capital confidence barometrer_spain
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4th Issue
Outlook AprilOctober 2011 Capital CondenceBarometer
Our fourth Capital Condence Barometer reports a surge in
condence in the global economic outlook. Condence in the
global economy has almost doubled in the last six months.
Leading companies are now focusing on growth instead of
defensive measures.Capital market conditions remain strong and condence in many local economies andindustries also remains high. However, more recent external factors such as politicalinstability in the Middle East and rising ination and natural disasters are creating longerterm uncertainty. This is leading to mixed messages for M&A.
In the short term M&A appetite is up, with one third of those surveyed looking for a newacquisition in the next six months. Longer term the appetite for M&A declines albeitfrom a relatively robust level as companies identify organic growth as their No.1 priority.The growing valuation gap between buyers and sellers could also constrain M&A appetite.We should see increased levels of M&A in 2011 but further external shocks may promptboards to rein in acquisition plans.
For the rst time, we compare the views of senior executives in Spain with their peers fromaround the world. In general terms, we can observe:
1 A higher degree of pessimism regarding the duration of the nancial crisis
2 Companies in Spain are more dependent on bank borrowing
3 There is greater reticence towards acquisition growth
4 Boardrooms are more focused on liquidity and improving the competitiveness of theirbusinesses
Our latest ndings again underline one critical point: how companies manage their capitalagenda today will dene their competitive position tomorrow. How they raise, invest,optimize and preserve their capital is vital to their future success. The Barometerclearly shows that many leading companies are in a strong position to determine theirstrategic course, while others are struggling to respond to current market challenges.
Raul Vazquez TAS Leader Spain,Transaction Advisory Services.
About this survey
Ernst & Youngs Capital Confdence
Barometer is a regular survey of senior
executives from large companies aroundthe world conducted by the Economist
Intelligence Unit (EIU).
Our panel, the Ernst & Young 1,000
is comprised of selected Ernst & Youngclients and contacts and regular
EIU contributors.
This snapshot of our ndings gaugescorporate condence in the economic
outlook and identies boardroom trendsand practices in the way companiesmanage their capital agenda.
Prole of respondents
Panel of more than 1,000 executivessurveyed in February and March 2011
Companies from 62 countries
Respondents from over40 industry sectors
559 CEO, CFO and otherC-level respondents
248 companies would qualify forthe Fortune 500 based on revenues
The Capital Agenda1. Preserving capital: reshaping the
operational and capital base
2. Optimizing capital: driving cash and
working capital and managing theportfolio of assets
3. Raising capital: assessing future
capital requirements and assessingfunding sources
4. Investing capital: strengthening
investment appraisal andtransaction execution
Fit for the future?
Survey highlightsOur ndings point to:
Global condence surge the nancial crisis is over, or the end is in sight
Capital market conditions are at a post-crisis high, and leadingcompanies have renanced
Newfound condence is resulting in boards focusing on growth
Short term, M&A activity is set to increase but remains well below pre-crisis levels
The No.1 strategic priority for companies remains organic growth
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2 Capital Condence Barometer Fit for the future?
Global condence is returning. However, any sustained upturn is likely to be determined by external factors: rising ination,continued political instability in the Middle East, austerity and tax regimes and the impact of natural disasters on supply chains
Leading companies have completed renancing, but for those who havent the need is now urgent
The survey shows that boardrooms are cautiously focusing on growth in light of the above factors
There are mixed implications for M&A. At least in the short term, the outlook for M&A activity is getting brighter, and theincreasing number of companies planning to acquire and divest in the next six months should increase deal activity. Targetsare likely to be emerging market companies in the automotive, consumer products, mining and pharmaceutical sectors
Longer term, if the external factors stabilize or diminish, we may see a resurgence in M&A
In the current market the highest priority in the boardroom remains organic growth
Our perspectives
Economic outlook
Boardrooms bullish on recovery.
Condence in the global recovery has surged since October 2010.
Buoyed by high equity values, stabilizing capital markets and low
interest rates, we are now seeing the rst signicant increase
in condence from respondents in 18 months. Almost 60% of
executives now think that the global economy will have recoveredby April 2012. Nearly a fth believe that the nancial crisis is
already over.
For the rst time, we asked, Does yourorganization believe the global nancialcrisis is over? 17% of all respondentssaid Yes.
17%
of companies in Spain believe the nancialcrisis will persist for longer than 12 months.61%
How long does your organization expect the nancialcrisis to persist in the broader economy?
0
20
40
60
80
100
Nov-09 Apr-10 Oct-10 Apr-11
12 months or less More than 1 year
30%
70%
40%
60%
34%
66%
57%
43%
Global
0
20
40
60
80
100
Nov-09 Apr-10 Oct-10 Apr-11
12 months or less More than 1 year
18%
82%
38%
62%
44%
56%
39%
61%
Spain
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3Capital Condence Barometer Fit for the future?
