European Financial Services M&A Insight - PwC€¦ · European Financial Services M&A Insight Data Analysis European financial services M&A remains relatively subdued, although it

Financial Services

European Financial ServicesM&A InsightSeptember 2010

02 Welcome

03 Data Analysis

06 Regulatory overhaul in European asset managementset to drive M&A

09 All change? Developments in the outlook forUK building societies

12 Looking Ahead

European Financial Services M&A Insight

WelcomeWelcome to the third edition of European Financial Services M&AInsight for 2010.

The quarterly report providesperspectives on the recent trendsand future developments in theM&A market, including analysisof the latest transactions andinsights into emerginginvestment opportunities.

Although the overall value of deals in theEuropean financial services sector grewin the second quarter of 2010, M&Aactivity has yet to reach the levels thatmany, including us, had anticipated atthe beginning of the year. Analysis ofrecent transactions shows that theimpetus for restructuring within bankingand consolidation within insurance is stillstrong, though smaller and mid-leveldeals predominate. (See ‘Data Analysis’).The sales by Royal Bank of Scotland ofmore than 300 branches to Santanderfor a reported £1.65bn1 and of its GlobalMerchant Services business to a USprivate equity consortium for a reportedenterprise value of up to £2bn2 tookplace after the quarter end, but will beexplored in more detail in the nextedition of Insight.

The regulatory shake-up in the Europeanasset management industry presentsimportant commercial opportunities andthreats for all parts of the value chain.Crucial considerations include groupstructures, operating locations and theviability of product, distribution andservice propositions. M&A is likely toplay an important part in the resultingstrategic realignment and restructuring.(See ‘Regulatory overhaul in assetmanagement set to drive M&A’).

UK building societies are struggling tosustain growth in the face of increasingfunding costs, decreasing net lendingand very low base rates. Securingsufficient funding looks set to remain akey challenge for the sector.Developments in the societies’ searchfor new capital therefore hold out thepossibility of further M&A activity in thesector. (See ‘All change? Developmentsin the outlook for UK building societies’).

Industry restructuring will continue todrive deal activity in the second half ofthe year. We also see the potential for agradual recovery in growth-orientedtransactions, albeit to some extent witha different focus to the boom years. Thisincludes cross-border deals aimed atdeveloping and strengthening acommercial presence in rapidly growingfinancial services markets such asTurkey, the Middle East and North Africa.Emerging market businesses may alsoseek to acquire European expertise –especially in wealth management orinvestment banking – and leverage thisacross their home or emerging markets.(See ‘Looking Ahead’).

We hope that you find this edition ofInsight interesting. Please do nothesitate to contact either of us or any ofthe article authors if you have anycomments or questions.

2 PricewaterhouseCoopers LLP

Fredrik JohanssonPricewaterhouseCoopers (LLP)[email protected]

Nick PagePricewaterhouseCoopers (LLP)[email protected]

Front cover image: Houses of Parliament, London

1 ‘RBS agrees to sell its RBS England and Wales and NatWestScotland branch based business to Santander UK plc’,Royal Bank of Scotland website, 04.08.10

2 ‘RBS agrees to sell 80.01% interest in Global MerchantServices to a consortium of Advent International and BainCapital’, Royal Bank of Scotland website, 06.08.10


Data Analysis

European financial servicesM&A remains relatively subdued,although it has grown from thelow levels of the first quarter.Banking restructuring,consolidation in insurance,private equity-led deals andscale-building in other areas ofthe industry continue to generatedeal activity, particularly in themid-market.

The value of European financial services M&A grew during the second quarter of2010, increasing to €10.9bn from €7.8bn in the first quarter of the year.3 However,most of this growth was attributable to the year’s largest announced deal to date,Resolution’s €3.3bn acquisition of AXA’s UK life and pensions business, and onlyone other transaction was valued at more than €1bn. Total deal values for the quarterwere 46% lower than the €20.3bn recorded during the same period of 2009, althoughthat quarter was arguably distorted by BlackRock’s purchase of Barclays GlobalInvestors for €9.7bn (see Figure 1).

The relatively slow recovery of the developed economies (see Figure 2) and theirneed for fiscal rebalancing continue to make strategic planning a challenge forEuropean financial services companies. Concerns over levels of European sovereigndebt and European banking solvency are also casting a shadow over the capitalmarkets,4 contributing to the relatively subdued level of M&A activity.

