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Sharing deal insightEuropean Financial Services M&A news and views

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2 PwC Sharing deal insight

Contents

03 Welcome

04 Data analysis

08 How is the Eurozone crisis affecting financial services M&A?

16 Methodology

€5bnof European financial services deals in thethird quarter of 2011

€106bncapital shortfall to be made up by Europeanbanks by June 2012 is likely to spur furtherdivestment

Deal values were subdued in the thirdquarter of 2011, reflecting marketuncertainty and volatility. Yet, if anythingthe sovereign debt, and a further roundof bank recapitalisation this hasengendered, underline the rationale forcontinued bank restructuring. Banks willbe expected to reach a 9% Tier 1 capitalratio by June 2012, with the EuropeanBanking Authority (EBA) estimating thatbanks will need to make up a shortfall of€106bn to reach this target.1

Many banks will be actively looking todivest non-core and capital intensiveassets as they seek to further stabilisetheir businesses and concentrateresources on fewer, stronger sources ofvalue. As we examine in this issue, thedivestments are likely to include non-banking operations such as securities andasset management. They are also likely toinclude smaller foreign operations,

creating acquisition opportunities forboth domestic and internationalcompetitors. A further focus is likely tobe the estimated €1.3tn in loan portfolios,earmarked as non-core across Europe.2

Specific current M&A opportunitiescentre on some of the still fast-growingmarkets in Southeastern Europe, mostnotably, Turkey. Potential sellers couldinclude some of the Greek banks thathave expanded into Turkey and theBalkans in recent years and may nowneed to sell some of these operations tobolster their capital position. There is alsoscope for increased divestment andconsolidation among Italian banks. Inturn, Russia is a good example of a marketwhere strategic rationalisation by somegroups is creating openings for others.

A further driver for deal activity is EUstate aid requirements, which will force anumber of banks to divest significantassets by the end of 2012. The prices forsellers may be disappointing if the currentlow valuations in the banking sectorpersist, though this of course representsan important opportunity for buyers.Our latest Valuation Index found that thebanking sector in Continental Europe wastrading at a discount of around 50% tobook value at the end of September 2011.3

Once confidence returns, we expectthe market to trend back towardsfundamentals – the question is how longwill that take?

Beyond banking, the new regulation andpressure on fees facing asset managementbusinesses are likely to spur further

consolidation as organisations seek tobuild scale and diversify into newmarkets. Insurers are generally facing lesspressing capital challenges than banksand can look to M&A to support longerterm strategic objectives, including movesinto new growth markets.

If the opportunities and impetus for M&Aare evident, buyers and sellers will ofcourse have to overcome the barrierscreated by current market conditions.Market volatility is making valuationmore challenging. Buyers’ and sellers’pricing expectations may be out of step asacquirers seek to take advantage of lowprice-to-book values on the one side andsellers seek to secure the price theybelieve reflects the underlying longerterm value on the other. Managementmay also be reluctant to embark on M&Aas it seeks to tackle immediate issueswithin the business. Yet, with effectivedue diligence, realistic pricing and a sharpassessment of the full upsides, deals willgo through and values may begin to climbback up again in 2012.

We hope that you find this edition ofSharing Deal Insight interesting. Pleasedo not hesitate to contact either of us, orany of the article authors if you have anycomments or questions, or would like todiscuss the issues in more detail.

Welcometo the fourth and final edition ofSharing Deal Insight for 2011.

Nick Page(PwC UK)[email protected]

Fredrik Johansson(PwC UK)[email protected]

Sharing Deal Insight provides perspectives on the latest trends and future developments in the financial servicesM&A market. In this edition we reflect on the impact of the turbulent recent months and look ahead to thechallenges and opportunities that are set to shape deal activity in 2012.

PwC Sharing deal insight 3

1 EBA media release, 26.10.11

2 PwC media release, 13.04.11

3 ‘PwC Valuation Index: Tracking the market tounderstand value’, Issue Three, 31.10.11

The value of European financial servicesM&A activity during the third quarter of2011 was €5.0bn, 25% lower than theprior quarter’s figure of €6.7bn and76% lower than the comparable figureof €21.2bn recorded in the third quarterof 2010.4

Even allowing for the upswing in deal-making recorded during the summer of2010 (see Figure 1), this represents aremarkable slowdown in activity. Totaldeal values for the second and thirdquarters of 2011 are the lowest recorded

in the history of our nine-year dataset.Deal activity is being overshadowed byconcerns about European sovereign debtmarkets and their impact on the financialsector and wider economy. In thefollowing article, ‘How is the Eurozonecrisis effecting financial services M&A?’,we examine the connection between thecrisis in the Eurozone and financialservices M&A in greater detail.

