Following the extraordinary volatility of the last 12 months, forward PE ratios are now seven percent higher (at 14.0x for 2010 versus 13.1x for 2009) while net debt to EBITDA ratios are expected to decline by 18 percent from 1.5x to 1.2x.
Improving forward PE ratios equate to enhanced deal-making appetite while declining net debt to EBITDA ratios equate to improved deal-making capacity. Therefore, the latest Predictor numbers point to a slow but assured improvement in the global deals market over the next 12 months even though credit markets remain tight.
However, closer analysis of the Predictor numbers does reveal just how far analysts had to revise their earnings expectations downwards during 2009. Looking at data as at December 2009, earnings expectations for the end of 2009 are now fully 20 percent lower than were originally predicted at the end of 2008, showing that analysts were decidedly over-optimistic with their 2009 predictions.
The same analysts now expect to see a 24 percent increase in earnings for 2010 over 2009, effectively pushing the forecasts they made a year ago out by a further 12 months. The net result of the market’s recent meteoric rise is therefore a modestly increased forward PE ratio; something more in keeping with a predicted period of slow, steady and considered growth.
Commenting on the results, David Simpson, Head of Global M&A at KPMG and a partner in the U.K. firm, said: “To me, these results bear all the hallmarks of a market that has been reset for growth. If we had not taken into account analysts’ reduced forecasts for 2009, we would now be showing unrealistic increases in forward PE ratios of over 30 percent. Once we had done so, however, a more sensible figure of seven percent emerged.”
“So long as the analysts are not as mistaken again in their predictions as they were a year ago, the market has thus been recalibrated and we should now be able to look forward to a steady, if unspectacular, reawakening of the M&A market during 2010.”
Looking at the regional numbers within the latest Predictor, all of the geographical regions exhibit the ‘preferred’ combination of improving PE ratios (increasing appetite) and declining net debt ratios (increasing capacity). Latin America shows the highest increases in PE ratios, moving up 62 percent from 8.9x to 14.5x. It is followed by AsPac (exc. Japan) at 35 percent, Africa & the Middle East at 13 percent, Europe at seven percent and North America at four percent.
On the net debt to EBITDA ratios, Africa & the Middle East forecasts a 37 percent decline (down from 0.8x to 0.5x), followed by North America at 24 percent, AsPac (exc. Japan) at 20 percent, Latin America at 18 percent and Europe at 15 percent.
The one outrider in all of this is Japan which registers a 41 percent fall in its forward PE ratio; a rare negative in an otherwise positive set of global figures – although its forecast net debt to EBITDA ratio does follow the trend with a more reassuring decline of 12 percent.
At a sector level, Basic Materials posts an excellent combination of results with forward PE up by 17 percent and net debt down by 32 percent. We can also expect M&A in Technology and Non-Cyclical Consumer Goods to perform well with 20 percent and 16 percent increases in PE ratios respectively. Healthcare and Cyclical Consumer Goods look very good on the debt front, posting 41 percent and 23 percent falls respectively.
David Simpson concluded: “It is important to note that our Global M&A Predictor is principally focused on corporate activity. Even though we have seen some resurgence in private equity deals, that sector of the market will continue to be hampered by a shortage of debt, putting it at a comparative disadvantage to corporates. The Predictor shows that corporate appetite and capacity are expected to increase - so we may confidently expect that corporate M&A will lead the way in 2010.”
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 144 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG’s Global M&A Predictor tracks 12 month forward Price to Earnings (PE) multiples and estimated net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratios to track and establish the potential direction of M&A activity.
Where possible, earnings and EBITDA data is on a pre-exceptionals basis with the exception of Japan, for which GAAP has been used.
KPMG’s Global 1,000 Index (against which the Predictor is calculated) comprises 1,000 of the largest companies in the world by market capitalization.
All raw data within the Predictor is sourced from Thomson Reuters. KPMG Corporate Finance calculates 12 months forward PE data for each region and sector. This tool is used due to its transparency, the ready availability of data and widespread acceptance in the investment community. Our PEs test for “paper appetite” i.e. the relative preparedness of companies, sectors and regions to originate deals on the basis of share values only.
Net debt to EBITDA is a respected ratio which indicates capital structure and financial gearing. This ratio tests for “debt capacity” – that is, the relative ability of companies, sectors and regions to originate deals using debt only.
KPMG’s Global M&A Predictor attempts to identify changes over time that could imply trends in appetite for deals and indeed capacity for deals. It also attempts to compare and contrast sector regions to highlight possible areas of deal flow. (Note: Net debt/EBITDA ratio calculations are considered not relevant (for the Predictor’s purposes) in the financial services and property sectors. These sectors have therefore been excluded from this analysis.)
KPMG’s Corporate Finance practices provide a range of objective, investment banking advisory services internationally and comprise more than 2,300 investment banking advisory professionals operating in 62 countries. KPMG’s Corporate Finance provides strategic advisory and deal management services covering: acquisitions and disposals; mergers and takeovers; valuations and fairness opinions; structured and leveraged financing; private equity strategies; initial and secondary public offerings; joint ventures and transaction alliances.