3 The source data on the deals analysed in this publicationcome from mergermarket, Reuters and Dealogic, unlessotherwise specified. Our analysis methodology issummarised on P14

4 ‘Volatility dulls appetite for big M&A activity’, FinancialTimes, 29.06.10

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BGI €9.7bnHypo Real Estate €3.3bnBPCE €3bnLeasePlan €1.3bn

Friends Provident €2.2bnParis RE €1.4bn BNP Paribas Lux €1.3bn

RBS Sempra €1.2bn

WestLB €3bnIntesa Sanpaolo Servizi €1.8bnDelta Lloyd Groep €1.1bnJPMorgan Cazenove €1.1bn

AXA UK life and pensions€3.3bn KBL European Private Bankers S.A €1.3bn

Figure 1: Quarterly European FS deals by value (€m)

Source: Mergermarket, Reuters, Dealogic and PwC analysis

-7

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-3

-1

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3

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Western EuropeNorth AmericaLatin AmericaEastern EuropeAsia Pacific

■ 2009 ■ 2010 ■ 2011

Figure 2: GDP growth prospects by world region (%)

Source: PwC UK Economic Outlook, July 2010

PricewaterhouseCoopers LLP 3


Data analysiscontinued...

Even so, it is worth noting that thequarter-on-quarter increase in totalfinancial services deal values was notjust the result of one large transaction.Mid-market activity increased, with theaggregate worth of deals valued at lessthan €1bn increasing to €6.2bn from€5.3bn in the previous quarter and €3bnin the comparable period of 2009. Theincrease in banking deal values reflecteda range of transactions across Europe,while the pick-up in insurance activitywas largely due to the Resolution/AXAUK deal (see Figure 3).

A review of all deals announced duringApril, May and June shows thatrestructuring in Western Europe was thecentral theme of the quarter. Domestic


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■ Asset Management ■ Banking ■ Insurance ■ Other

Figure 3: Quarterly European FS deals by value – subsector analysis (€m)

Source: Mergermarket, Reuters, Dealogic and PwC analysis

Figure 4: Top 5 Deals Q2 2010

Month Target company Target country Bidder company Bidder country Deal value (€m)

Jun AXA SA (UK life and pensions) United Kingdom Resolution Limited United Kingdom 3,330

May KBL European Private Bankers SA Luxembourg The Hinduja Group India 1,350

Jun Societe Marseillaise de Credit SA France Societe Generale France 872

Jun Banco Guipuzcoano Spain Banco de Sabadell SA Spain 807

Apr Citibank International plc Sweden Marginalen AB Sweden 640(Swedish operations)

Subtotal 6,999

Other 3,879

Grand total 10,878

Source: PricewaterhouseCoopers analysis of mergermarket, Thomsons Reuters and Dealogic data


transactions accounted for 70% of totaldeal value and five countries dominateddeal-making, namely the UK (39% byvalue), Spain (14%), France (13%),Luxembourg (12%) and Sweden (9%).Government led activity wasinsignificant, representing just 0.5% oftotal deal value compared with 4%during the first quarter of this year and24% during the second half of 2009.

Our analysis of the quarter’s largestdeals (see Figure 4), along with mid-market and smaller transactions, pointsto several key themes. In particular wedraw attention to:

• Consolidation in insurance. In termsof individual transactions, thequarter’s largest announced dealwas the €3.3bn acquisition by theinsurance consolidation vehicleResolution of AXA’s annuity,protection and group pensionsbusinesses in the UK. The deal is tobe part-funded by a rights issue, andwill enable Resolution to combine thetarget with Friends Provident, the UKlife insurer it acquired in 2009. FromAXA’s perspective, the sale supportsits goal of withdrawing from capitalintensive operations in maturemarkets in order to focus onopportunities in Asia.

Other significant deals involvinginsurance targets included theacquisition of Standard LifeHealthcare by South Africaninsurance group Discovery Holdingsfor €200m, and – following itspurchase of 50% of CaixaCatalunya’s insurance businessesduring the first quarter – Mapfre’sacquisition of 50% of the insuranceactivities of Catalunya’s mergerpartners, Caixa Tarragona and CaixaManresa, for €86m.

One interesting transaction was theacquisition of Turkish insurancecompany Fiba Sigorta by SompoJapan Insurance for €253m. Therehave not been many recent examplesof inward bids for European growthtargets, but we believe there is furtherscope for deals of this nature (see‘Looking ahead’).