How long does your organization expect the nancialcrisis to persist in your industry?
of companies in Spain expect thecrisis to last more than 12 months intheir industry compared with 22%globally.
48%
Survey respondents are even more positive when viewing
the outlook through an industry lens. At a global level third say
the nancial crisis is over in their sector, and 78% expect
the recovery to be well under way in the next 12 months.
Participants also remain upbeat about their local markets.
Two-thirds (66%) are optimistic about their local economy,up from 64% in October 2010. Levels of condence in Germany
and China remain high.
The survey reveals a surprising decrease in condence in
India and Russia. The UK and Spain show the lowest levels of
condence around the world.
0
20
40
60
80
100
Nov-09 Apr-10 Oct-10 Apr-11
48%
52%
61%
39%
59%
41%
78%
22%
12 months or less More than 1 year
Global
0
20
40
60
80
100
Nov-09 Apr-10 Oct-10 Apr-11
37%
63%
30%
70%
57%
43%
52%
48%
12 months or less More than 1 yearSpain
of Spanish executives interviewedare now more optimistic, comparedto 66% at global level.40%
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4 Capital Condence Barometer Fit for the future?
Capital market conditions continue to strengthen.
Almost 60% of companies say capital market conditions are
continuing to improve. Thirty-eight percent say access to
funding for capital projects is not a problem. And balance sheet
leverage remains low: only 13% of companies in the survey have
a debt-to-capital ratio above 50%; the majority are below 25%.
With banks re-establishing their capital positions and interest
rates low, nancing for deals is increasingly available.
The preferred sources for funding over the next six months
remain cash and bank loans.
What will be your main source of deal nancing in thenext 612 months?
Capital markets
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
57%54%
59% 59%
80%
90%
Cash
Global
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
36%
21%
36% 36%
80%
Bank loansGlobal
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
45%
89%
57%
45%
80%
90%
Cash
Spain
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
64%
15%
43%
48%
80%
Bank loansSpain
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5
The pressure to renance is over forleading companies.
Over the past six months, the percentage of companies that
have renanced has signicantly increased. Eighty percent of
the businesses surveyed say they have completed renancing,
compared with 52% in October 2010. But for those that need
to renance, the speed with which they need funds is increasing
rapidly. Nearly two-thirds need to renance within
six months, a three-fold increase since October 2010.
The results point to the availability of nancing as a polarizing
factor among boardrooms dividing the corporate landscape
into those who are thriving and well-placed to grow organically
or through M&A and those who are struggling and lack the
capital to compete.
20%
49%
14%
17%
0% 30%20%10% 50%40%
We have no needto refinance
In need ofrefinancing
We completed asignificant debtrefinancing lessthan 1 year ago
We completed asignificant debt
refinancing1 or 2 years ago
Global
Which of the following most accurately describesyour companys debt/renancing situation?
all businesses in the survey havenow completed or have no needto renance.80%
16%
48%
16%
19%
0% 30%20%10% 50%40%
We have no needto refinance
In need ofrefinancing
We completed asignificant debtrefinancing lessthan 1 year ago
We completed asignificant debt
refinancing1 or 2 years ago
Spain
Capital Condence Barometer Fit for the future?
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6 Capital Condence Barometer Fit for the future?
Mergers and acquisitions outlook
Mixed messages for M&A.
The surge in global condence is encouraging businesses
to focus on growth rather than defensive measures.
In the short term, appetite for acquisitions is increasing, but
overall, companies are focused on organic growth. This caution
is driven by three dominant external factors that have arisen
in the past six months: political instability in the Middle East;
natural disasters and their impact on supply chains; and tax
and inationary concerns.
Worldwide a third of companies are likely to acquire in the next
six months. Since October there has been an uptick (from 28%
to 33%) in the percentage of companies likely to acquire in the
next six months reecting newfound condence in economic
recovery.
Longer term, nearly half of all companies expect to be
acquisitive. The proportion likely to acquire in the next one
to two years continues to decline. However, if the external
factors diminish, we could see this gure increase.
of Spanish companiessurveyed are likely to acquirein the next six months.35%
Globally speaking, acquisitive
sectors in the next six months
include power and utilities, oil and
gas, and pharmaceuticals.
How likely are you to execute acquisitions in thefollowing periods?
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
27%27%
11%
43%
25%
35%
24%
59%
56%
67%
23%
0-6 months 6-12 months 1-2 years
11%
Spain
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
24%
33%
41%
47%
28% 33%
38%
41%
54%57%
67%
44%
0-6 months 6-12 months 1-2 years
Global
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7Capital Condence Barometer Fit for the future?
