market report issue 7 dec 5th

UYIFS Market Report December 2012

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TECHNOLOGY

Ravi Sharma

Overview

The technology sector has had an important year in 2012 with new products, software and hardware being released by all the major tech firms (Apple – Ipad 3 / Iphone 5, Microsoft – Windows 8, Google – Nexus Tablets). We have also seen the largest technology IPO in history this year (Facebook). FT (Apple (Red) vs. Amazon (Light Blue) vs. Google (Orange) vs. Microsoft (Dark Blue))

This is the only sector which grows at an enormous rate; there are numerous new entrants into the market with revolutionary ideas and gadgets. However growth in the technology sector globally does not meet the levels of growth in science and technology. This means that there are still product ideas which are not coming into the market, although there is a lag involved in the process, this can also be attributed to a magnitude of issues, funding and regulation are large factors but also perhaps a lack of entrepreneurship to promote


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the stages of technology from science to product ideas. One to watch The new method of funding which has made a huge success in the US through 2009 onwards has now moved to the UK. Kickstarters is a funding platform where anyone can get funding for their project ideas. This funding doesn’t come from Kickstarters themselves but people who want the venture to come alive, this may be friends or family, or random people wanting to back innovative ideas and watch them flourish. This is a great new platform which means that people do not have to rely on Venture Capitalists or taking out large loans to support a project. Anyone can start building their idea or business, present the business plan and the ‘people’ can decide whether it’s worth backing or not. Hopefully we

should see the success in the UK like Kickstarters had in the US. Some of the noteworthy projects included: Pebble: E-Paper Watch raised $10 Million; An Affordable Professional 3-D Printer raised nearly $3 Million; Oculus Rift: Step Into The Game (Immersive virtual reality device) raised $2.5 Million. We will see more innovative, crazy and ambitious ideas in years to come, and people can make it all happen through Kickstarters…This is one to watch. Amazon – Are you published? As well as changing the way we shop Amazon have now changed the way people can get published. Publishing books usually is a long drawn out process which can take months from large publishing companies, but now Amazon can publish a book within days, make a physical copy and


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launch it into market and this service is entirely free. The margins which authors can obtain by publishing through Amazon is astonishing when compared to the normal methods, royalties can increase tenfold. So I can see a rush of new ‘writers’ entering the industry, no doubt some will be great and other worse, however the opportunity is now there for anyone. Amazon has also managed to shock the market this week by offering a $3bn debt offering, they managed to borrow money for record low costs and investing in its kindle tablet, warehouses and data centres as well as expanding new business ideas. An acquisition may also be in the workshops with this bond offering. With strong company financials and future growth prospects, the bond offering was not difficult to pull off. The three-, five- and 10-year bonds were sold offering

yields of 0.38, 0.63 and 0.93 percentage points, respectively, over comparable Treasury rates. Amazon is nowhere in sight of its peak, we will be seeing huge developments within the firm in the next year and foreseeable future. Facebook IPO – Short term failure, long term success? From Amazon’s debt offerings to the largest Equity offering in tech history, Facebook shook up the financial industry over anticipation of the IPO in May 2012. The IPO in a way was a failure; the share price could not stabilise and decreased steadily over the proceeding days and weeks. This immediately showed the overvaluation of Facebook from the initial value of around $100 Billion. However not everything is as clear cut as the share price, Facebook is in here for the long term and has a lot of

http://www.efinancialnews.com/search?mod=articlehyperlink&q=Treasury


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prospects in potential growth avenues.

FT (Share Price since IPO) Currently investors are interested in the mobile side of the business and how to drive in advertisement revenues from the mobile platforms as there is a notable switch from laptop computers to phones and tablets. However one of the largest factors which could change Facebook’s future in the long term is their vast amounts of personal data which they have. Facebook now has information

which hundreds and thousands of firms could potentially use to increase revenues/profits. The

difficult part is creating a market for this data and whether firms are willing to stop collecting other new data and start to analyse current data. This data is not put into any real use outside of Facebook at the moment and once we see a shift in activity of this data, perhaps we might see the share price increase above IPO levels and the short term failure of the IPO could be turned into long term success for the company. -


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Commodities

Trent Howell

Overview Gold - an investors hedge against uncertainty. This rise in Gold price to a peak of 1794 USD per oz. has been a testament to that relationship. The equity market is still unforgiving and many financially sound companies are stagnating. The accelerated rise in Gold prices has been apparent for the past 5 years. What’s surprising is the recent dip in the price over the last 30 days. The reason that this dip is surprising is that a depreciating dollar typically drives the price of Gold upwards. The precious metal retains its value much better than other forms of currency. It is the option for investors during inflationary

times due to its limited supply and inherent value.