• Continued restructuring in banking.The process of banking restructuringin Europe continues, with divestmentof non-core activities still a key driver

of M&A activity. The largest such dealwas the Hinduja Group’s acquisitionof KBL European Private Bankers for€1.35bn from KBC, which had agreedto sell the unit after receiving stateaid. The transaction marks a rareEuropean banking acquisition by aprivate Indian company, which plansto give the business an emergingmarkets focus. In connection withKBC, we also note the announcementsince the quarter end of ananticipated management buy-out ofits UK brokerage, KBC Peel Hunt.

Other deals involving the divestmentof non-core businesses includedCitibank’s sale of its Swedish retailbusiness to local firm Marginalen for€640m and Libyan Arab ForeignBank’s purchase of a majority stake inBritish Arab Commercial Bank fromHSBC for €68m.

There were also several notablescale-building banking transactions inWestern Europe. The largest of thesewas Societe Generale’s acquisitionof Societe Marseillaise de Credit for€872m, but other in-market dealsincluded Banco de Sabadell’spurchase of Banco Guipuzcoanofor €807m and Veneto Banca’sacquisition of a 45% stake in BancaIntermobiliare di Investimenti eGestioni (€299m).

Lastly, the quarter saw a number ofsales of branch networks, in whole orin part. In addition to Marginalen’sacquisition of Citibank’s Swedishoperations, we noted Credit Mutuel’spurchase of 123 of Banco PopularEspanol’s branches for €313m, theacquisition of 50 of Banca Monte deiPaschi di Siena’s branches by InstesaSanPaolo subsidiary Banca CRFirenze, and Societe Generale’sacquisition of SEB’s French branchesfor an undisclosed consideration.

• Ongoing private equityinvestments. Private equity activitycontinued the resurgence seen duringthe first quarter. Secondary buyoutsincluded AXA Private Equity’sacquisition of holdings from NatixisPrivate Equity for €534m and VisionCapital Partners’ acquisition of astake in Swedish lender NordaxFinans from Palamon Capital Partnersfor €105m. Direct investmentsincluded deals focused on speciality

finance targets, such as Duke Street’sacquisition of a 58% stake in debtrecovery firm Marlin FinancialServices for €57m.

In addition to these themes, we notesigns of continuing scale-buildingactivity among asset managers, assetservicers and mutual savings banks.On the asset management side, notabledeals included Swedish investmentmanager Investment AB Oresund’sacquisition of local rival HQ Fonder ABfrom its parent bank for €89m and F&CAsset Management’s purchase ofalternative investment manager ThamesRiver Capital for €62m. Although outsideour dataset since it involves a US target,we also note Man Group’s $1.6bnacquisition of GLG.5 This is a significantdeal for the hedge fund sector, as ManGroup continues to build scale andextend its geographic coverage.

In the asset servicing area, two dealssaw specialised asset servicingbusinesses acquired by larger, globalplayers hoping to develop their nichecapabilities. Credit Suisse acquiredFortis Prime Fund Solutions for aminimum consideration of €150m,and JP Morgan Worldwide SecuritiesServices purchased Schroders PrivateEquity Administration Services for anundisclosed amount.

There was also a further round of mergeractivity involving mutual savings banksin the UK, and as anticipated in theprevious edition of Insight, Germany andSpain. In the UK, the process of buildingsociety consolidation continued with themerger of the Skipton and CheshamBuilding Societies (see ‘All change?Developments in the outlook for UKbuilding societies’); in GermanySparkasse Karlsruhe merged withSparkasse Ettlingen, and in Spain therewere a large number of mergersinvolving Cajas and rural Cajas, withCajamar and Caja Rural de Toledoamong the most active merger partners.(Please see May edition of Insight for aM&A assessment of the German andSpanish banking markets).


5 ‘Man agrees to $1.6bn takeover of rival GLG’, FinancialTimes, 17.05.10


Regulatory overhaulin European asset management set to drive M&A

The European assetmanagement industry is facinga wave of new regulations in thewake of the global financial crisis,aimed at improving choice,strengthening investor protectionand extending the single marketin the EU. These developmentswill have important strategicimplications for the industry,spurring many companies toconsolidate, relocate or shift thefocus of their operations.

The current European regulatory shake-up includes a far-reaching update of theUndertakings for Collective Investmentsin Transferable Securities (UCITS IV) andthe controversial Alternative InvestmentFund Managers Directive (AIFMD). Alsoon the horizon is the Retail DistributionReview (RDR), which while specific tothe UK market has echoes in other partsof Europe as regulators strive to improvevalue, transparency and fairness forinvestors.

