by Phil Doel
1. July 2011 01:41
The announcement that Cheung Kong Infrastructure are considering a bid for Northumbrian Water has breathed new life into the utilities sector and provided a boost to my F&C UK Equity Income Fund. This announcement was quickly followed by engineering group Melrose approaching Charter with a view to an acquisition and while I only hold a very small position in Melrose, Peter Lees does have a significant position in his F&C UK Alpha Fund.
The important point here though is that it indicates that M&A activity remains in rude health and there are two main reasons why I believe this will continue.
The first is the strength of company balance sheets and the need to put capital to work or return it to shareholders in a low interest rate environment. The second is that with growth starting to wane in certain areas margins are beginning to come under pressure, which seems to be the case with Charter deal. Any corporate activity that enables costs to be taken out of a combined business is likely to be attractive to shareholders.
While potential M&A activity is not a key driver of investment decision making within my Fund, it is something we need to be aware of when conducting our analysis.