The future? Analysts anticipate the medium term future of Gold prices to be stable and continue on its rising path, despite its shaking short term outlook. The evidence supporting this claim is that the FED is likely to announce additional quantitative easing on the 12th December in an effort to further stimulate the economy and its struggling labour market. Furthermore, this will be supported by further depreciation of the US dollar.


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The true mortality of diamonds. Diamonds are not strictly forever. Trends over the past 5 years have shown an increasing divergence between the sales of diamonds and of other precious gems; emeralds, rubies and sapphires. Diamonds account for 90% of sales in the global precious gemstone market. However, the price of diamonds has fallen for the past five quarters. Whilst an emerald of equal size and quality will cost only half as much, the price is rising. The reality of celebrity endorsement cannot be understated. The engagement ring exhibited by Kate Middleton, a new addition to the British Royal Family, has sparked a change in tastes and driven up demand for sapphires. A similar effect can be attributed to the recently married Halle Berry who has overseen a rise in the price of emeralds.

The flow of investment into Japan. Japan now boasts groundwater as one its biggest attractions to overseas investors. Groundwater is the product of rain and snow that seeps into the ground. This can be accessed by simply drilling a well into the aquifers where it all collects. China are rapidly swooping in to profit from Japan’s low real estate value, now at 60 cents - a result of two decades worth of declining prices. Japan also currently operates with fairly loose regulation of foreign investment. The motive for Chinese investors is to tap into the water reserves and export it back as bottled water. The safety of drinking water in China is questionable and currently a major cause of concern. In addition to this, China and


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India are projected to face water shortages by 2030. The sensitivity of the China-Japan trade market is heightened due to the clash over the Senkaku/Diaoyu islands. The islands are both resource rich and could provide a great boost to either economy aside from the national right that both countries lay claim to. -

Retail & Consumer

Vasil Popovski

Costco to pay out $3 billion in special dividend.

Costco Wholesale Corporation, one of the largest retailers in the world, has announced special dividends in recent months in order to escape higher taxes on equity income

payments. After saying that it would pay out $3bn to its shareholders, Costco share prices jumped by more than 5 % and reached $102 per share. The retailer, which has 617 warehouse-style discount stores worldwide, has proclaimed that it would pay out a special dividend of $7 per share on the 17th of December.

The current tax rate of 15 per cent on dividends, legislated by the Bush tax cuts in 2003, could spike to a top rate of more than 40 per cent next year unless President Barack Obama and Congress can avoid the fiscal cliff, which would trigger automatic tax rises and spending cuts. As a result companies are racing to beat the year-end deadline. So far this quarter 112 companies have declared special dividends more than 3 times bigger than


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the average for the final three months of the year.

Costco’s special dividend will cost the company some $3bn. That would theoretically use up most of its cash and short-term investment, which totaled $4.8bn at the end of the fiscal-fourth quarter. The company is selling $3.5bn in notes to finance the dividend. The notes will mature in three, five and seven years. This early afternoon in New York, Costco shares were up 5.6 per cent at $101.87, increasing the 30-year-old company’s market capitalization to nearly $44bn.

In many Companies that are paying special dividends management insiders hold a high proportion of the shares. Costco is not such a company, but its co-founder and former chief executive, Jim Sinegal, is set to gain $14m from the payout. Richard Galanti, Executive Vice President and Chief Financial Officer, commented: “Today’s announcement of $7.00 special dividend, to be paid before the end of the calendar year, is our latest effort in returning capital to our shareholders while maintaining our conservative capital structure. Our strong


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Balance sheet and favourable access to the credit markets allow us to provide shareholders with this dividend, while also preserving financial and operational flexibility to grow our business globally; allowing for ongoing dividend and share repurchase activities; and enhancing the value of the Costco membership to more than 67 million Costco cardholders throughout the world.”

Industrials

Georgi Georgiev

Catastrophe Morals. Admittedly an environmental catastrophe, the 2010 BP oil spill in the Gulf of Mexico has proved to work out for the best. The looming fear of governmental sanctions (a mesmerizing $ 4.5bn in BP`s settlement case) has urged

private companies and organisations to invest in spillage prevention R&D to guarantee popular and state trust, but also secure a safer venturing in the Arctic circle, said to contain more than a tenth of Earth`s undiscovered oil and a third of the unknown gas resources. And here is what science has to offer. Synthetic-aperture radar (SAR) is the most conventional means (used also by BP in Mexico) of detecting oil patches. A satellite emits highly-penetrating radio waves, that bouncing off the water measure the calmness of its surface, as crude oil`s specific characteristic is smoothening the waves. Scientists from the Norwegian Northern Research Institute however, claim SAR is admittedly unlikely to tell the difference between calm water and “black” spillage. What is more, this method requires a


