European Comment: A vintage year for dealmaking

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This could turn out to be the best year for European merger and acquisition activity since the high-tech bubble burst five years ago. Even including last year's €60bn ($72.4bn) blockbuster Sanofi-Aventis drug deal, overall M&A volumes are already 35 per cent higher so far this year compared with the first half of 2004.

The trend was further confirmed on Tuesday with KPN's €1bn offer for its smaller Dutch mobile telephone rival Telfort, and the disposal by France's Thomson of its television tube business in China, Mexico and Poland to India's Videocon.

So far this year there have been 160 mergers or acquisitions in Europe involving deals of more than $500m, compared with 120 in the first half last year. Pernod Ricard's acquisition of Allied Domecq and UniCredito's takeover of Germany's HVB are the biggest.

Industrial and service companies are active again, giving the market a better balance between so-called strategic players and the private equity firms that have dominated activity in the past two years, notes Yoel Zaoui, joint head of Goldman Sachs' European operation.

All this implies European business is in far better shape after the European constitutional treaty fiasco than Eurozone statistics and political sentiment suggest. If companies are back on the acquisition trail, it is largely because they are more confident about growth and equity markets after cleaning up their balance sheets.

The flip side is that the M&A revival is unlikely to do much to help Europe's job market recover. If anything, it will probably have the opposite effect.

Putin's gambit

Vladimir Putin is playing a cynical game of chess in his latest pitch to woo foreign investors back to Russia. His gambit is simply to renationalise his country's extensive energy assets as a bid to reassure foreigners interested in buying shares in Russian oil and gas companies.

This may sound like wishful thinking, considering the damage inflicted by his appropriation of the Yukos oil company. He also seems to be breezily brushing aside recent OECD criticism of too much state intervention.

Just before meeting European and American businessmen, he took majority control of Gazprom, with the state lifting its stake to just over 50 per cent in the giant gas company.

His officials say this will allow the Kremlin to lift the 20 per cent foreign ownership cap in Gazprom shares. With the state in control, the Kremlin could also remove the two-tier Gazprom share structure penalising foreign investors.

Up to now, foreigners could buy Gazprom shares only through American depositary receipts sold in London and trading at a premium to local shares.

Mr Putin claims Russia could not risk allowing a private shareholder gaining majority control and "threatening" a company accounting for as much as 7 per cent of gross domestic product.

He also believes foreigners will feel more secure knowing the government is in charge. In other words, investors will now have to deal with one clan rather than Yeltsin-era anarchy. Small comfort.

Airline turbulence

The market capitalisation of airline stocks has fallen more than $10bn since oil prices started their latest upward spiral in February.

The response of some large carriers, such as British Airways, is to continue pushing up the fuel surcharge introduced last year on airline tickets to offset the rise in jet fuel prices.

Low-cost airlines are still resisting, betting on picking up more customer volumes with cheap fares. Others, such as Lufthansa or Air France-KLM, have so far held back further increases, although the German airline did put up its surcharge for freight this week.

How far can airlines continue offloading the cost of fuel on travellers? Probably as much as the market will take. And if all other taxes and charges already imposed on tickets are added, they must be getting close to the limit.

Cost-cutting and restructuring may help some airlines protect their balance sheets and avoid even higher surcharges. But at some point, especially if expensive oil starts significantly undermining economic growth, airlines will simply have to lower their fares to fill their aircraft.

President Jacques Chirac is planning to revive at next month's Gleneagles G8 summit a proposal to levy a special tax on all international airline tickets to provide a constant flow of funds for developing countries. No doubt a worthy cause, but one the over-taxed airline industry could well do without.

european.comment@ft.com

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