The third quarter’s announced dealactivity included two transactions valuedat more than €1bn. The first was VTB

Data analysis

The Data analysis section of the May 2011 edition of Sharing Deal Insight concluded that “barring a freshoutbreak of equity market volatility we still believe that 2011 should be a year of M&A recovery” Since then,financial markets have been increasingly disrupted, and European financial services M&A has declined steeply.

Figure 1: European FS M&A by value (€bn), Q1 2010–Q3 2011

Source: PwC analysis of mergermarket, Reuters and Dealogic data

25

15

20

10

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0Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11

1. €3.3bn AXA SA (UK lifeand pensions businesses)- Resolution Limited

2. €1.4bn KBL EuropeanPrivate Bankers S.A -The Hinduja Group

1. €1.3bn BNP ParibasLuxembourg SA (47%) -BGL BNPP

2. €1.2bn RBS SempraCommodities LLP (European& Asia operations) - JPMorgan Chase

1. €3.8bn Allied Irish Banks plc(91%) - Ireland

2. €1.1bn Bluebay AssetManagement Plc -Royal Bank of Canada

1. €2.6bn Bank of Moscow OAO (46%) - VTB Bank OAO2. €1.8bn Caja de Ahorros y Pensiones de Barcelona La Caixa

(Banking operations) - Criteria CaixaCorp SA3. €1.1bn Vidacaixa-Adeslas Seguros Generales (50% Stake) - Mutua

Madrilena Automovilista SL

1. €1.1bn RAC Plc- The CarlyleGroup, LLC

1. €1.3bn Bank of Moscow(34%) - VTB Bank OAO

2. €1.1bn Bank of Ireland(37%) - Group ofinvestors led by FairfaxFinancial Holdings

1. €3.9bn Deutsche Postbank AG (70%) - Deutsche Bank 2. €3.1bn Bank Zachodni WBK SA - Banco Santander3. €2.3bn RBS WorldPay - Investor Group 4. €2.0bn RBS Group (318 branches) - Banco Santander


4 Deal data is sourced from mergermarket, Reuters and Dealogic, unless otherwise specified. For details of our analysis methodology, please refer to the informationon page 16

Bank’s €1.3bn bid for a further 34% stakein rival Bank of Moscow. This followsVTB’s initial investment announced inthe first quarter of 2011, and takes itsownership of Bank of Moscow above 75%.The quarter’s other large deal was theacquisition of a 37% stake in Bank ofIreland for up to €1.1bn by a consortiumof investors including Americanbillionaire Wilbur Ross, FidelityInvestments and US property developerKennedy Wilson.

Small and mid-market deal activitydeclined steeply during the quarter.Transactions valued at less than €1bntotalled just €2.6bn, compared with€5.5bn in the previous quarter and asimple average of €6.1bn for the previoussix quarters.

A review of European financial servicesM&A by subsector shows that bankingtransactions retain their habitualdominance (see Figure 2). Even with dealactivity at an exceptionally low level,banking restructuring remains the singlemost important driver of M&A in theindustry.

The insurance and asset managementsectors had a very quiet quarter for M&A.Only two asset management dealsfeatured among the quarter’s ten largest,and no insurance transaction in ourdataset exceeded the €100m mark.

Figure 2: European FS M&A by value (€bn) by subsector, Q1 2010–Q3 2011

n Asset Management n Banking n Insurance n Other


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10

8

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0Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11

Small and mid-market deal activity declinedsteeply during the quarter. Transactionsvalued at less than €1bn totalled just €2.6bn,compared with €5.5bn in the previousquarter and a simple average of €6.1bn forthe previous six quarters.



Western Union’s scale-buildingacquisition of Travelex UK’s GlobalBusiness Payments division for €670mwas the quarter’s third largest announceddeal, and accounted for the lion’s share of‘Other’ transactions during the quarter.

As in the second quarter of 2011,domestic transactions remained evenlybalanced with cross-border deals (seeFigure 3). The exceptionally low volumeand value of transactions mean that weare wary of reading too much into thesefigures. Even so, it is notable that anumber of the quarter’s largesttransactions involved bidders fromoutside Western Europe – an indicationof the relative weakness of Europeanfinancial institutions in the presentpolitical and economic climate(see Figure 4).