These developments present importantcommercial opportunities and threatsfor all parts of the value chain, includingasset managers, distributors, servicecompanies and other intermediaries.Firms will need to look beyond theimmediate compliance implications athow the regulations will affect theirstrategies, business models and tacticaldecisions. Crucial considerations includegroup structures, operating locationsand the viability of their product,distribution and service propositions.We believe M&A will form an importantelement of the resulting strategicrealignment and restructuring.

UCITS IV

UCITS IV is the latest stage of the EUdrive to create a single market forinvestment funds. It is due to come intoforce in July 2011 and introduces fivekey provisions: a new managementcompany (ManCo) passport; new rulesfor fund mergers; new rules for master-feeder fund structures; key informationdocuments (KID) for investors and moreefficient notification procedures (forfurther information and analysis, pleasesee the PricewaterhouseCoopers’‘UCITS IV: Time for Change’ series –www.pwc.com/gx/en/asset-management).

The ManCo passport will enable assetmanagers to market funds anywhere inthe EU without maintaining a physicalpresence. Many firms are likely to usethe ManCo passport as an opportunity

to concentrate their operations in astrategic or tax efficient jurisdiction anduse the fund merger and master-feederarrangements to develop larger andmore cost efficient cross-border funds.The potential benefits include fundrationalisation, tax savings and lowercosts (which should also lower the costsof the funds and therefore to theinvestor). However, it is important to bearin mind the challenges in managing afully centralised operation. These includemanaging the complexity of differentmarket dynamics and regulatoryframeworks and dealing with operationalchange and new compliancerequirements (mainly the KID).

UCITS IV’s impact on M&ATo maximise the benefits of restructuringand rationalisation, asset managers maydivest some of the entities that provideda physical presence in a particularmarket. The buyers are likely to becompanies seeking to establish orstrengthen operations in target marketsor non-EU asset managers looking togain a foothold inside the EU.

As asset management operations couldbe consolidated in fewer locations,service providers will need to positionthemselves to be able to service clientseffectively both where their operationsare based and where their products aresold. Furthermore, depositories will needto be physically present in the locationswhere their clients’ products are sold.This means that many service providersmay have to increase their geographicalfootprint. M&A can play an importantrole in achieving this as service providersmay view acquisitions of local entities asa speedier alternative to proprietarystart-up strategies. Among the sellerswill be firms that no longer wish or areunable to operate on a pan-Europeanlevel.


Salv NigrelliPricewaterhouseCoopers (LLP)[email protected]

Fredrik JohanssonPricewaterhouseCoopers (LLP)[email protected]


AIFMD

The AIFMD, which was born out of theG20 meeting in London in 2009, aims toprovide more transparency, robustgovernance and improved solvencywithin the alternative investment sectors.While it is mainly directed towardshedge funds and private equity, thescope may extend to mainstreammanagers and funds by coveringvirtually all investment vehicles outsidethe UCITS framework. The AIFMD hasbeen the subject of considerablepolitical wrangling, which has resulted inrival European Parliament and Council ofMinisters drafts. However, a deal isbelieved to be imminent and thedirective could be in place by 2012(please see PricewaterhouseCoopers’‘AIFMD News’ for further information onthe AIFMD and regular updates on thelatest developments in the directive –www.pwc.com/gx/en/asset-management).

AIFMD’s impact on M&AAs the draft directive currently stands,the AIFMD would make it difficult fornon-European asset managers incountries that do not apply the mainprovisions of the directive, most notablythe US, to distribute their funds withinthe EU. As a result, some of these ‘thirdcountry’ asset managers might wish toacquire EU regulated businesses tocontinue to be able to distributeproducts within the EU. Alternatively,they may choose to dispose of their EUoperations, creating attractiveacquisition opportunities. Furthermore,the tighter controls on delegation inareas such as risk and depositorymanagement may encourage someservice companies to withdraw from theEU, creating further openings forpotential buyers.

RDR

The RDR aims to increase transparencyfor investors, improve the quality ofadvice through increased professionalstandards for advisors and ensure thatadvisor remuneration does not influencethe advice to investors by disallowingcommissions. The RDR is due to comeinto force on 1 January 2013(PricewaterhouseCoopers’ ‘DistributionPost-2012’ series examines the impactof the RDR and underlying changes inconsumer expectations –www.pwc.co.uk/eng/issues/the_ retail _distribution_review.html).

