. for $3.6 billion in the hours leading up to the Brexit result. More European companies may take advantage of cheap financing and high cash stockpiles to make acquisitions in the U.S. and other countries less impacted by the vote.

Deutsche Boerse AG and London Stock Exchange Group Plc, the European exchanges whose planned combination is among the biggest pending deals right now, reiterated Friday that they will proceed with their tie up.

A sustained drop in the value of the pound could make some U.K. companies more attractive, cheaper targets, said Roger Barron, a London-based partner at law firm Linklaters LLP, who advises on mergers and acquisitions.

“In a funny way, we have some sort of certainty now even though there are clearly further questions to be answered,” he said. “We are aware of a few processes that are getting ready to launch in July, and while some of them may pause just to assess immediate market reaction, I think they are still likely to go forward.”

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