Divestment activity is also expected to rise in the short term.
A fth are likely to dispose of assets. Mirroring the acquisition
trend, the percentage likely to divest over the
next one to two years falls.
Barriers to M&A are increasing.
The No.1 deal breaker now relates to the valuation gap between
buyer and seller expectations, which leapt by nearly a third
(from 38% to 50%). In October 2010, the biggest obstacle
to completing an M&A transaction was stakeholder caution:
more than half of companies (52%) cited it as a problem.
Stakeholder caution is still a serious obstacle, but it has
eased a little (down to 46%).
Management challenges, meanwhile, have grown in
signicance. Concerns over the uncertainty or complexity
of valuations are signicant and growing (from 41% to 49%).
Management is additionally demanding a stronger business
case before supporting a transaction: the percentage of
companies saying that business case thresholds or hurdle
rates are blocking deals increased by a third (from 30% to 39%).
Emerging markets continue to drive growth.
Enthusiasm for globalization and emerging market investment
remains strong as companies look for ways of fueling growth.
The percentage of companies saying they are considering
an emerging market acquisition within six months is 50%
higher than it was in November 2009 and continues to rise.
By contrast, interest in developed market transactions is low
and falling (to 18% from 21% this time last year).
of respondents in Spain arelikely to make divestmentswithin six months.20%
How likely are you to execute divestments in thefollowing time periods?
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
17%
21%
18%
38%
16% 18%
20%
19%
27%
21%
40%
42%
0-6 months 6-12 months 1-2 years
Global
0%
20%
30%
10%
40%
60%
50%
70%
Nov-09 Apr-10 Oct-10 Apr-11
10%
11%
27%25%
20%
23%
41%
35%
13%
0-6 months 6-12 months 1-2 years
Spain
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8 Capital Condence Barometer Fit for the future?
Which statement most accurately describes your
organizations focus over the next six months?
Sectors most likely to acquire in the emergingmarkets are automotive, consumer products,mining and pharmaceuticals.
The most popular structure for an emerging market transaction
is a joint venture/alliance (29%). This is not surprising given
the signicant risks associated with an emerging market
investment, not least in the areas of business culture and
growing domestic protectionism. Moreover, many organizations
will be experiencing these risks for the rst time.
For most the No.1 priority remainsorganic growth.
Continuing the trend we saw in October, almost half
of all companies are focused on organic growth, representing a
100% increase from 18 months ago. By contrast, only a third of
companies say they are focused on M&A activity,
a small increase on October 2010 but still a fth fewer than
12 months ago.
0%
20%
30%
10%
40%
50%
Nov-09 Apr-10 Oct-10 Apr-11
25%
38%
46%
49%
Focused on organic growth
Global
0%
20%
30%
10%
40%
50%
Nov-09 Apr-10 Oct-10 Apr-11
18%
38%35%
42%
Spain
Likelihood of undertaking emerging and developed marketacquisitions in the next six months.
0%
20%
30%
10%
40%
Nov-09 Apr-10 Oct-10 Apr-11
15%
21%
27%
20%18%
32%31%
21%
Emerging markets Developed markets
Global
0%
20%
30%
10%
40%
Nov-09 Apr-10 Oct-10 Apr-11
18%
27%
15%
13%
23%25%
8%
Emerging markets Developed markets
Spain
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9Capital Condence Barometer Fit for the future?
Short term xes remain important, but the focusnow is on building sustainable improvements.
In the aftermath of the nancial crisis, leading companies
took immediate protective steps to preserve cash and reduce
costs. Companies are now focusing on improving long term
business performance.
In October 2010, two-thirds of companies were focusing their
efforts on cutting costs and improving cash ow. While these
remain key priority areas, the percentage of companies planning
to give increased focus to them over the next 12 months is
falling.
In Spain, cash ow and liquidity issues continue to be the
primary focus for companies (74%) closely followed by cost
reduction and operational efciencies (68%).
Companies are now moving on to the tougher challenge
of building sustainable improvements into their business
operations. Areas where they plan to invest greater effort
include customer segmentation, performance management
of subsidiaries and optimizing capital structures. There is also
increased effort on acquisition integration and tax efciency
which doubled (from 6% to 14% and 5% to 10% respectively).
The two-speed boardroom.
The business outlook is improving for companies that have
completed renancing and started the work of optimizing their
operations. But for those left behind, the opportunity to catch
up could be disappearing fast. This polarization is clear.
While the majority of companies have renanced their balance
sheets and set a strategic course, 1 in 10 remain focused simply
on survival. Such companies will increasingly nd themselves
with their options diminished. For some, their business model
has been permanently impaired.
