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Coronavirus strikes down global M&A as companies keep their distance

NEW YORK/LONDON (Reuters) – Global M&A activity tumbled to its lowest level in more than a decade in the second quarter, according to data provider Refinitiv, as companies gave up on expansion plans to focus on protecting their balance sheets and employees in the wake of the coronavirus outbreak.

Chief executives were reluctant to explore transformative deals without more certainty about the financial outlook of their companies, deal advisers said. Instead, they seized on favorable financing conditions to raise capital by selling stock and borrowing cheaply, driving equity and debt issuance to record highs.

“It was the quarter for capital market activity. Companies are making sure their balance sheets are strong and durable for what comes next,” said Michael Carr, global M&A co-head at Goldman Sachs Group Inc.

Global M&A totaled $485.3 billion in the second quarter, down 55% from a year ago and its lowest since the third quarter of 2009, according to Refinitiv. This was based on 8,272 deals, the lowest quarterly number since the third quarter of 2004.

Most of the decline was driven by the United States, where M&A plunged 85% from year-earlier levels to $94.3 billion as U.S. coronavirus cases surged. It marked the first time since the third quarter of 2009 that United States has not led the rankings.

Europe and Asia saw more modest declines of less than 10%, to $182 billion and $150 billion respectively.

Dealmakers said the economic uncertainty wrought by the pandemic had curtailed the ability of many companies to initiate and successfully complete M&A negotiations.

“The main challenge to get deals done is that buyers have to be prepared to pay a full price while the current business performance is still well below pre-COVID-19 level,” said JPMorgan Chase & Co global co-head of M&A Dirk Albersmeier.

The biggest deals of the quarter came from Europe, the Middle East and Africa.

Liberty Global and Telefonica agreed last month to merge their British businesses, Virgin Media and O2, in a $38 billion deal that will create a powerhouse in mobile and broadband.

National Commercial Bank, Saudi Arabia’s biggest lender, said last week it would buy smaller lender Samba Financial Group for as much as $15.6 billion.

“Many of the deals you see now are between companies that already knew each other or were talking before the pandemic,” said Andrew Bednar, co-president of investment bank Perella Weinberg Partners LP.

European food-ordering firm Just Eat Takeaway.com NV this month agreed to buy U.S. peer Grubhub Inc in a $7.3 billion all-stock deal – one of only a few cross-border deals inked in the quarter.

“Doing cross-border deals requires a level of confidence and optimism that has taken a knock this year, especially when it comes to transactions across continents,” said Nick O’Donnell, a partner at law firm Baker & McKenzie LLP.

Even as some deals were announced, others that had been signed but were not yet completed, unraveled.

Simon Property Group Inc, the biggest U.S. mall operator, said this month it was ending its $3.6 billion deal to buy Taubman Centers Inc, citing the beating the retail sector has taken during the coronavirus outbreak.

Last month, private equity firm Sycamore Partners ended its $525 million deal to acquire lingerie brand Victoria’s Secret from L Brands Inc, while Japanese tech conglomerate SoftBank Group Corp dropped its agreement to fund a $3 billion tender offer for additional shares in co-working company WeWork.

“It does require more courage to do a deal in this environment. You need a CEO with a lot of credibility with investors, and they need to be doing something very strategic,” said JPMorgan global M&A co-head Anu Aiyengar.

GRADUAL RETURN OF APPETITE

Some dealmakers say they are seeing a gradual pick-up in M&A activity as companies adapt to a post-coronavirus reality.

“Right now we are seeing significant pick-up in client dialogue, just in the past three to four weeks,” said Goldman Sachs global M&A co-head Dusty Philip.

“Many of our clients are starting to think big and outside of the box, asking themselves what has changed and how do I adjust my strategic priorities to reflect the pandemic we have all been living through.”

Companies and their advisers are also getting accustomed to negotiating and carrying out due diligence digitally.

“Nearly all of the management presentations and expert sessions – from a diligence standpoint – are being done by video conference. That is true for most board meetings. We are also seeing companies employ drones and (camera crews) filming in place of site visits for due diligence,” said Bank of America head of global M&A Patrick Ramsey.

While many companies are struggling to regain their footing, some have taken advantage of advances in technological innovation and are poised to emerge from the downturn stronger and with an appetite to pursue acquisitions, dealmakers said.

“The companies that survive the crisis will largely be those with balance sheet and cash flow strength which position them to be industry consolidators,” said Cary Kochman, global co-head of M&A at Citigroup Inc.

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Italy bank showdown looms in test for European consolidation

MILAN/LONDON (Reuters) – As many bankers fled Italy’s financial capital for second homes in the mountains or lakes at the start of a coronavirus lockdown in March, Victor Massiah rushed instead to rent a house within walking distance of UBI Banca’s Milan offices.

And that is where the 61-year-old CEO has since spent most of his waking hours, battling not only to pull the bank through a pandemic that devastated its core areas in Italy’s industrial north, but also to see off a takeover he opposes.

Intesa Sanpaolo (ISP.MI) CEO Carlo Messina sprang the bid onUBI (UBI.MI) days before the coronavirus outbreak, seeking a deal he hopes will hasten a wave of European consolidation that the European Central Bank has been calling for.

And what would be the biggest bank takeover in Europe for more than a decade is now approaching a finale, with Intesa’s offer to UBI shareholders set to run from July 6 to July 28.

The bid needs the approval of at least 50% of UBI investors plus one share to be valid, a control threshold which the ECB cleared earlier this month.

But while markets have priced in the deal going ahead, Massiah is firmly against UBI being a takeover target and he is banking on small investors, whose choice will be critical.