Apart from the three transactions alreadymentioned, only two more of the quarter’sten largest deals were valued at morethan €500m. The slowdown in mid-market activity is evident from thenumber of smaller deals making it intothe top ten, and the fact that the tenlargest transactions accounted for 94% ofthe quarter’s total announced deal value.

One of the deals worth more than €0.5bnwas the acquisition of Austria’s VolksbankInternational for €585m or more bySberbank. This is the first major

acquisition outside the Commonwealth ofIndependent States (CIS) by the state-owned Russian banking giant, and gives itimmediate exposure to a number ofbanking markets in Central and EasternEurope.

Five of the next six transactions involvedUK targets. The first was the €543macquisition of UK credit card companySAV Credit by Varde Partners, a US-basedalternative investment firm. The nextwas J O Hambro Asset Management’sacquisition from its management team byBT Investment Management, a dealintended to increase the Australian firm’sdiversification and growth potential(€238m).

Two smaller UK deals involved insurancetargets. Insurer FirstAssist was acquiredby US health insurance group Cigna for€82m. HSBC also sold its UK motorinsurance run-off business to SyndicateHolding, an insurer domiciled in PuertoRico, but active in the Lloyd’s market(€69m).

The quarter’s ten largest deals werecompleted with the purchase of TurkishAdabank by Bahraini Islamic investmentbank Gulf Finance House and Turkishbusinessman Remzi Gur for €56m, andPrincipal Global Investors’ acquisition of a74% stake in UK asset manager Origin(€46m).

Figure 3: European FS M&A by value (€bn), domestic v. cross-border,Q1 2010–Q3 2011

n Domestic n Cross-border


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Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11

€1.3bnwas paid by VTB fora further 34% stakein the Bank ofMoscow


It is beyond doubt that the Europeansovereign debt crisis has played asignificant role in keeping transactionvolumes low during 2010 and 2011.Beginning in January 2010 with therevelation of inaccurate Greek fiscal data,the crisis appeared to reach its criticalphase in the third quarter of 2011. Theresult has been exceptional levels ofvolatility in European financial markets(see Figure 1), and at the time of writingthere is still no comprehensive solutionin sight.

In this edition of Sharing Deal Insight weconsider how market volatility is effectingthe drivers of financial services deals,and the ways in which the crisis acts asa barrier to M&A. We also identify areasof European financial services where wesee particular potential for deal activitywithin the next few months, despite – orin response to – problems in theEurozone.

The crisis is strengtheningbanks’ need to restructureIn our view, the need for banking sectorrestructuring remains the central driverof European financial services M&A.If anything, the Eurozone crisis is onlystrengthening this rationale. The EuroSummit decision of 26 October 2011 to

launch another estimated €200bn ofbank recapitalisations is a reminder ofhow far many European banks still needto go to reach stability and sustainability.

Most European banks are sharpeningtheir strategic focus to concentrate onfewer, stronger activities. Improvingefficiency is an important goal, but themost pressing factor is the need forcapital. The requirements of Basel III arebringing greater urgency to the non-coredisposals that many banks have beenpursuing since early 2009.

Banks are most likely to divest non-banking businesses, particularly in assetmanagement, non-life insurance andsecurities brokerage. EU State aidrequirements are also forcing some banksto divest parts of their core franchise.In some cases these deadlines are stilltwo to three years away, but other banksmay become forced sellers during 2012.If bank valuations remain at their currentlow levels,5 this raises the possibility ofpoor value realisations and furtherpressure on capital. Even banks that donot need to make urgent disposals areidentifying non-core business units andpreparing them for sale.

How is the Eurozone crisisaffecting financial services M&A?

Since a mini-recovery in deal activity during the summer of 2010, European financial services M&A has becomeincreasingly subdued. Although deals continue to take place, transaction data for the first three-quarters of2011 show a further decline in total deal values (see ‘Data analysis’). Anecdotal evidence of longer due diligenceprocesses and deals failing to complete, underline the downbeat mood among European financial services leadersand deal professionals.

5 PwC Valuation Index: Tracking the market tounderstand value’, Issue Three, 31.10.11

Banks are increasinglykeen to divest foreignsubsidiaries – and loanportfoliosOne impact of the crisis has been toaccelerate some European banks’ retreatfrom the geographic expansion of theprevious decade. A number of institutionsare reversing prior acquisitions andwithdrawing from cross-borderinvestments, particularly in South-Easternand Central and Eastern Europe. Smaller

foreign operations that had been targetedfor organic growth are also being sold.

