There is value in the European stock markets, but investors often need muscle to extract it.
The valuation gap between US and European equities has reached unprecedented levels this year. The comparison between the US and UK is the most extreme: based on futures price-earnings multiples, the S&P 500 is now around 75% more expensive than the UK blue-chip FTSE 100 index. in the year before the pandemic, the average was around 35%.
There are good reasons for this trend: Covid-19 has rewarded US tech companies, and the London market has a penchant for struggling sectors such as oil, gas and banking. Yet the question rings louder and louder: could American investors get more for their money on the other side of the Atlantic?
The current interest of private equity in Europe offers an answer. As of Dec. 23, $ 300 billion had been invested in European companies this year, well ahead of the previous annual record of $ 256 billion set in 2006, according to Dealogic. The pressure to deploy plentiful capital is one reason and may cause investors to turn to goals they might have previously ignored. The main caveat is that corporate privatization allows buyout companies to make changes that equity investors often cannot.
Take the continuing pursuit of KKR from Telecom Italia.
Through its infrastructure branch, the American investor already owns part of the fixed network of the former Italian telephone monopoly, FiberCop. Telecom Italia last month said KKR offered a buyout of the entire company for around $ 38 billion, including debt the new owner would assume. Telecom Italia is currently evaluating its options in a long-drawn-out process that may test KKR’s patience, but if a deal emerges it would be the biggest equity buyout of a European company ever. realized.
For years Telecom Italia has been a hopeless case. Excessive debt and dysfunctional governance have led it to under-invest in its network, leaving the door open to multiple challengers. KKR could give the business the full reset it needs. The Italian government, which has the power to block the deal, has not ruled it out: in a year-end press conference this week, Prime Minister Mario Draghi contented himself with saying that discussions were in progress.
KKR will have to embark on a major investment program if it is to own a central part of Italy’s digital infrastructure. But there are also potential returns that don’t just depend on renewed growth. FiberCop could be separated from Telecom Italia to improve its valuation and potentially increase its leverage; Broadband assets are much more popular among investors and lenders than the telecom operators who typically own them. If politicians are open to the idea, an independent FiberCop could merge with its main rival, Open Fiber, to create a regulated national monopoly.
There are echoes of private equity interest here in another sector: British supermarkets. Grocer Wm. Morrison this summer became the subject of a bidding war that ended in victory for Clayton, Dubilier & Rice. Interest in the buyouts was likely sparked by lucrative real estate deals made by the new private equity owners of another UK supermarket, Asda, following its sale by Walmart in February. Wm. Morrison owns real estate assets that in isolation would be more valuable than the company itself.
What these cases have in common is the apparent need for a new ownership structure to release the accumulated value. Such strategies can be continued without buyouts, but a little shareholder activism often helps. Elliott Management, which had previously failed to accelerate the turnaround of Telecom Italia, took a stake in Amsterdam-listed Ahold Delhaize last month after the owner of grocery chains such as Stop & Shop said it ‘he could pursue a first public offering of his Dutch e-commerce. operation, Bol.com.
European stocks have underperformed US stocks so consistently since the 2008 financial crisis that a large investment in the region may seem like a gamble against history. In some struggling sectors, however, a little more business activity to highlight assets that tick the boxes for investors could help turn the tide.
Write to Stephen Wilmot at [email protected]
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