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maximum of 30% ice coverage to work in Arctic conditions, as icing prevents the penetration of radio waves, effectively providing a “cover”. Norwegian high-tech developer Aptomar equipped Italian oil trader ENI ships in the Northern Sea with infra-red and ultraviolet high-visibility cameras able to detect oil on top of the ice and floating above water. However, spillages usually incur the biggest damage underwater. To get a picture of ice`s subsurface researches use a GPR (ground-penetrating radar). It was a Norwegian research organisation that rated GPR`s performance. A 2010 controlled spill experiment proved the technology`s efficacy to discern between ice, water and oil on the ground of signals emitted off a sled or a low-flying aircraft. GPR`s inability to state clear results when faced with underwater

inhomogeneity (hollows, ridges, etc) and/or melting ice have prompted oil companies like Shell, Exxon Mobil and Statoil to invest in the development of more sophisticated, nuclear based technology, also known as NMR. Nuclear magnetic resonance simply boosts all elements underneath the surface with an electromagnetic impulse (ice being transparent to NMR) that triggers distinct nuclear variations in all particles. Oil reacts specifically, presumably, making NMR the favourite by private investors like Exxon and Shell, who, having patented different versions of the technology, increasingly try to market and sell it to governments of the North, in their territory claims and exploration ventures. SL Ross consultants say that the companies` marketing does not say anything about the limitation of NMR`s reach – the


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antenna`s diameter has to match the distance between the radar and the oil. In other words, NMR requires a helicopter, fitted with a massive antenna underneath to hover around hundreds of miles above the ice. Physics, the costs and the unwelcoming Arctic weather are likely to put the project on hold. The Scottish Association of Marine (SAM) sensors carried out significant research in 2012 to devise a strategy for deep sea exploration allowing a more qualified and in-depth research. The result is the autonomous underwater vehicle (AUV) – a submarine, in short. The common traits with submarines however, end with the description of its basic principle. AUVs are smaller, remotely operated, admittedly limited in range, but well-equipped to gather data, send information back to source, and conduct experiments underwater. While

SAM has not invented the AUV, they have fitted it with a radar reflector, numerous sensors, a multi-beam sonar, underwater cameras, oil laser technology. Although low temperatures and ice blocks act as natural impediments and inhibitors of the fast oil spreading in a possible spill, companies and governments can no longer rely on highly ineffective and costly methods like skimming (3% of BP`s Mexico spilt oil successfully skimmed off the top ) and chemical dispersing, making oil more dissolvable for bacteria to handle. To recapitulate, high scale spillages (see BP`s graph) lead to huge risks, both environmental and economic. It is however, the fear of several catastrophes happening one after the other that forces governments, investors, organisations to seek for safer, more reliable, far reaching and enabling methods to provide a


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sustained future development. In the case of Arctic oil and safety measures, technology has benefited the most. -

Energy

Abel Seow

Rosneft – the emergence of an oil powerhouse.

Just eight years ago, Rosneft was the runt of the Russian oil business, the eighth-biggest producer holding the remaining non-privatised scraps of the industry and valued at approximately $6bn. However, the recent acquisition of TNK-BP by Russia’s Rosneft will see it become the largest public oil company in the world in terms of reserves and production, producing about 4.4 million

barrels of oil a day. The deal that seals it will be worth close to $56 billion, the largest in the industry since Exxon bought Mobil in 1999. For comparison - Nike is worth $34 billion and Kraft - $27 billion.

Although the deal will only be completed in the first half of 2013, markets have reacted positively to the news on the agreement in principle reached between the parties, which will also see BP receiving a 19.75% stake in Rosneft. As recently as early November, Rosneft’s shares were up more than 5%, exceeding the maximum level for the year, and rating agencies such as Standard&Poor’s are mulling over the increase of its long-term ratings. Managers at Artemis Global Energy Fund publicly announced that they have started accumulating Rosneft’s shares and a host of


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brokers such as Investec have reiterated their ‘Buy’ rating.

However, how much respect do investors truly have for the company? The company has grown dramatically in the past decade due to a combination of rising oil prices and Vladimir Putin reasserting state ownership over a fair chunk of Russia’s oil fields. But movements in the market indicate that the jury is still out on Rosneft’s ability to win investors’ confidence.

The company is notoriously inefficiently managed and, as a government-controlled entity, subject to the vagaries of Kremlin policy. It lacks experience in attractive offshore and Arctic regions, which hold its best potential for future growth, and it has virtually no presence outside of Russia. These factors alone have resulted in investors willing to pay far less for a share of

Rosneft’s assets than they are for rival oil companies’.