Another result of current marketdisruption is the growing trend forEuropean banks to identify elementsof their lending activities as non-core.This has been true for some time amongbanks exposed to property lending inIreland and Spain, but banks acrossEurope are becoming increasingly keento improve their regulatory capital ratiosby selling off entire books of non-performing or non-core assets.

Figure 1: Dow Jones Euro Stoxx 50 Volatility Index, Nov. 2010–Nov. 2011

The index reflects the anticipated annual volatility of 50 leading European shares. It is based on equity optionprices and is expressed in percentage terms. For example, a value of 40% implies that leading Europeanshares will experience volatility of 40% over the coming year.

Source: PwC analysis, Thomson Reuters 3000 Xtra

60%

40%

20%

0%Nov 2011Sept 2011May 2011 July 2011March 2011Jan 2011Nov 2010



M&A is becoming a moreurgent goal for many assetmanagers. Most insurershave a longer term focusBeyond banking, the rationale for M&A isarguably strongest in asset management,where the Eurozone crisis is rapidlyputting profitability under severepressure. On the cost side, firms continueto suffer from the effects of local andinternational initiatives including MiFIDII, the AIFM Directive, FATCA and Dodd-Frank. Revenue streams already feelingthe effects of investors’ demands for lowerfees are now facing a further threat fromvolatile markets and punishing levels ofnet outflows.6 Many European firms seeM&A as their best hope to boost profits,achieve economies of scale and improvetheir diversification.

In contrast, most European insurers seethe sovereign debt crisis as a lessimmediate threat than their banking orasset management peers. Investmentvolatility – coupled with the requirementsof Solvency II – is encouraging many tofocus on their levels of capital, but largefirms are typically under far less pressurethan their banking counterparts. This hashelped insurers to keep their M&A focuson longer term goals, including the drive

to increase scale and the desire to reduceexposure to slow growth in Europe, whileexpanding in faster-growing markets.

The greatest negativeimpact of the Eurozonecrisis stems from intangiblefactorsThe crisis in the Eurozone, and the widereconomic uncertainty it generates,present a number of barriers to Europeanfinancial services M&A. In the short term,the crisis is having several negative effectson senior decision-makers. We identifythree in particular:

• Uncertainty. The most obviousproblems are uncertainty over theimmediate outlook, and a lack ofconfidence in the financial marketsas a whole and financial services as anindustry. “M&A is always affected bylevels of confidence among managersand investors”, says Stephen Cater ofPwC UK.

• Distraction. The senior managementof many financial institutions acrossEurope are too preoccupied withproblem-solving and other urgentpriorities to give much attention tostrategically focused M&A. 6 EFAMA Investment Fund Industry Factsheet

(14.10.11) shows accumulated net UCITSoutflows of €63bn for Jun, Jul and Aug combined


• Risk aversion. Even when M&A remainson the agenda, heightened perceptionsof a target’s potential exposure to creditor liquidity risks are cooling bidders’enthusiasm. “Executives also fear thatboard members and investors are lesslikely to forgive a failed deal in thecurrent market environment”, explainsChristopher Sur of PwC Germany.

Market disruption is alsocontributing to a numberof practical M&A hurdlesCurrent disruption in the financialmarkets is not only affecting sentiment.It is also contributing considerably topractical deal-making hurdles. In ourview, the four leading problems are:

• Volatility: Market volatility makesvaluations more unstable, making itharder for parties to a transaction toagree a price. This is a particularchallenge for larger, share-basedtransactions.

• Price gaps: The sense of crisis is makingsellers more reluctant to transact atcurrent prices, while also strengtheningthe sense of a buyers’ market. As aresult, price expectation gaps are againwidening.

• Funding: Deal funding – whether viainternal resources, or the issuance ofdebt or equity – is becoming scarcer andmore costly.

• Risk assessments: A desire for moreaccurate confirmation of sovereigndebt, interbank and property lendingexposures is making due diligenceprocesses slower, more searching andmore expensive.

Looking further forward, the currentcrisis could also have a longer termimpact on Europe as an investmentdestination. The prospect of greatereconomic damage and heightenedperceptions of political risk could both dopermanent damage, particularly in someof Europe’s southern and eastern markets.This stands in particular contrast to therelative economic resilience of otherregions, both mature and developing.

What now? We make someshort-term predictionsfor financial services M&Ain EuropeWe have reviewed the current impact ofthe Eurozone crisis on the drivers offinancial services M&A in Europe and theoffsetting negative effects of ongoingmarket disruption. Despite the undoubted

difficulties of deal-making in the currentenvironment, we believe a number ofspecific financial services markets andsectors will remain relatively active areasof M&A during late 2011 and the earlypart of 2012.

