M&A and Debt
- M&A We have had an enormous M&A cycle. Just as markets appear to be rolling over it seems the brokers are at it with Macquarie said to be discussing buying Liberum at c 2X turnover and 15X PBT while Santander have been looking at Peel Hunt. Yet I can’t help wondering what happened to the boom. It seems that just perhaps the answer is to do with debt levels. So to work out what happens next I find it helpful to look at history. A good example of countries having too much debt is when we put too much debt on Germany after WW1.
- The chart below shows the sequence of events
- History After Germany defaulted in 1923 a kindly Chicago banker called Benjamin Dawes organised a $200m loan from France and Belgium to Germany in exchange for getting the Ruhr back receiving the Nobel Peace Prize for his efforts. JP Morgan swiftly floated the loan in a hugely over subscribed issue. But this didn’t stop the financial distress so in 1928 Mr Young proposed a reduction in Germany’s payments as the loans from US banks to prop up the German economy were beginning to dry up.
- Nationalism As the European economies sunk into recession in 1931 a one year moratorium was placed on all debt and reparation payments by President Hoover and in November 1932 European nations agreed to cancel their claims against Germany. Of course the national unrest this caused resulted in the Germans electing a disruptive new leader called Adolf Hitler in 1932 who immediately started a huge fiscal stimulus for the German economy.
- Inflation In the 1930’s of course Germany had a huge inflation problem which we don’t have today. What we have today is austerity. The difference is that with austerity the wage side of the equation is not growing while real inflation is understated by factors such as a large hedonic adjustment whereby goods are deemed to deflate because of technology improvements. And just maybe that why we don’t feel like there has been a boom.
- Again The result seems likely to be a period of currency adjustments and nationalism which is just starting. Followed by a huge fiscal stimulus. And changes in governments. Just maybe we have been here before.
- WH Ireland H1 Results – A significant loss is reported from the private client division while corporate broking made a positive contribution. Revenue declined in private wealth year on year where the “project Discovery” migration has been reported to have caused problems.
- Brewin FY Results – AUM up 6.7% over the year gave PBT up 10.7% to £77.5m. Full year dividend of 16.4p is paid from EPS of 21.7p. With cash now up to £186m and the company undergoing significant innovation as changing regulation, legislation and technology is fragmenting the industry I can’t help thinking they need to spend some of that cash on acquisitions to accelerate innovation.
- Ramsden – H1 results show 10% revenue increase translating to a 3.7% decrease in PBT as the company invests in new stores and infrastructure. The ROE remains in the high teens implying investment is beneficial. Shares are down 23% from their high in January. PER is now a modest 9X and yield 4.7%
- Funding Circle – Announces £150m commitment from British Business Bank for lending to SME’s