Investors are already expressing concerns that Rosneft has overextended itself. The company is struggling to stay on top of a vast number of capital-intensive projects to upgrade refineries, develop fields in the Far East or Russia and explore the Arctic after signing partnership agreements with ExxonMobil, Statoil and Eni.

According to Robert West, a Bernstein analyst, there is enormous potential to increase Rosneft’s stock market value. He said Rosneft’s reserves were valued at about $2 a barrel, compared with $7 a barrel for BP and $15 for Exxon Mobil. This disparity reflects investors’ lack of confidence that Rosneft can efficiently turn its oil into cash.

Comparisons made to another national champion, Gazprom,


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are inevitable. It appears Putin concluded that Gazprom, which until 2008 was a symbol of Russian power and prestige, has become more of a liability.

The company does not currently have the ability to reform itself and adapt to a more competitive environment, while its business model in Europe is coming under increasing strain and has so far been unable to diversify to Asian markets.

The Kremlin needed to change horses, and Rosneft has clearly been identified to take over the baton. How far and fast will this horse gallop? The answer will be revealed in a decade from now.

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Healthcare

Ivan Petkanov

The healthcare boom.

After 2003, the number of healthcare deals has rapidly increased and peaked in 2007 when it reached near 160, which is almost 4 times more than it was in 2002. However, in the dawn of the first decade of the 21st century and in the first year of the second, the statistics suggest a rapid decrease in the number of healthcare deals. Looking at 2012 and particularly at one of the recent reports, made by the corporate finance boutique Catalyst, the expectancy for the growth of the number of deals has increased and it was indeed the government’s continuous effort to ‘open the door’ to competition throughout the NHS, which was a process that dates back to Blair’s


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cabinet. Statistics show that in 2011 the number of completed deals reached 68, whereas by this time this year the number of transactions successfully completed was 50, but it is continuously picking up with the time. Further investigations state that 20 of these deals were in the domiciliary sector, which is the provider of personal care and support services for the elderly or disabled people in ‘a person's home, rather than in a residential or care home’. Probably one of the most broadly highlighted deals in 2012 was the sale of ‘Four Seasons’ for the remarkable price of £825m. Other recent deals worth mentioning are the £210m takeover of Lifeways, a provider of services for adults with learning difficulties, by Omers, the Canadian pension fund and the £111m purchase of Enara, the 4th biggest provider of homecare services

in Britain by revenue. All in all, the deal expectancy in the healthcare sector for 2012 is believed to continue to increase.

The most recent deal in the sector sees Baxter International trying to make a bid for the Sweden's Gambro for around $4bn, in order to make a progress in the kidney dialysis business. Gambro is known as one of the top companies in the


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healthcare sector and is famous for being one of the main providers of kidney and dialysis equipment. On the other hand Baxter are particularly specialized in the creation of devices that can provide treatments for haemophilia immune disorders, kidney, trauma and others and has actually expanded significantly in the past years. Gambro has been speculated to have been of particular interest for Baxter International for a long time. However the owners of the Swedish company refuse to make any comments regarding a deal. Nevertheless, the deal is expected to take place in the first half of 2013, and it is going to equip Baxter with even better renal care and as the Chief Executive of Gambro Guido Oelkers has put it: it would be the link that would ‘shape our industry for the future’.

Another major deal in the sector is Aetna buying Coventry Health Care for the price of $5.7bn. That will be a great step forward for Aetna, because it will increase their influence and commercial opportunities in Medicaid and Medicare markets. Mark Bertolini, Aetna’s chief executive has recently announced: “We think diversification is incredibly important as we head into healthcare reform”, and that this would be a great move for Aetna's development. The acquisition of Coventry by Aetna would mean an expansion of the share of revenues Aetna generates from its government business from 23 per cent to 30 per cent. Goldman Sachs and UBS were the advisors of Aetna, whereas Greenhill & Co. was the institution that advised Conventry.

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Forex

Vasil Popovski

Sterling surges after UK economic growth

Confirmation that the UK economy has expanded by 1 per cent over the summer has bumped the pound against

euro. One pound now purchases € 1.24 – up from € 1.233 this morning. The rise in sterling of almost 81p came as decent third quarter growth in the UK appeared to trump last night’s Eurozone-IMF debt deal to prevent Greece going burst and keep it in the euro.

Currency analysts were even more upbeat on the prospects for the sterling after Mark Carney’s surprise appointment as the next Governor of the Bank of England. The well-respected Canadian central banker is seen as more hawkish on interest rates than incumbent Sir Mervin King and less likely to ease monetary

policy further, which will be supportive for the pound in the future, although the Bank’s monetary policy committee appeared to have ruled out another rate cut in its latest minutes.