• Loan portfolio sales: As alreadydiscussed, the Eurozone crisis isencouraging European banks to disposeof non-performing and non-core loans.“We estimate that non-core assets in theEuropean banking sector are worthmore than €1.3 trillion,” says RichardThompson of PwC UK. “Even if thesedisposals are spread over a decade,portfolio transactions represent asignificant source of deal flow.”Corporate loans, leasing assets, retailmortgages and consumer finance booksare all potentially for sale. “Banks inSpain and the UK have the greatestpotential to generate sales during thecoming year, followed by Germany andIreland”, says Richard. Royal Bank ofScotland, Lloyds Banking Group andIrish Life & Permanent are among thoselooking to sell assets or entire lendingbusiness. Recent reports suggest thatBNP Paribas and Societe Generalecould follow them in seeking to reducerisk-weighted assets.


Despite the urgency, loan portfolio saleshave proceeded comparatively slowlyso far. “We see genuine interest frompotential investors,” says Richard “butthere is no question that the crisis iscreating some barriers.” For now,explains Christopher Sur of PwCGermany, “the greatest single obstacleis the fact that selling a held-to-maturity loan requires a fair valueadjustment. The resulting impairmentshurt sellers’ equity capital ratios, andthat is not an appealing prospect.”As a result, pricing gaps remainconsiderable. It also takes time forsellers to identify loans for sale andgather the necessary information.Retail assets can often be valuedstatistically, but corporate loans requiremore careful due diligence.

So when will European loan portfoliosales take off? “Sellers will eventuallyhave to accept lower prices than theyare currently willing to offer,” saysSteve Pearson of PwC UK. “The latestwave of bank re-capitalisationannounced at the Euro Summit couldbe the catalyst that gets this processmoving.”

• Turkish banking: As discussed in theNovember 2010 edition of Sharing DealInsight, the Turkish banking sector isbenefiting from restructuring andreform at the start of the last decade.Competition is strong and reserverequirements are high, but Turkishbanks are stable, profitable andexposed to a fast-growing market withlow levels of household debt.

“Ironically, these attractions are forcingsome foreign owners to sell their prizedTurkish banking assets,” says SerkanTarmur of PwC Turkey. Dexia is sellingits wholly owned subsidiary Denizbank,one of the ten largest banks in Turkey,and National Bank of Greece is widelyexpected to sell off at least part ofFinansbank within the next fewmonths. “The smaller local operationsof a number of foreign banks could alsocome onto the market in the nearfuture.”

There will be no lack of interest in thesetargets. “Turkey’s private sector banksare certain to identify significantpotential synergies,” says Serkan “andthe award of new banking licences – forexample to consumer credit companies– could create domestic bidders forsome of the smaller targets too.”Although regulators might preferdomestic deals, they have also shownthemselves to be open to foreigninvestment that brings expertise to thelocal industry.

• Russia: Russia has generated arelatively high proportion of Europeanfinancial services deal values during2010 and 2011. “We expect domesticbanking and insurance transactionsto continue to flow into 2012,” saysAndrew Cann of PwC Russia. “In ourview the process of domesticconsolidation has further to run.” Inaddition to VTB Bank’s pursuit of Bank

of Moscow, Russia’s largest banks havemade a number of acquisitions duringthe year. Targets have included smallerdistressed institutions, as well asspecialised businesses – as seen inSberbank’s acquisition of Moscowbrokerage Troika Dialog for €0.7bn.

Foreign investors continue to monitorthe Russian market, but levels ofinterest remain lower than they werebefore the financial crisis of 2008.“It is possible that 2012 will see someinternational banks divest or downsizetheir Russian activities as they focus oncore markets”, says Andrew.

• Central and Eastern Europe: InCentral and Eastern Europe (CEE), thepicture of retrenchment by foreignbanks is much clearer. Poland illustratesthe tendency for distressed WesternEuropean banks to release valuablecapital by selling CEE subsidiaries.Allied Irish Banks, KBC and MillenniumBCP have all announced the sale oftheir Polish units over the past 12months and market rumours suggestthat others may follow suit.7

At the same time, some well-capitalisedWestern European banks such asSantander are emerging as newacquirers in CEE markets. “Russianbanks would like to expand in theregion too,” explains Andrew Cann “butapart from Sberbank, most have fairlylimited scope for foreign acquisitions.”State-owned Sberbank has emerged asa highly acquisitive player, and recentlyagreed to buy Volksbank Internationalof Austria for €0.6bn. Targets in Centraland Eastern Europe could also attractbidders from less mature markets.Garanti Bank of Turkey – 25% ownedby BBVA of Spain – is said to beweighing investment in CEE banksexperiencing depressed valuations.8

