The Financial Times’ main headline today (see here) was that there were $1130bn of M&A deals over the first three months of this year, the largest ever for a first quarter, and 14% higher than Q1 last year. Private equity accounted for a large chunk (the $45bn proposed LBO of TXU was included in the figures). As we have regularly stated on this blog (such as here), leveraged buyouts are getting larger – private equity groups raised around €100bn in Europe last year, which translates into €500bn to spend on takeovers once this is leveraged up five times. This money will be spent, since private equity companies do not earn any fees until the companies are taken over.
Within the M&G Optimal Income Fund, I have expressed my view on rising LBO activity by buying protection on the iTraxx HIVOL index, which contains the 30 most volatile CDS names (see here for more information on iTraxx indices). All CDS within the HIVOL index are investment grade companies and the list is updated every six months. As you’d expect, the vast majority of the companies with the most volatile CDS are those that are subject to takeover speculation, and particularly those that are seen as LBO targets. This can be seen by looking down the names on the HIVOL index – BT, Cadbury Schweppes, Compass Group, Continental, GKN, ICI, Kingfisher, M&S, Pearson, Telecom Italia and Vivendi are all rumoured to be takeover targets. If any of the index constituents are bought via LBO then the index spread would be expected to widen out.