The Canadian dollar has been one of the most popular


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currencies among investors this year. The Bank of Canada has been one of the few big central banks to suggest raising, not cutting, interest rates. That has made difference for currency investors in such an environment where most developed world central banks are easing monetary policy as much as possible, with interest rates making up a big part of returns on currencies.

Carney’s impending arrival at the Bank of England and the improved economic climate is also thought to have appreciated sterling to a three-week high against the US dollar. It rose to $1.6056, its highest level since November 2.

“I think that Carney appointment as the new Bank of England governor will have a greater impact on sterling,” said Valentin Marinov, currency strategist at Citigroup. “I see the primary driver being a shift

towards greater cautiousness about the potential market distortions caused by quantitative easing.”

Andy Scott of foreign exchange broker HiFX commented: “This could keep a positive tone on the prospects for the UK economy in the months ahead given the potential confidence boost generated by strong growth numbers. This can lead to increased spending by both businesses and consumers and even help demand in the sluggish housing market.” And he added: “If we can get half decent growth in the current quarter, it may give a bit of a base to build on and further reduce the chances that the Bank of England will ease monetary policy which would be supportive of sterling”

However, analysts are still urging caution on sterling. Many of those in the currency markets are waiting for details


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of the chancellor’s Autumn Statement next week before making firm predictions for the pound’s direction next year.

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Emerging Markets

Anton Gospodinov

Rising markets in Russia and the international significance.

U.S. industrial companies are switching over to Moscow, with increasing interest, in searching for fresh markets.

At a time of weak economic growth in the U.S., slowing up of the Chinese economy and recession in many European countries, Russia is attracting increasing attention as a

potential growing market for U.S. producers, says CNBC.

Russian Federation, which have joined the World Trade Organization (WTO) in August, represents only 1 percent of U.S. foreign trade. The costs of infrastructure in the country are constantly increasing and growing middle class is seeking more and more goods that American manufacturing is able to provide. U.S. exports to Russia have increased by almost 30 per cent in the first eight months of the year and it is expected by the end of this year to reach $ 10 billion. This is almost five times compared the export a decade ago.


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Russia’s Retail Turnover, $ U.S. billion Source: Federal State Statistics Service (Rosstat)

Once Russia has joined the WTO, a number of large companies increased their investment in the Federation because they expect a good opportunity for expanding the markets. Besides this, Russia is also increasingly taking the place of China as a leading market for U.S. companies. That is due to the fact that the business in the U.S. is less

optimistic about the Chinese market now.

Naturally, the U.S. business is aware of what setbacks to expect – corruption, interests of the oligarchy and unreliable rule of law. Therefore, multinational companies remain cautious. For instance, Prologis in 2005 left the Russian market due to the outlined obstacles and problems and even has no intention of returning. For now, at least.


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In addition to current good performance of Russian markets, it is expected its retail industry to become a leading market in Europe by the end of this year. This opinion was backed by the participants of MAPIC 2012 exhibition, reported online edition of Property Investor Europe. Similarly, because of the growing middle class, retail sales in the country are constantly increasing, while investments are reaching record-breaking levels in commercial real estates. Retail sales in the country rose by 7.3 percent in the first half of this year compared to the same period in 2011, whereas according to the company Cushman & Wakefield, in the first nine months of the year, investment in a commercial property in the country reached the record-breaking $4 billion dollars.

"Given the increase in the disposable income and the growth of the middle class, Russia will become the leading market for retailers in Europe," predicts Robert Bronuel, chief executive director in department of commercial property in the region of Europe, Middle East and Africa at Jones Lang LaSalle. In September, the retail sales in Russia were 4.4 percent above the level recorded during the same month last year. According to Maxim Karbasnikov from Cushman & Wakefield, in Russia the retail chains in the country now turn to the secondary cities. "In some towns there is almost nothing. We will be witnesses of change in these cities over the next three to five years," he claimed.

The shopping outlets, that were previously undeveloped and can rarely find them in Russia, also show strong growth. By the end of 2013 similar projects


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with an area of 100,000 square meters are expected to be completed. Among the major brands with expansion plans in Russia are: Auchan, which is opening its first outlet in Moscow, Auchan Drive, next year and the Spanish fashion chain Inditext, which has plans to open 50-60 new stores, also Leroy Merlin and Burger King.

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M&A Overview

Milen Kisov

Global M&A activity disappointed in Q3 with deal volume falling by 16% from 3,203 in Q3 in 2011 to 2,679 in Q3 in 2012. Deal value paints a similar picture, dropping by a fifth from $579bn to $461bn over the same period.