• Spanish savings banks: Levels ofexposure to impaired real estate andproperty development remain the keydriver of consolidation among Spanishsavings banks, just as they have for thepast two years. The number of Cajas hasfallen from over 40 in 2009 to just 15today. Several Cajas will need to raisecapital soon if they are to meet Bank ofSpain requirements. “The fact thatmany of the Cajas have created bankingsubsidiaries means they can now sellequity stakes,” explains PatrickAtkinson of PwC Spain. “This providesclear potential for further mergerswithin the sector. Two of the strongest,La Caixa and Bankia, listed during 2011and could act as consolidators.”

Acquisitions are also likely to flow fromthe sale of Cajas currently under publiccontrol. The Banco de Espana is knownto be keen to divest its holdings,although some like NovaCaixaGaliciaand Catalunya Caixa – recapitalisedand nationalised by FROB9 inSeptember 2011 – may prove hard tosell. “Others like Unnim, which waspreviously a takeover target, are likelyto be more popular,” says Patrick. Theauction of CAM is reported to haveattracted bids from Santander, BBVA,CaixaBank and Banco Sabadell. “Wefirmly expect to see further M&A in thesector after the general election inNovember 2011.”

• Greek and Italian banking:The current phase of the Eurozonesovereign debt crisis is puttingparticular downward pressure on theprice of Greek and Italian governmentbonds. As a result, concern about theexposure of Greek and Italian banks totheir own governments’ debt is pushingup their own cost of borrowing. Greekbanks are under particular fundingpressure. At the time of writing,liquidity is a dominant issue, with manyGreek depositors withdrawing theirfunds to supplement falling levels ofincome.

“The Greek banks are currently drawingon emergency guarantees from thecentral bank, but there will come a

point when several may have to engagein M&A to strengthen their capitalpositions,” says Emil Yiannopoulosof PwC Greece. “Many of the banksexpanded into Turkey, the Balkans andother areas of South Eastern Europeduring the last decade, and these arelikely to provide the most attractiveopportunities for disposal.” As well asNational Bank of Greece’s anticipatedsale of part of Finansbank, Piraeus Bankhas recently agreed to sell its Egyptianoperations to Standard Chartered. “Thedrive for greater balance sheet strengthcould also lead to further consolidationamong the Greek banks, as seen inAlpha’s recently announced mergerwith Eurobank EFG,” adds Emil.

Italian banks have traditionally beenamong the biggest buyers of domesticgovernment debt, although they are notyet under such acute pressure as theirGreek counterparts. Even so, as MatteoD’Alessio of PwC Italy points out, manystill need to significantly strengthentheir equity capital. “There is clearscope for increased levels of M&A inItalian banking during the comingquarters, whether from domesticconsolidation or Italian banks disposingof non-core activities.”

The auction of CAM is reported to haveattracted bids from Santander, BBVA,CaixaBank and Banco Sabadell. “We firmlyexpect to see further M&A in the sector afterthe general election in November 2011.”


7 ‘Record earnings may lead to shake-up’, Financial Times, 01.11.11

8 ‘Garanti eyes E. Europe expansion with BBVA’, Reuters, 07.11.11

9 Fondo de Reestructuración Ordenada Bancaria (Fund for Orderly Bank Restructuring), set up by the Spanish Government in June 2009


• Asset management in WesternEurope: “We see clear opportunities forstrong independent asset managers inEurope, North America and Asia to takeadvantage of European banks’ disposalprogrammes,” says Fredrik Johanssonof PwC UK. “Independent firms feelingthe effects of the crisis could also beattractive targets for buyers looking forproduct or geographic diversification,”he adds, citing the example of RoyalBank of Canada’s €1.1bn acquisition ofBluebay, announced in October 2010.Asian financial services groups arelooking intently at the European assetmanagement market. “We have alreadyseen a number of Asian and Europeanfirms set up distribution agreements,”says Fredrik “and some Asian firms arelooking to develop locally domiciledUCITS’ funds for distribution intoEurope. Acquiring a European firmcould give these managers valuableaccess to product and distributionexpertise.”

The Italian asset management marketalso offers particularly strong potentialfor M&A, according to MatteoD’Alessio. “Asset managementdistribution in Italy has traditionallybeen dominated by closedarchitectures – most Italian banks ownan asset manager,” he explains.However, many are lacking scale andstruggling to compete in a market thatregulators have opened up to foreigncompetition. Several are experiencing

heavy net outflows. “Non-core disposalsby Italian banks offer clear potential forlarge Italian players to build scale, or fora successful entrant to boost its localexpertise”.

