Fortune favours the brave as Europe suffers

10 November 2011

by Graeme Davies

The slow motion car crash that the European Union has begun to resemble over the past few months is likely to have severe repercussions on economic growth in the region over the coming years.                                  
With governments strapped for cash, pressure on public spending will remain intense and the seismic economic shockwaves that have rolled around the continent have 
not engendered much confidence in businesses to throw their hard-earned cash at European projects.
But contrarian investors would argue that now is the ultimate time to be investing in European assets as the best returns are always available to those who invest at times of maximum distress. This was summed up by Baron Rothschild, who said in the 18th century: “The time to buy is when there’s blood in the streets.” Indeed, the Baron himself cleaned up after investing heavily during the market panic following the Battle of Waterloo.

And there are plenty more stories of bold buyers who move into the markets when they are on their backside and pick up quality assets for a knock down price. And anecdotal evidence suggests that some buyers have been on the prowl in Europe in the most distressed periphery countries. Here, there are decent assets that have been left up for grabs as funding has dried up from the local banking market and wider European lenders have shut up shop. Indeed, such is the size of the balance sheets of Europe’s embattled banks and the mounting pressure for those balance sheets to be brought down to a manageable level, that what amounts to a firesale of assets is likely to continue for many months to come.

Strength in numbers
So with Europe heading into what is likely to be another recession with an effectively frozen banking system and shrinking governments, any buyer with cash is going to be negotiating from a rare position of strength. Hence why cash rich sovereign wealth funds and pension 
funds are eyeing up assets 
across Europe.

It is also likely that we will see an uptick in corporate activity even after G4S’s failed tilt at ISS of Denmark. This had all the hallmarks of a bold deal struck at a moment of distress in the European economy.

The private equity owners of ISS were increasingly concerned about not shifting an asset that had been effectively on the market for several months. But, unfortunately for the ambitious G4S chief executive Nick Buckles, some shareholders had been spooked by the wider economic conditions and do not seem to share his vision for an integrated service company offering all manner of outsourced services from security to office cleaning and pretty much everything in between.

When the number of shareholders balking at the cost of the deal, particularly the cost to them in terms of the potential dilution to their holdings, reached a critical mass, G4S management had to accept reality rather than try to force through a shareholder vote they were increasingly unlikely to win.

With an eye on the ongoing calamity in the eurozone, shareholders were uneasy about taking on significant amounts of debt for a deal which seemed to lack in terms of obvious synergies between the businesses.

In such deals, the leap of faith required by investors to follow management’s hunches, which requires extreme confidence, is just too far, especially in such fraught times.

Graeme Davies writes for Investors Chronicle