RDR’s impact on M&A As advisor remuneration moves toa fee basis, it will become transparentto investors how much they pay forparticular advice and services. As aresult, most investors are only going towant to pay for advice and services theyperceive as adding value, rather thaninformation they could themselves freelyobtain from publicly available sources.



Regulatory overhaulcontinued...

The expected lower fee margins forasset managers in the post-RDRenvironment mean that for many assetmanagers, continuing ‘as is’ will putsignificant pressure on profitability.To sustain current margins, assetmanagers may need to offer more of thisvalue-adding advice and service than isgenerally the case today. We expectsome of the required capabilities to beacquired through M&A.

Furthermore, the increasing cost ofproviding such advice and services willmake it more important to generateeconomies of scale through increasingvolumes. This is likely to accelerate thecurrent trend towards consolidation.For non-UK asset managers, theexpected lower fee margins and the costand complexity of RDR compliance maymake the market unattractive and somemay wish to exit as a result.

In the advisor sector, higher professionalstandards will put significant pressureon both individual advisors and firmsand may spur many to exit as a result.The level of investment required by massmarket advisory firms to comply withthe competency standards of the RDRand scale needed to provide cost-competitive advice may prove especiallyprohibitive. We believe there will beconsolidation as a consequence.Consolidators that act decisively willhave significant opportunities for growth,horizontally or vertically.

Finally, the outlook for platforms andtheir role within the value chain are stillunclear, with the RDR not finalised in thisregard. If the platforms’ business modelscontinue to be challenged in the finaldirective, some firms may prefer towithdraw from this area of productdistribution and servicing.

Capitalising on the opportunities

This latest round of regulation forms partof a wider European drive for increasedtransparency, comparability and choice,with the impetus coming from bothregulators and investors. It is importantto recognise their areas of overlap anddynamics – individually and betweenthem as well as with other regulatoryinitiatives – as many participants in theEuropean asset management industrywill be impacted by more than one ofthese regulatory initiatives. The result islikely to be a growing overhaul ofstrategy, product design, distributionand pricing.

Asset managers, distributors and servicecompanies will need to act quickly ifthey want to take advantage of thepotential opportunities opened up bythese regulatory changes. This includes:assessing the impact of thesedevelopments on their operations;deciding how and where they intend tocompete; and addressing the potentialgap between product and serviceoffering and investor needs. M&A islikely to play an important part, whethertransformational or bolt-on in nature, inhelping them to capitalise on theopportunities and defend against thethreats. Naturally there will be a numberof firms with similar goals and the mostattractive firms are likely to be targetedearly. Divesting companies also need toassess their options and move speedilyas once the full implications of theregulations are understood, there couldbe a glut of operations coming on to themarket and hence lower prices/greaterdifficulties in securing a deal.


Editorial eyeThe new regulatory initiativesmay provide a catalyst for a widercompetitive shake-up in the assetmanagement industry. For somecompanies, the priority will be basiccompliance. Others are alreadylooking at how these developmentswill affect their business models,what they will need to do torespond to the implications andhow they can turn the changes totheir advantage. This needs toinclude assessing the role of M&A.


All change?Developments in the outlook for UK building societies

Building societies are typicallyrenowned for their dependability,but the last two years havebeen anything but predictable.Developments in the societies’search for new capital hold outthe possibility of further M&Aactivity in the sector.

UK building societies have had a rough ride since 2008, symbolised by thedowngrades of nine societies’ ratings by Moody’s in April 2009. The UK FinancialServices Authority (FSA) responded with a round of capital stress testing to try andcounteract market uncertainty over the sector’s solvency, its funding problems andpressures on profitability. The challenges of stress tests, solvency, funding andprofitability reinforced each other, creating a vicious circle (see Figure 1).


