M&A Activity Will Eclipse Current Levels in 2007 And Fuel A 12% Rise In S&P Europe 350, says S&P Equity Research

London - 14 December 2006

&P Equity Research To Host European Market Outlook Teleconference At 14:00 GMT Today.

European M&A volumes will exceed the Î1.3 trillion expected to be generated by the end of 2006 next year, according to Standard & Poor’s Equity Research, underpinning a 12% rise in the benchmark S&P Europe 350 to 1,630 by the end of 2007. However, acquiring companies will have to pay a rising premium to gain control and will find it increasingly challenging to repeat the rate of return achieved on previous deals in 2007. For a full copy of the report, European Investment Outlook – Riding A Wave Of Volatility, please contact your local media contact below.

Europe has led the charge in global M&A activity this year, with competitive valuations acting as a key attraction for listed and private equity buyers. In the year to date, the average premium paid for M&A transactions in Europe was 18.5%, compared to 14% a year earlier. “The premium payable in Europe is very attractive compared with the US, where in the year-to-date it has averaged 27%,” Mr McDonnell said.

Cash currently represents 80% of the currency used to initially finance an acquisition, indicating Europe remains in the early stages of the M&A cycle. “This reflects the ready availability of cheap funding, be it from private equity, hedge fund investors or banks. Only when we see investors switch their preference to using equity or bonds as the initial currency to finance acquisitions can we say that the M&A boom is entering its mature phase,” Mr McDonnell said. Companies from emerging markets, particularly Russia and China, are expected to become more aggressive in targeting European companies in 2007 due to the scale of foreign currencies that both private and state-owned companies are accumulating.

Mr McDonnell said the doubling in the S&P Europe 350 from its March 2003 low has been matched by a corresponding doubling in earnings. “This implied that the rally that we have witnessed thus far in the cycle is supported by fundamentals and our forecast is based on a continuation of this trend.” With consensus 2007 earnings per share (EPS) growth forecast at 8%, Standard & Poor’s Equity Research 2007 forecast implied only a modest re-rating in the market to 13.5x 12-month forward earnings by year-end. Industrials and pharmaceutical stocks are expected to outperform the market, while the consumer discretionary and IT sectors will lag.

Standard & Poor’s expects GDP growth in the Eurozone and US to weaken in 2007. However, global emerging markets, which now account for nearly one third of global output, are of sufficient size to offset much of the slowdown in the US.

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