Casting a look to regional activity, North America stands out as a global bright spot: while Q3 has seen a decline in overall M&A, aggregate deal value climbed to the highest level since the first quarter of last year at US$235.7bn. It appears that fewer, higher-value deals are boosting deal making among both financial and strategic investors.

Certainly, this recent trend is evident in the consumer sector – particularly in relation to North American Kraft Foods’ spinoff of


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its snacks business. The deal, valued at US$26bn, ranks as the largest North American transaction in the quarter and forms part of a string of spinoffs by international food groups over the past year.

Another good example is the announced TCC Assets acquisition of Fraser & Neave (F&N), a Singapore-based conglomerate with extensive food and brewing operations. In a related transaction, Dutch brewer Heineken moved to acquire a majority stake in Asia-Pacific

Breweries (APB) for US$6.6bn in July – indeed, as F&N holds a 40% stake in APB, Heineken’s move may well have made F&N a more attractive target for TCC.

Turning to deals in the pipeline, Richard Schulze, who owns a 20.3% stake of Best Buy Co Inc, voiced his plans to take the

company private – a move with a projected value of US$6.2bn.

Latin American M&A activity in Q3 2012 saw 112 deals worth $13.4bn, the lowest deal value since Q1 2009, which had 101 deals valued at $12.1bn. The top deal for Q3 2012 was the acquisition of Obrascon Huarte Lain Brasil, the Brazil-based construction company, by Abertis Infraestructuras SA and Brookfield Infrastructure Partners LP for $2.7bn. It is followed by the acquisition of a 75% stake in Promigas SA ESP, the Colombia-based operator of natural gas transmission and distribution systems, by Corporacion Financiera Colombiana SA for $1.9bn.

As expected, Brazil, with 247 deals worth US$37.9bn in the first three quarters of 2012, or a 47.3% market share of the Latin American M&A, was the


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most active country in the region. The largest deal in the year-to-date for Brazil remains the acquisition of a 44.4% stake in Redecard, a provider of credit card payment processing services, by Itau Unibanco for a deal value of US$5.2bn.

Mexico was the second most active Latin American country in the first three quarters of the year, attaining a 29.2% share of deal value with 40 deals worth US$23.4bn. Chile came in third with 38 deals and a $7.1bn deal value representing an 8.8% market share in the region.

Consumer was the most active sector in the year-to-date, followed by Energy, Mining & Utilities.

In North America Q3 2012 was the highest performing quarter since Q1 2011. Q3 2012 ended

on a high note with 879 deals collectively valued at $235.7bn, the highest value since Q1 2011 ($263bn). This was a 12.7% increase in value from Q3 2011, but a 10.8% decrease in volume ($209.2bn with 985 deals). The highest performing quarter in the year-to-date, Q3 2012, represents 39.7% of total North American M&A in the year-to-date.

The Energy, Mining and Utilities sector secured three of the top 10 deal spots with the acquisition of Nexen Inc by China National Offshore Oil Corporation Ltd for US$17.6bn, which was the second largest deal of the month, and two other acquisitions worth over US$5bn. For the last month of the quarter, the Consumer sector saw an increase of 717% from Q3 2011 with 78 deals worth $35.3bn.


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M&A activity in the Asia-Pacific region during the third quarter of the year witnessed a slight decrease, but fared remarkably well considering the gloomy outlook for other regions. A total of 566 deals worth $102.6bn were recorded in the region between July and September, a tally virtually unchanged by value and 10% lower by volume compared to the previous quarter. A number of significant acquisitions were announced during this period, deals which may be the harbinger of future M&A activity in the region

Growing economic uncertainties, coupled with a general slowdown in economic growth have put the brakes on large deals across the globe. The Asia-Pacific region, however, has bucked the downward trend. Deals worth over $5bn have grown as a proportion of total deal value

for two successive years to hit 25.6%, the highest level since 2008.

While fears of a slowdown in the region’s export-oriented economies continue to linger, these rises attest to the faith acquirers have placed in the region. Rising incomes, along with favourable demographics and sluggish growth in other regions are likely to cement Asia’s status as the focal point of global M&A activity in the near future.

India’s Infrastructure sector received a big shot in the arm in the shape of the Japanese government’s acquisition of a $4.5bn stake in the Delhi Mumbai Industrial Corridor. The project, slated to cost US$90bn, will rely heavily on low-interest loans and technical assistance from the Japanese government.