Shaun McNameePricewaterhouseCoopers (LLP)[email protected]

Caught in a vicious circle

FSA Stress tests

Reduced profits/

increased losses

Funding challenges

Rating agencies

downgrade

Figure 1: The challenges of stress tests, solvency, funding and profitability

Source: PricewaterhouseCoopers analysis

Move forward to 2010 and, despite a government guarantee for short-term debt,funding remains a key challenge for the sector. The origins of this problem lie in thesocieties’ 13% average annual growth in mortgage loans between 2002 and 2007, ata time when remortgage volumes were at their highest (see Figure 2). This expansionwas largely enabled by wholesale funding, which increased at an average annual rateof 23% over the period.6 When wholesale funding began to be far less affordable, theconsequences were severe. The societies tried to fall back on retail deposits, butthese proved hard to attract and expensive to maintain. In 2009 net lending by thesector went into reverse for the first time since data began to be collected in 1982.7

6 Source: Building Societies Association statistics and PricewaterhouseCoopers analysis

7 Source: Council of Mortgage Lenders statistics


All change? Developments in the outlook forUK building societiescontinued...

The combination of increasing fundingcosts, decreasing net lending and verylow base rates squeezed buildingsocieties’ net interest margins, andcompetition for retail deposits ismaintaining that pressure. The societiesare facing tough competition fromestablished banks, which have fundingchallenges of their own, not to mentionNational Savings & Investments and newretail banks with deposit-led strategies.Foreign players are also active in the UKsavings market. The Irish and Icelandicbanks may have retired, but others –such as the Indian banks that currentlyfeature in best buy tables – areresurgent.

Combined with the costs of the FinancialServices Compensation scheme, thismargin pressure is putting the sector’score profitability under strain. Potentialresponses include acquiring existingsavings books from other deposit-takers, developing non-balance sheetbusiness and making cost-focusedadaptations such as back-officeoutsourcing.

Unfortunately, all of these moves requirecapital investment, at a time whenprudential regulation of the sector istightening. In 2009, the FSA ruled thatpermanent interest bearing shares(PIBS), a form of subordinated capitalunique to the sector, could not becounted towards Tier 1 capital. Thesocieties’ need for additional capital hasconsequently grown, and is only likely toincrease further with the advent of BaselIII, which is expected to place morestringent capital requirements on allEuropean mutual banks.

A key question then is how to introducenew capital to the societies withoutcompromising their mutual status?

In the past, PIBS might have been seenas the solution, but the loss of their Tier1 status and the fact that institutionalholders were arguably hurt by theconversion of West Bromwich’s PIBSinto profit-participating deferred shares(PPDS) means that these instrumentshave lost their appeal for issuers andinvestors alike.

The UK coalition government has statedits hope that a revived building societysector – in combination with new retail

banking entrants such as Metro Bank,Virgin Money and the NBNK InvestmentsPLC8 among others – will strengthencompetition in consumer banking.Indeed, a March 2010 discussion paperfrom HM Treasury called on societies todevelop a new form of instrument thatwould combine bond-like attributes withequity-like loss absorption.9 There islittle doubt that both the FSA and thesocieties would be delighted by such adevelopment, and for a time the BuildingSocieties Association had hoped to10 PricewaterhouseCoopers LLP

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Note: In 1910, there were 1,723 authorised building societies in Great Britain. This figure declined to 726 by 1960 and 273 by 1980.

Source: Building Societies Association

8 ‘NBNK Investments starts trading as it eyes UK bankingassets’, Wall Street Journal, 21.08.10

9 ‘Building society capital and related issues’, HM Treasury,March 2010


agree a new category of ‘mutual ordinarydeferred shares’ with the FSA. However,this has proved a difficult square tocircle, not least because investorsremain wary of the risks of regulatory-driven restructuring.

The obvious alternative to introducingnew capital to the sector is to useexisting resources more efficiently – inother words, to merge. The rationale forbuilding society consolidation isstraightforward: Deals offer the chanceto realise cost synergies, improvediversification and access cheaperwholesale funding. The financial crisishas certainly proved a catalyst forconsolidation among building societies,which has accelerated since 2007 (seeFigure 3).

Mergers announced during the last twoyears include Yorkshire’s merger with theBarnsley, and then with the Chelsea;Skipton’s mergers with the Scarboroughand the Chesham; Nationwide’sabsorption of the Derbyshire, theCheshire and much of the Dunfermline;and the merger of Co-op FinancialServices and the Britannia. The effecthas been to reinforce Nationwide’sleading position, with Co-op/Britanniaand Yorkshire/Chelsea the only other

societies coming close to a nationalbranch network.

Furthermore, July 2010 saw theappearance of a potential new avenuefor societies seeking to access externalcapital. The announcement that the KentReliance was in talks with US privateequity house J.C. Flowers over a newjoint venture came as a surprise to manyin the sector.

