Adam Jeffery | CNBC
Goldman Sachs has tipped several European technology, insurance and utility companies for acquisition in the latest reshuffle of its M&A basket for the region.
The group includes stocks that Goldman analysts believe have a greater-than-15% chance of acquisition based on their M&A framework. Those allocated an over-30% probability are ranked 1, and those over 15% ranked 2, providing they meet the necessary liquidity requirements.
Analysts at the Wall Street bank on Monday added 15 stocks as part of its semi-annual assessment of its European M&A basket, which has outperformed the pan-European Stoxx 600 index by around 10% since its inception in 2015.
It remains heavily exposed to U.K.-listed stocks, which account for 37% of the total holdings, followed by Germany on 11% and France on 9%.
Industrials are the most represented sector, accounting for 27% of stocks in the basket.
The components of Goldman’s M&A basket have an average market cap of 6.9 billion euros ($7.7 billion), versus 19.6 billion euros for the average stock covered by the bank’s European equity analysts.
Tech and insurance opportunities
Avast, which was admitted to Britain’s FTSE 100 index for the first time on Monday, was added with a ranking of 2 by Goldman analyst Gautam Pillai, who said the Czech internet security company stands to benefit from “increasing ‘work from home’ trends in a heightened cyber risk environment.”
Pillai said in the note Monday that “in a consolidating software industry landscape, the company could be considered a key strategic asset,” and that Avast represents an “underappreciated earnings growth opportunity, further augmented by up/cross-selling product adjacencies.”
Insurers Hiscox and Quilter were also both added to the basket, with a 1 ranking. Goldman analysts highlighted that a number of consolidators were active in Quilter’s various business divisions, and said Hiscox’s “strong local and global franchises imply it could be an attractive vehicle for an acquirer looking to enter the specialty and/or U.S. P&C (property and casualty) markets.”
There was an influx of U.K. utility stocks into the basket this time around, following completion of the industry regulator’s price review published in December 2019. British water companies Pennon, United Utilities and Severn Trent were all upgraded from a rank of 3 to 1, with analysts also citing a “reduced risk of nationalisation.”
Energy supplier SSE was also upgraded from 3 to 1, with Goldman analyst Ajay Patel citing it as a possible target owing to a “favourable combination of high earnings’ exposure to low-risk infrastructure activities, and its relatively small market cap.” Uniper, meanwhile, was assigned a rank of 2 on account of Finnish state-owned energy company Fortum holding a significant non-controlling stake which could be increased further.
In consumer products, Remy Cointreau and FeverTree were both added to the basket, while Essity and Unilever dropped out due to a lack of strategic interest in the tissue market and the size limitations of a potential strategic acquirer, respectively.
“Remy Cointreau could provide revenue synergies, as adding it to a bigger platform would open up new markets, potentially adding scale to its U.S. and Asia presence, as well as opening up new premium on-trade channels,” Goldman analysts said in the report.
“However, the family owns more than 50% of the company, which is a potential blocking stake; hence he applied an M&A rank of 2 (and not 1).”
Italian banks BMPS and Banco BPM were also both added to the basket. Meanwhile, British defense contractor Babcock and Spain’s EDP Renewables were also included since the last rebalancing exercise in December 2019.