Instead he wants UBI, which was itself formed by a merger of local banks in 2007, to instigate any deal-making.

Following aborted efforts in recent years to negotiate deals involving rivals Banco BPM (BAMI.MI) and Monte dei Paschi (BMPS.MI), only weeks before Intesa’s incursion, Massiah had tried but failed to clinch a merger with smaller peer BPER Banca (EMII.MI), a person involved in the talks said.

Since Messina informed him of the offer with a late-night call in mid-February, Massiah has been working with Credit Suisse and Goldman Sachs on an alternative plan, with the backing of local shareholders, many of which are long-standing small business customers of UBI and say the bid undervalues their bank.

UBI investor Domenico Bosatelli, owner of Bergamo-basedelectric components maker Gewiss, has said that while the offer makes sense for Intesa and strengthens its competitiveness, it does not for UBI, as its “mission would disappear”.

While institutional investors holding 40-50% of UBI sharesare largely expected to back the deal, attracted by the prospect of bigger dividends, it is the bank’s core investors that willdecide whether Intesa secures more than its minimum goal.

Sources close to UBI say its retail customers, who accountfor 15-20% of its share capital, may decide to hold ontostock which has been handed down over generations.

This is despite many analysts saying it would make littlesense for UBI investors to shun Intesa’s bid, which was at a 24%premium to UBI’s share price on the day it was announced.

Although the premium has since evaporated, analystssay UBI shares would likely tank if the bid fell through.

Local dynasties like the Bombassei family, owner ofBergamo-based brake maker Brembo, or the Beretta family ofgunmakers belong, like Bosatelli, to the CAR shareholder pactwhich holds 19% of UBI and calls Intesa’s bid “unacceptable”.

A smaller group with 1.6% of UBI shares also opposes theoffer, while a bigger one holding 7.7% has not expressed a view.

CHARM OFFENSIVE

Prevented by takeover rules from mounting an active defence, UBI has sought to challenge Intesa in court and with regulators, saying it is solely interested in taking out a competitor.

Despite its ties with a chronically stagnant economy,Italy’s second largest bank boasts one of the highest payouts inEurope thanks to lean costs, a focus on fees earned throughwealth management and insurance and deals such as therecent sale of its retailers’ payments business.

To defuse UBI’s legal threat, Intesa has waived a clausethat would have given it a right to walk away due to thecoronavirus crisis, making it harder to back out.

Intesa has also responded with a charm offensive that hasseen executives interviewed by tiny regional papers in theshareholder heartlands and meet with local authorities.

It has pledged to provide an extra 10 billion euros a year in credit to UBI’s core areas and keep lending decisions largely local, while rushing to donate to local institutionsin its target’s stricken Bergamo and Brescia provinces.

“We’ve publicly committed to lending and social initiatives on a scale that UBI simply can’t match. Local investors will value both the economic and community benefits of our offer,” said a spokesman for Intesa, which has also enlisted the services of Mediobanca as its leading adviser.

The Milanese power broker has underwritten a cash call for BPER Banca in a parallel deal which Intesa struck for antitrust purposes. And as Generali’s (GASI.MI) main investor, Mediobanca has also backed a capital injection by the insurer at rival Cattolica (CASS.MI).

This may assist Intesa’s bid given Cattolica and one ofits leading shareholders are members of the CAR investor group, two people familiar with the matter said. Cattolica and its Fondazione Banca del Monte di Lombardia declined to comment.

Italy’s market watchdog has cleared the bid prospectus pending a pivotal antitrust ruling due only in late July.

Intesa has vowed to hit profit goals even if a low take-up stops it from merging with UBI, curbing cost cuts.

Yet such an ending may not provide the best remedy for Italy’s fragmented banking sector, said Stefano Caselli, banking and finance professor at Milan’s Bocconi University.

“An outcome that prevented Intesa from incorporating UBIwould weaken the rationale for the deal and lessen itsadvantages for both the banks involved and the system as awhole,” Caselli said.

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Wirecard North America seeks buyer, distances itself from German company

(Reuters) – Wirecard North America Inc, a unit of German payments company Wirecard AG (WDIG.DE), on Monday said it has put itself up for sale, days after the troubled parent firm filed for insolvency. The U.S.-based unit, which was bought by Wirecard in 2016, said an investment bank is coordinating the sale process. The unit was formerly known as Citi Prepaid Card Services.

It did not provide further details but said Wirecard North America is a separate legal and business entity of Wirecard and is “substantially autonomous” from the German company, adding that it remains “self-sustaining”.

Last week, Wirecard filed for insolvency owing creditors almost $4 billion after disclosing a 1.9 billion euro ($2.14 billion) hole in its accounts that its auditor EY said was the result of a sophisticated global fraud.

The company said on Saturday it would proceed with business activities after the insolvency filing and an administrator was appointed on Monday.

($1=0.8895 euros)

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Exclusive: Italy's Generali in bid to acquire U.S. asset manager Brightsphere – sources

NEW YORK/LONDON/MILAN (Reuters) – Assicuracioni Generali SpA (GASI.MI) has approached Brightsphere Investment Group Inc (BSIG.N) about a possible acquisition of the U.S. asset management firm, people familiar with the matter said on Friday.

A deal would expand the U.S. footprint of Italy’s top insurer while enabling Brightsphere’s largest shareholder, hedge fund Paulson & Co, to cash out.

There is no certainty that Generali will be able to meet Paulson’s valuation expectations for Brightsphere, the sources said. However, if the companies can negotiate a deal, the acquisition would not face any significant antitrust hurdles, one of the sources added.

The sources requested anonymity because the matter is confidential. Generali, Brightsphere and Paulson did not immediately respond to requests for comment.

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