According to the published terms of thetransaction, Kent Reliance will convertinto an ‘industrial and provident’ society,the same legal structure as Co-opFinancial Services.10 In exchange for a£50m injection of capital, the society willgive J.C. Flowers part-ownership of anew banking subsidiary into which itwill place its main activities. Commentsreported in the media at the time of theinitial announcement suggested thatJ.C. Flowers was ready to recapitalisea number of societies in this way, andthat the new entity could serve as aconsolidation vehicle to create a ‘minisuper-mutual’11.

This deal clearly opens the possibility ofother foreign investors or new entrantsto the UK banking market becominginvolved in the mutual sector. Regulatoryattitudes will be crucial, but the presence

of former FSA chairman Sir CallumMcCarthy on J.C. Flowers’ UK board isunlikely to harm the proposed deal.

In conclusion, there is no doubt thatbuilding societies’ models are undersignificant pressure and that manysocieties would benefit from injectionsof fresh capital. However, until the legal,regulatory and competition frameworkswithin which the societies operate areclarified, the sector will struggle to raiseTier 1 capital on the open markets.

Even so, the societies are not withoutoptions. Mutual mergers will continue toattract societies seeking greater financialstability, and the potential involvementof private equity or other investorsraises further possibilities for strategictransformation. Societies wishing tosurvive and prosper in the future mustresist the temptations of inertia. Insteadthey should make a clear-headedassessment of the challenges facingtheir business and, if they have notalready done so, begin to explore theirstrategic choices.


10 ‘New Business Structure and Capital Investment’, KentReliance Building Society, 03.08.10

11 ‘Building societies tackle merger issues’, Financial News,19.07.10

Editorial eyeWe have written about thechallenges of the UK buildingsociety sector in earlier editions ofInsight and the drivers for M&Aactivity and restructuring in thesector have, if anything, increasedover the last 12 months. We believea number of building societies havean unsustainable business modelon a stand-alone basis and weexpect the strategic conversationsand transactions to continue overthe forthcoming quarters.


Looking Ahead

Financial services M&A in the firsthalf of 2010 may not have livedup to expectations, but weexpect industry restructuring tocontinue to drive deal activity inthe second half of the year.We also see the potential for aslow recovery in growth-orientedtransactions, albeit in a ratherdifferent form to those seenduring the boom years.

In common with many commentators,at the start of 2010 we felt that the scenewas set for a recovery in M&A activity.In fact, debt finance has remainedexpensive, financial markets havebecome more volatile in recent months(see Figure 1) and it has been hard forbuyers and sellers to agree onvaluations. As discussed in ‘Dataanalysis’ (see pages 3–5) this has had adirect impact on levels of M&A activity,especially at the large end of thespectrum. Our perception is that thecollapse of Prudential’s ambitious bid toacquire the Asian assets of AIG may alsohave dented confidence among chiefexecutives and deal-makers in Europeanfinancial services.

Even so, we believe that the underlyingdrivers of European financial servicesM&A remain at work, and we expectthe coming months to see a continuingflow of mid-market deals punctuated bythe occasional €1bn-plus transaction.We have grouped the areas where weexpect to see deal activity under twomain headings.

Further industry-wide restructuring.Banking restructuring may not be theonly game in town, but we expect banksto remain at the heart of European

financial services deal activity, both assellers and bidders. More specifically,we predict:

• Further consolidation in areas ofEuropean banking seen as beingunder particular stress, such as Greekprivate sector banks, Spanish Cajas,German Landesbanken and UKbuilding societies;

• Additional disposals of non-coreactivities such as asset management(including wealth management),payment processing and assetservicing, especially, but not uniquelyby, banks like Lloyds Banking Group,ING and Commerzbank, which needto satisfy European Commission stateaid conditions;

• More sales of captive insurancesubsidiaries by banking groups,especially in areas of Northern Europewhere the bancassurance model hasnot always worked well; and

• Further disposals of bank branchnetworks, such as Royal Bank ofScotland’s recently announced sale ofits 318 former Williams & Glyn’sbranch network.12


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4/20

09

01/0

3/20

09

01/0

2/2009

01/0

1/20

09

Figure 1: European Financial Services Equities Index, January 2009 – June 2010

Source: Datastream

12 ‘Santander seals deal for 318 RBS branches’, FinancialTimes, 04.08.10


Beyond banking-led activity, we alsoexpect to see:

• Further consolidation amongEuropean insurers, as global groupslook to trim their developed marketbusinesses and re-focus on higher-growth markets in Asia; and

• Additional scale-building andrestructuring deals among assetmanagers and asset servicers,encouraged by the wave of newregulation affecting the industry.