Top 5 areas of focus for businesses over the next 12 months.
April 2011 October 2010
Customer segmentationand profitability
Cash flow/liquidity
Operationalefficiencies/
cost reduction
Performance monitoringof subsidiary businesses
Capital structure
57%
51%
38%
32%
27%
67%
58%
32%
24%
22%
Global
April 2011 October 2010
Customer segmentationand profitability
Cash flow/liquidity
Operationalefficiencies/
cost reduction
Performance monitoringof subsidiary businesses
Capital structure
74%
68%
39%
29%
23%
83%
74%
22%
30%
4%
Spain
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10 Capital Condence Barometer Fit for the future?
A strong Capital Agenda needs to be at the heart of all strategic
boardroom and management decisions. The ndings of our
Capital Confdence Barometer provide useful insights into
the ways companies are raising, investing, optimizing and
preserving capital.
Using the Capital Agenda will help companies considertheir issues and challenges, and more importantly,understand their options to make more informedstrategic capital decisions.
Understanding your Capital Agenda
Stress and distress e.g., liquidity issuesand turnaround plans
Customer and supplier analysis
Preserving tax assets andminimizing costs
Refinancing or restructuring debt,
equity and other obligationsDealing with stakeholder
relationships and pressure
Dispute resolution
Optimizing asset portfolio
Delivery of synergies andeffective integration
Improving working capitaland releasing cash
Optimizing capital structureOptimizing tax and
corporate structure
Fundraising (equity and debt)IPO readiness, rights issues,
PE, private placement and
capital markets
Optimizing funding structuresAsset divestment
Infrastructure projects
Cost-and tax-efficientstructures
Acquisitions and alliances
Planning and structuring transactions to optimize
stakeholder returnFocused due diligence to mitigate
risk and drive value
Asset valuations
Cost-and tax-efficient structures
Preserv
ing Optimiz
ing
Inves
ting Raisin
g
The CapitalAgenda
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11Capital Condence Barometer Fit for the future?
Survey demographics
What is your current debt-to-capital ratio?What is your position in the organization?
75100%
5074.9%
2549.9%
Less than 25% 58%
29%
8%
5%
0 605040302010
What are your companys annual global revenues in US$? In which industry is your company? (Number of companies)
US$5b or more
US$1b4.9b
US$500999.9m
Less thanUS$499.9m
25%
24%
28%
23%
0 605040302010
Oil and gas
Technology
Power andutilities
Automotive
Professionalservices
Life Sciences
Consumerproducts
Manufacturing
Banking/Financial
services
Information
technologyMining and
metals
Chemicals
0 175150125100755025
160
128
100
78
74
72
69
66
60
55
18
17
C-level
SVP
Head of businessunit/department
Manager or other
0 605040302010
50%
30%
18%
2%
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Ernst & Young
Assurance | Tax | Transactions | Advisory
2011 EYGM Limited.
All Rights Reserved.EYG no. DE0232
This publication contains information in summary form
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About Ernst & Youngs Transaction
Advisory Services
How organizations manage their capital
agenda today will define their competitive
position tomorrow. We work with our
clients to help them make better and
more informed decisions about how
they strategically manage capital and
transactions in a changing world. Whether
youre preserving, optimizing, raising
or investing capital, Ernst & Youngs
Transaction Advisory Services bring
together a unique combination of skills,
insight and experience to deliver tailored
advice attuned to your needs helping you
drive competitive advantage and increased
shareholder returns through improved
decision making across all aspects of your
capital agenda.
If you would like to discuss your companys Capital Agenda, please
contact your usual Ernst & Young advisor, or any of the contacts
listed below.
Contacts
Name Telephone number Email
Transaction Advisory Services
Raul Vazquez
Transaction Advisory Services
Leader
+34 915 727 772 [email protected]
Transaction Support
Mar Ares +34 915 727 296 [email protected]
Pedro Rodriguez +34 915 727 469 [email protected]
John Bristol +34 915 727 283 [email protected]
Eva Maria Abans +34 933 663 805 [email protected]
Restructuring Services
Remigio Barroso +34 915 727 226 [email protected]
Mergers & Acquisitions
Victor Duran +34 915 727 690 [email protected]
Valuation & Business Modelling
Javier Sanchez +34 915 727 476 [email protected]
Acknowledgements
Our special thanks go to the Ernst & Young 1,000* for their contribution to this survey.
* The Ernst & Young 1,000 comprises an EIU panel of senior executives and selectedErnst & Young clients and contacts who participate in the Capital Condence Barometeron a biannual basis. The surveys are conducted on an independent basis by the EIU.
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