Cash-strapped companies are turning to one of the oldest forms of commerce: trading what they have for what they want – without exchanging money.
The financial crisis, which has deprived many of cheap bank debt, has forced mergers and acquisitions bankers to come up with innovative ways of structuring deals, including using assets and existing stakes as acquisition currency.
In theory, asset swaps are designed to provide companies with a way of expanding a core business or entering a new market, while eliminating the need either to pay a cash premium for an asset or to sell a business at a significant discount.
These deals, however, are typically limited to companies with cash-generative assets, such as those in the energy and utilities sectors.
“Utility M&A in this environment is likely to be subdued,” says William Vereker, co-head of global investment banking at Nomura. “Political and regulatory uncertainties, combined with a disconnect between equity valuations and commodity prices, mean that cash or stock transactions are challenging.
“Corporates are again looking to asset swaps as a way of bridging valuation differentials and addressing domestic regulatory pressures.”
In April, for instance, Gazprom, the Russian oil and gas group, agreed terms with Eni of Italy on joining the Elephant oil field in Libya in an asset swap. Under the deal, Gazprom took half of Eni’s stake in the deposit in exchange for Eni taking part in projects to develop north-west Siberian assets owned by the Arctic Gas company.
But while chief executives and their advisers often discuss the idea of swapping businesses, the talk rarely turns into reality as these are among the hardest types of transaction to execute.
First, companies have to find matching assets to trade with each other, which can be extremely difficult. Thales, the French defence electronics group, and aerospace group Safran recently ended talks to exchange certain assets after failing to agree which assets should stay with each company. In particular, Thales wanted to maintain control of certain areas of high-tech equipment, which proved to be one of the biggest obstacles to overcome.
The second problem for companies involved in a swap is that they rarely agree on valuations – as assets rarely line up dollar for dollar. Two sets of valuations and two sets of due diligence automatically multiply the issues on which companies can disagree. Centrica’s deal with EDF two years ago is a case in point.
Other companies in the oil, gas and energy sector – where asset swaps are often discussed – have found it equally difficult to agree on deals.
GDF Suez, the French power and gas group, recently experienced the challenge of asset swaps when it tried to strike a deal with International Power of the UK.
Under the proposed terms of the deal, GDF would have handed some assets over to International Power, which would have issued stock to GDF allowing it to take a stake.
Had the deal gone ahead, it would have created a world-leading electricity group with installed generation capacity of roughly 73GW – slightly more than the French group’s current total of 68GW.
However, the two companies were unable to come to an agreement, possibly because the deal lacked a cash component.
This could explain why some of the more straightforward deals have taken place in the consumer, leisure and retail sectors, where comparable businesses are easier to value.
In 2005, the UK’S Tesco and Carrefour of France entered a swap designed to allow the two retailers to exit markets where they were weak and exchange them for markets where they had stronger positions. Under that deal, Tesco took 15 hypermarkets from its French counterpart in Slovakia and the Czech Republic in exchange for six stores and two sites in Taiwan.
Likewise, Mitchells & Butler (M&B) entered an asset swap with rival UK pub operator Whitbread in 2008. The move involved M&B offloading 21 of its Express by Holiday Inn hotels in return for 44 Whitbread Brewers Fayre and Beefeater pub restaurants. That allowed the companies to refocus their core operations, while preserving their balance sheets. Whitbread expanded its budget hotels arm, and M&B exited the field.
Trading assets is rare in the pharmaceutical industry, but earlier this year, the UK’s GlaxoSmithKline swapped a plant in Germany and eight drug lines for a 16 per cent stake in Aspen Pharmacare, Africa’s biggest generic drugmaker.
Some financial services companies have also looked at exchanging assets: at the peak of the banking crisis, Santander, Spain’s biggest bank, and General Electric Money agreed to swap some European assets in a deal valued at roughly €2bn (£1.7bn, $2.5bn).
Santander took control of GE Money’s German, Finnish and Austrian businesses, as well as its credit card and automotive financing operations in the UK, giving the bank its first foothold in Finland while raising its profile in Austria.
In exchange, GE Money, through its Commercial Finance business, took over Interbanca (formerly the corporate banking division of Banca Antonveneta of Italy). Santander was assigned Antonveneta and Interbanca as part of its three-way acquisition – along with Royal Bank of Scotland and Fortis Bank – of ABN Amro of the Netherlands.
With groups under pressure to preserve cash and shareholders sceptical about the value big acquisitions can add, asset swaps could stay at the top of the management agenda for a while.