Investment in growth. We are notpredicting a return to significantnumbers of large cross-border dealsaimed at acquiring growth or buildinginstant scale in ‘second home’ markets.Nonetheless, we believe that comingquarters will see a slow recovery intransactions aimed at raising the growth profile of bidders, whether they arebased in Europe, North America or Asia.These could include:

• Scale driven consolidation in theinsurance industry. We have alreadyseen transactions and bids for scaledriven deals across Europe(particularly in the UK) and there areplenty of rumours of multi-billion eurobids in the short-term future.

• Deals aimed at acquiring positions inrapidly growing financial servicesmarkets such as Turkey, the MiddleEast or North Africa;

• Transactions focused on acquiringEurope-based expertise – especiallyin asset (including wealth)management or investment banking –and leveraging this across emergingmarket-based financial groups; and

• Deals involving targets in maturemarkets with potential for above-market rates of growth. Santander’sacquisition of part of Royal Bank ofScotland’s branch network,announced after the quarter end, is an

example. The UK is now one of Santander’s strongest units andthis deal could give a boost toSantander’s ambitious growth plansfor UK business banking.

In addition, we expect the revival inprivate equity deal-making to continue.Secondary and even tertiary buyoutsmay become an increasing feature asfunds look to drawdown on existingcapital commitments. The acquisition bytwo US private equity firms of RoyalBank of Scotland’s Global MerchantServices unit13 (including its WorldPaybrand), announced after the quarter end,suggest that direct investments will alsoremain firmly on the horizon.


13 ‘RBS to unveil £2bn sale of card processing arm’, FinancialTimes, 05.08.10


MethodologyFS M&A deal activity analysis

This issue includes financial servicesdeals:

• Reported by mergermarket, Thomsonand Dealogic;

• Announced during the second quarterof 2010, and expected to complete;

• Involving the acquisition of a >30%stake (or significant stake givingeffective control to the acquirer); and

• Acquisitions of European basedfinancial services targets where a dealvalue has been publicly disclosed.

Since 2009, our data coverage hasincluded Dealogic information. However,comparative figures for previous yearshave not been restated.

Our analysis also excludes deals that, inour view, are not ‘pure’ financial servicesdeals involving corporate entities orentire operations, e.g. real estate dealsand sales/purchases of asset portfolioswhere the disclosed deal valuerepresents the value of assets sold.


This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness ofthe information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assumeany liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or forany decision based on it.

For further information on the Global FS M&A Marketing programme or for additional copies, please contact Maya Bhatti, Global Financial Services Marketing,PricewaterhouseCoopers (UK) on +44 (0) 20 7213 2302 or at [email protected].

About PwCM&A advisory services in the financial services sector

PricewaterhouseCoopers is aleading consulting andaccounting advisor for M&A inthe financial services sector.Through our Corporate Finance,Strategy, Structuring, TransactionServices, Valuation, Consulting,Human Resource and Taxpractices, we offer a full suite ofM&A advisory services.

The main areas of our services are:

• lead advisory corporate finance

• deal structuring, drawing onaccounting, regulation and taxrequirements

• due diligence: business, financial andoperational

• post-merger integration: synergyassessments, planning and projectmanagement

• valuation and fairness opinions

• human resource and pension schemeadvice.

For more information on any of theabove services or if you have any otherenquiries, please contact:

Nick [email protected]

Fredrik [email protected]

About this reportIn addition to the named authors of the articles, the main authors of and editorial team for this report were Nick Page, apartner, and Fredrik Johansson, a director in PricewaterhouseCoopers (LLP) Transaction Services-Financial Services team inLondon. Other contributions were made by Andrew Mills of Insight Financial Research and Maya Bhatti, Katrina Hallpike,Caroline Nurse, Antoine Royer and Bridget Hallahane of PricewaterhouseCoopers (LLP).

Are you ready to capitalise?

The impetus for restructuring within the Europeanfinancial services sector continues to gather pace.

Is your organisation ready to take advantageof the emerging opportunities for divestment andacquisition?

If you are looking to restructure or grow yourbusiness, visit www.pwc.com/financialservices.

© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership in theUnited Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.

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European Financial Services M&A Insight - PwC€¦ · European Financial Services M&A Insight Data Analysis European financial services M&A remains relatively subdued, although it