• Private equity investment in banking:The uncertainty in financial marketscontinues to make it very hard forprivate equity firms to raise debtfinance. However, private equity fundsthat have already raised capital havethe potential to become active minorityinvestors in European banks. A numberof US-based private equity groups suchas KKR, TPG Capital and Corsair haverecently been rumoured to beconsidering taking advantage of low price-to-book valuations.

“Banks are in such need of capital thatsmall or medium sized institutionsmight well be open to private equityinvestment,” says Matteo d’Alessio.“Banks that create specialisedsubsidiaries for lending activities theywould like to exit could be particularlyattractive to private equity funds”.

Spanish savings’ banks in search ofcapital have a similar profile, addsPatrick Atkinson. “There could be scopefor private equity funds to invest inCajas looking to boost their capitalratios,” he explains. “The fact that Cajaswhich attract outside investors willqualify for lower capital ratios thanthose remaining entirely mutualisedcould act as a further incentive for thebanks to welcome private equitycapital.”

• Specific insurance markets: Even ifmarket volatility is keeping a lid oninsurance transactions, we still seescope for short-term activity in a fewspecific areas. According to James Tyeof PwC UK, the most obvious is theLloyd’s market, which has recently seennotable deals including Brit’s €0.9bnacquisition by a private equityconsortium in October 2010, Chaucer’s€0.3bn acquisition by US insurer TheHanover in April 2011 and Canopius’continuing pursuit of rival Omega.

“Banks are in such need of capital that smallor medium sized institutions might well beopen to private equity investment” says Matteod’Alessio. “Banks that create specialisedsubsidiaries for lending activities they wouldlike to exit could be particularly attractive toprivate equity funds”.


“No new admissions to Lloyd’s areanticipated for 2012, so the competitionfor potential targets is only likely toincrease in the near term,” says James.“We expect private equity firms tojoin Lloyd’s companies consideringpotential bids.”

Another specific area of potentialM&A activity could be inboundacquisitions by Asian insurers. July2011 saw Nippon Life announce aplanned investment of €500m incontingent convertible bonds issuedby a subsidiary of Allianz. “OtherEuropean insurers might welcome thechance to raise capital in this way,” saysJames “while Japanese firms could takeadvantage of the strong yen to acquireexpertise in some of Europe’s moresophisticated markets like France,Germany or the UK.”

Lastly, the huge growth potential of theTurkish insurance market – and the lifesegment in particular – will continue toattract large insurers from WesternEurope’s more mature markets. “Thesegroups are most likely to have thenecessary firepower to launch a bid,should the opportunity occur,” saysJames. In recent months the attractionsof the Turkish market have been

demonstrated by MetLife’s acquisitionof Deniz Emeklilik from Dexia-ownedDenizbank. Other developing marketsin Central and Eastern Europe couldalso attract bidders seeking exposure tofaster rates of growth.

Even if the European crisis can be resolved, its long-term effects remain unclearWe have made some predictions for thecoming months, identifying several areaswhere we expect the desire for M&A toovercome the obstacles created by theongoing European sovereign debt crisis.

While no-one would predict a return tothe boom years of the middle of the lastdecade, we feel market volatility willsurely not continue at current levels,indefinitely. At the same time, there is agrowing view that the deal environmentfor European financial services firms hasprobably undergone some permanentchange. “Funding conditions haveprobably changed permanently,” saysStephen Cater. “The difficulty of raisingdebt will pose particular problems formedium-sized unlisted firms looking toexpand via M&A.”

Looking further forward, it becomes farharder to make intelligent statements.Should sellers wait for markets tostabilise, or is this the new reality forfinancial services M&A? “The greatestconcern right now is that there is no wayof knowing when current marketconditions will come to an end,” saysShamshad Ali of PwC UK.

Only time will reveal the full extent ofthe impact of the Eurozone crisis onthe long-term prospects for financialservices M&A. Watch this space.


The ‘Data analysis’ section in this issueincludes FS deals:

• Reported by mergermarket, Reutersand Dealogic.

• Announced during the third quarter of2011, and expected to complete.

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

• Acquisitions of Europe-based FS targetswhere a deal value has been publiclydisclosed.

Our analysis also excludes deals that,in our view, are not ‘pure’ FS dealsinvolving corporate entities, or entireoperations, e.g. real estate deals andsales/purchases of asset portfolios wherethe disclosed deal value represents thevalue of assets sold.

