Cash flow is king?

Wary European firms are sitting on a cash pile of US$475 billion, but they may risk losing out to their US rivals on the acquisition front

PUBLISHED : Tuesday, 26 February, 2013, 12:00am
UPDATED : Tuesday, 26 February, 2013, 4:54am

European companies are hoarding more than three times the cash they held a decade ago as the region heads for a second year of recession, putting them at risk of losing out to US rivals boosting acquisitions and investment.

Cash holdings at the 265 European companies in the Stoxx Europe 600 Index, excluding banks and insurers, to have reported 2012 results totalled US$475 billion at the end of last year. That compares with US$136 billion in 2002 and is 14 per cent more than in 2011. Siemens, Vodafone and Total are among nine companies that each held more than US$10 billion.

"Many European companies are taking a conservative view with respect to their capital structure and keeping meaningful cash positions," said Francois-Xavier de Mallmann, head of European investment banking services at Goldman Sachs in London. "They find it challenging to predict the combined impact of higher unemployment, higher taxes and lower public spending on consumer demand and their top line."

The euro area would shrink for two consecutive years for the first time since the common currency was introduced, the European Commission predicted on last week, scrapping an earlier growth forecast. Western European companies have announced US$50 billion of acquisitions so far this year, almost half the total a year ago, while purchases by US companies almost doubled to US$184 billion, data shows.

Daimler, whose cash and cash equivalents rose 15 per cent last year to €11 billion (HK$112.75 billion) at the end of December, encapsulated the mood in European boardrooms.

While the company would roll out 13 new models with no predecessor in the next eight years, the maker of Mercedes-Benz vehicles did not plan any "major" acquisitions, chief financial officer Bodo Uebber said. "The liquidity is a sedative," he said. "We want to be prepared for uncertain times."

To preserve cash, European companies are also limiting payouts to shareholders. The dividend yield of companies in the Stoxx Europe 600, excluding financials, will probably stagnate at 3.45 per cent this year, according to analyst estimates.

Deutsche Lufthansa said this month that it planned to suspend its dividend for the first time since 2010 to save cash as the German airline rejuvenated the fleet and pushed ahead with its most ambitious cost-savings programme to date. Nokia said last month that it would omit a dividend for the first time in at least 143 years.

Other firms that cancelled or reduced dividends in recent months include phone companies Telecom Italia, Royal KPN and Telefonica as well as car companies Peugeot Citroen and Faurecia.

"Companies are wary," said Nils Ernst, a Frankfurt-based fund manager at DWS Investments. "If you raise the dividend, you have to be certain that in the next five to 10 years you don't have to cut it."

Switzerland's Nestle, the world's largest food company, planned to maintain capital expenditure for this year at the same level as in 2012, chief financial officer Wan Ling Martello said this month. The operating cash flow of the maker of Movenpick ice cream, which last year agreed to buy Pfizer's infant-nutrition business for US$11.9 billion to expand in markets such as China, surged 55 per cent last year to 15.8 billion Swiss francs (HK$131.76 billion).

With many of Europe's biggest companies reluctant to spend on deals this year, their US peers may choose to pounce instead. John Malone's Liberty Global, based in Colorado, took advantage of low financing costs and agreed this month to buy British cable-television provider Virgin Media for US$16 billion.

"There are a lot of acquisition targets out there," said Matthias Born, a Frankfurt-based fund manager at Allianz Global Investors in Frankfurt. "Consumer, chemicals and parts of industrials are areas where there should be attractive targets in Europe."

In a note this month, Deutsche Bank analysts Fadi Chamsy and Sascha Levitt identified Dutch cable company Ziggo, British airport-security scanner company Smiths Group, German fragrance maker Symrise, French car-parts manufacturer Faurecia, Belgian retailer Delhaize Group, Switzerland's Nobel Biocare and British fashion brand Burberry as potential acquisition targets.