Chinese bidders accounted for two of the largest outbound


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deals to emanate from the region. Li Ka Shing’s tryst with British utilities continued after he sought to add Wales & West Utilities to the Northumbrian Water Group he snapped up last year. The desire to secure high, stable yields will prompt Asian bidders to scour the developed world for utility providers. More striking, however, was CNOOC’s bid for oil major Nexen. It represented the largest ever bid for a foreign corporation to emerge from China at a time when Chinese state-owned enterprises are being scrutinized by the US government and regulatory bodies. The timing of the acquisition is even more significant, as it came before leadership transitions in both China and the US.

Making such a large bid amid political and economic uncertainties reflects China’s

desire to maintain high economic growth at all costs

The consumer sector notched up US$29.1bn-worth of deals this quarter.

Europe has seen a total of €80.9bn, contributing to a total of €348.3bn worth of M&A deals to date. UK (€19.5bn), Germany (€18.9bn) and France (€9.4bn) have been the most active.

Scepticism of the direction Europe is heading to in the crisis facilitated the lowest deal value since Q3 2009 (€55bn) with €80.9bn creating a 42.8% decline on last quarter (€141.4bn). Fittingly, Germany, France and the UK are the top three countries for deal values in Q3 and also key decision makers on the EU crisis – they’re under pressure to close deals and provide a more


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attractive settlement for investors in Europe. Contenders propping up Europe are known for their tumultuous relationships in the bid for power. Proof of the repeated struggle was them trying to find an agreement over share percentages for the now lapsed mega-merger between BAE-EADS. It was Germany’s Chancellor Angela Merkel, the cog in any EU deal making at the moment, who vetoed the deal that would have added €16.1bn to UKs value count The UK continues its title as the most active country in Europe for deal value in Q3 for value, €19.5bn and deal volume (210) which is in part down to the shadow of indecisiveness over the Glencore-Xstrata arrangements.

It has been a focus this summer after a series of special events consumed the country boosting regional economy. The short

term affects are surrounded by doubt though because of its deficit and consequent IMF warnings which means there are still many guarded investors out there.

The Italian government is trying to be more constructive in its attempt to re-structure the country’s economy and encourage international expansion of Italian businesses. Cassa depositi e Prestiti acquiring Siminvest and Grupp Sace from the Italian Ministry for the Economy and Finance was one of the top deals in September worth €3.8bn.

A buoyant Industrials and Chemicals sector is the most active in Europe on the whole with deals worth €21.2bn (239 deals) and a 26% market share that puts deal value up 33.8% on Q3 2011 (€15.9bn).

In Q3 2012 the German Industrials & Chemicals sector


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accounted for deals worth €14.5bn, 76.7% of the total German M&A Activity of €18.9bn.

The Middle East and Africa could not escape the global slowdown in M&A activity, with deals totalling $31.2bn for the period Q1-Q3 2012, down 12.8% on the same period last year ($35.8bn).

Alongside an 8.3% drop in deal count, the first nine months has been the worst such period for M&A in the region since 2009 ($24.7bn) and the second worst since 2005 ($23bn).

Whilst the first two quarters of this year brought successive growth, Q3 marked a 37% decline in deal values on Q2, dropping from US$13.5bn to US$8.5bn. However, it is notable that average deal sizes in the mid-market in Q3

reached $83.5m. Since 2004, this figure has been surpassed only once (US$92m in Q4 2010), perhaps providing a glimmer of hope for dealmakers.

Energy, Mining & Utilities was the most active sector of Q3 2012, its US$3.3bn worth of deals accounting for 38.3% of the market. Despite this position, and with five of the top ten deals, it posted a 36.5% drop on its performance in Q3 2011 (US$5.2bn). The top deal in the sector was UAE-based Shelf Drilling Holdings purchase of 38 shallow water drilling rigs from Transocean for US$1.1bn.

Telecommunications, with just one US$ 2.2bn buy constituting a 25.9% market share, was ousted from its position as Q2 sector leader (US$ 6.1bn, 41%). Although deal flow has slowed, sizeable opportunities of significant scale appear to have remained in the sector.


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European interest in the market was demonstrated in the spring by France Telecom’s US$3.3bn acquisition of a stake in OCMS, the top deal of the year so far. However, the largest transaction of Q3 suggests that there may be competition from within the region, as Qatar Telecom bid US$2.2bn for the 47.5% shares it does not already own in Kuwait’s Wataniya Telecom.

Elsewhere, the most notable story was the emergence of Iraq, which posted its joint highest quarter by volume, shared with Q2 of this year. It grabbed a 7.9% share of the market by value with US$596m worth of deals, helping make 2012 the most active year for Iraqi M&A activity by some distance already. All three of Q3’s deals in the region concerned oil, the largest of which being Turkey-based Genel Energy’s US$240m

acquisition of a 21% stake in the Bina Bawi Exploration Block. Additionally, an auction for the Nassiriya Oil Field, with proven crude oil reserves of 4.4bn barrels, is likely to take place later this year, according to a senior Iraqi official.