Each deal was classified dependingon the type of acquirer (Private Equity,Corporate, Government, Other), thetarget's subsector (Asset Management,Banking, Insurance, Other) and whetherthe deal was domestic or cross-border;this is therefore PwC's analysis andinterpretation of the publicly availableinformation.

Methodology

Figure 1: European FS deals – quarterly summary

Deal value

€ in billions Q110 Q210 Q310 Q410 FY10 Q111 Q211 Q311 YTD11

Asset Management 1.7 1.0 2.4 1.5 6.6 1.0 0.4 0.4 1.8

Banking 4.4 5.8 14.8 5.5 30.4 5.9 2.0 3.7 11.7

Insurance 2.0 4.1 1.8 1.6 9.5 2.0 2.5 0.2 4.6

Other 0.5 0.3 2.3 0.9 3.8 0.9 1.8 0.7 3.4

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 21.4

Corporate 7.5 10.8 17.0 4.5 39.8 9.5 4.8 3.3 17.5

PE 0.8 0.0 4.2 1.1 6.1 0.3 1.9 0.5 2.7

Government 0.3 0.2 0.0 3.9 4.3 0.0 - - 0.0

Other - - - - - 0.0 0.0 1.2 1.2

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 21.4

Domestic 3.9 7.5 10.2 7.1 28.7 8.5 3.0 2.6 14.1

Cross border 4.6 3.6 11.0 2.4 21.6 1.3 3.6 2.4 7.3

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 21.4

Source: Mergermarket, Thomson Reuters, Dealogic, PwC analysis Note: May contain rounding errors


The main areas of our services are:

• lead advisory corporate finance.

• deal structuring, drawing onaccounting, regulation and taxrequirements.

• due diligence: business, financialand operational.

• business and asset valuations andfairness opinions.

• loan portfolio advisory servicesincluding performance analysis,due diligence and valuation.

• post-merger integration: synergyassessments, planning and projectmanagement.

• human resource and pensionscheme advice.

About PwCM&A advisory services in thefinancial services sector

PwC is a leading consulting and accounting adviser for M&A in the FS sector. Through our Corporate Finance,Strategy, Structuring, Transaction Services, Valuation, Consulting, Human Resource and Tax practices, we offer afull suite of M&A advisory services.

About this reportIn addition to the named authors of the articles, the main authors of, andeditorial team for, this report were Nick Page, a partner and Fredrik Johansson,a director in the Transaction Services – Financial Services team at PwC UK inLondon. Other contributions were made by Andrew Mills of Insight FinancialResearch and Maya Bhatti, Valerie Martin, Tina Mayo, Natasha Pitchacaren,Kate Davies and Fred Lewis of PwC UK.

Geared up for growth?We can help you take advantage of the emerging opportunities forexpansion and acquisition. Find out more about our M&A advisory services at

www.pwc.com/financialservices

Nick Page(PwC UK) +44 (0) 20 7213 1442 [email protected]

Fredrik Johansson(PwC UK) +44 (0) 20 7804 4734 [email protected]

Steven Pearson(PwC UK) +44 (0) 20 7804 8608 [email protected]

Steve Cater (PwC UK) +44 (0) 20 7804 7029 [email protected]

Patrick Atkinson(PwC Spain) +34 915 684 266 [email protected]

Serkan Tarmur(PwC Turkey) +90 212 376 53 12 [email protected]

James Tye(PwC UK) +44 (0) 20 7212 4347 [email protected]

Matteo D'Alessio(PwC Italy) +39 02 778 5272 [email protected]

Christina Zarifi (PwC UK) +44 (0) 20 7213 2045 [email protected]

Christopher Sur (PwC Germany) +49 69 9585 2651 [email protected]

Richard Thompson(PwC UK) +44 (0) 20 7213 1185 [email protected]

Andrew Cann(PwC Russia) +7 495 967 6130 [email protected]

Shamshad Ali(PwC UK) +44 (0) 20 7804 9600 [email protected]

Emil Yiannopoulos(PwC Greece) +30 210 6874640 [email protected]

Piotr Romanowski(PwC Poland) +48 22 746 6706 [email protected]

Contacts

If you would like to discuss any of the issues raised in this report in more detail please contact one of the following below or your usual PwC contact.


This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any 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 for anydecision 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, PwC UKon +44 207 213 2302 or at [email protected]

www.pwc.com/financialservices© 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of itsmember firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions ofany other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

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