Despite ongoing tensions with Baghdad, the outlook for M&A activity in involving oil in the Kurdistan region remains buoyant. With an International Energy Agency report suggesting its oil output could double by 2020, Iraq looks on course to become an M&A hotspot in the ME&A region.

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Fixed Income

Trent Howell

Eurozone woes.

European equity markets have shown that it is an impossibility


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to predict the conclusion of the Eurozone crisis. In summation, the Eurozone has undergone a credit fracture between southern and northern economies. The yields of Spanish and Italian bonds are rising and lending from German banks has been cut. The cost of borrowing for these countries is therefore ever increasing, making the repayment of sovereign debt a momentous task. Greece is the subject of growing urgency for a bailout, despite pressure from the public who are hostile towards austerity measures. The urgency for a Greek bailout is that there could be a run on Spanish and Italian banks that they simply could not handle.

The latest in the Eurozone solution is an additional aid package supplied to Greece to the tune of £32bn. In addition to this, Greece have also been given an extended repayment

timeframe and Greece have begun to buy back its bonds from investors at 30-40% of face value.

Hedge funds have benefited from the policymakers decision to raise the value that Greece would pay for these bonds. The percentage was originally capped at 28% of face value.

Angela Merkel is in a delicate position. She faces re-election into the cabinet in 2013. Her decision now will almost certainly affect public favour when it comes to voting next year. The German taxpayer, who ultimately foot the bill for a Greek bailout, are largely opposed to the large aid packages that Germany offers in order to save the Eurozone.

Spanish and Italian relief

Demand for higher yielding Eurozone bonds has risen given the news that Greece is likely to


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receive its next instalment of aid due to its participation in the buyback scheme.

Italian 10-year yields fell 5 basis points to 4.40 percent while the Spanish equivalent was down at 5.24 percent.

Emerging Markets

Emerging markets have seen sovereign debt returns of 16% over the past year. Investors that chose to enter the emerging markets due to uncertainty within Europe have performed greatly. Another attraction of emerging market bonds is the buying of the local currency that will hedge against future depreciations of the US dollar. When compared with the overpriced values and low yields of the bonds of developed economies, i.e Germany & US, emerging

market bonds are looking even more attractive.

The current and estimated inflation compared to the 7-year Bond Yield.

US: 2.2% / 1.1%

Germany: 1.9% / 0.92%

EM: 3.5% / 4.51%

Sources: Bloomberg

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Financials

Milen Kisov

European Bank Union Crisis

With the end of the year deadline approaching, European finance ministers failed to agree on key elements of a plan to establish a common banking regulator, seen as central to eurozone efforts to


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emerge from the debt crisis. Germany’s respected financial minister Wolfgang Schäuble opposed the union as to moving too quickly.

Some of Mr Schäuble's counterparts at a gathering in Brussels warned that markets could be spooked by any sign that the EU was backing away from consolidating banking oversight, just five months after agreeing to pursue it.

The proposed banking union – agreed by EU heads of state at a summit in October -- and the European Central Bank's commitment to buy bonds of troubled eurozone nations, have been welcomed by investors as bold steps to end the crisis.

By giving the European Central Bank the power to supervise the region's 6,000 lenders, the EU hopes to begin separating weak banks and national

governments. Ireland was bailed out by the EU after it was forced to pump capital into its banking sector, while Spain has been granted funds to keep its banks afloat.

Banks in other eurozone states, including Italy, are facing a further deterioration in asset quality as the recession comes, undermining capital levels.

Supervision by the ECB would allow failing banks to draw directly from the eurozone's €500 billion rescue fund – the European Stability Mechanism – without their governments falling deeper into debt as a consequence.

However, there are some differences between the member states. Germany wants to limit the ECB supervisory remit to big banks, while France thinks it should apply to all.


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How to include EU states that want to join the banking union but do not share the euro currency is also proving difficult to resolve. Sweden, which falls into that group, wants all participating states to have equal status.

Britain is also threatening to block the deal without safeguards to check the dominance of the ECB in setting technical standards for all EU countries. It is demanding a "double majority" voting system at the European Banking Authority, requiring assent from those inside and outside the banking union.

While London has support from non-eurozone countries, France and Germany strongly opposed its demands, setting the stage for a highly-charged political fight.

An EU spokesman confirmed that the finance ministers would

try again to resolve their differences at another meeting on 12.12.2012, after little progress was made on the role of the ECB and national regulators, voting rules and how to phase in the new supervisory functions during the course of next year.

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market report issue 7 dec 5th

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