BTI British American Tobacco PLC

Safran's Zodiac tie-up is latest in spate of multibillion-dollar transactions this week

By Ben Dummett 

Another day, another deal.

Safran SA's EUR8.5 billion ($9 billion) tie-up with Zodiac Aerospace is the third multibillion-dollar European transaction announced this week, taking the value of agreed deals in the region so far this year close to $100 billion.

However, bankers say it is too early to tell whether the spate of deals signals a marked and sustained upturn in activity from last year.

This flurry of deals, which include British American Tobacco PLC's $49.4 billion transaction to take full control of Reynolds American Inc., and the merger of Italian and French eyewear companies Luxottica Group SpA and Essilor International SA, comes as European companies face profitability challenges due to muted economic growth.

In November, the European Union lowered its 2017 economic growth forecast for the region to 1.6% -- 0.3 percentage point lower than previously projected -- in part because of the U.K.'s decision to leave the European Union.

In response, some companies are turning to acquisitions to cut costs, generate new sources of revenue and eliminate potential competition. Investors are rewarding these moves by boosting the companies' share prices.

So far this year, announced M&A deals involving European companies have totaled $47.2 billion, more than twice the corresponding figure for a year earlier of $19.6 billon, according to Dealogic. This year's data excludes the BAT-Reynolds deal because the original offer was made last year.

Paulo Pereira, a partner at investment bank Perella Weinberg Partners, cautioned against drawing any conclusions about the M&A outlook for Europe so early in the year. He also noted that geopolitical and political events can have a "sobering" effect on dealing making, but says "transactions that have clear strategic rationale and clear synergies will continue to be pursued," Mr. Pereira said.

Severin Brizay, the head of M&A for Europe, the Middle East and Africa at Swiss bank UBS, suggested that the series of deals is the continuation of a trend of sustained activity in the fourth quarter of last year.

The Safran-Zodiac deal is designed to give the companies additional scale to absorb pressure from the world's largest airplane makers for supplier discounts, as Boeing Co. and Airbus SE seek to win new plane orders by offering air carriers lower prices. Safran, a maker of aircraft engines and other equipment for the aerospace sector, estimates the deal will generate EUR200 million of annual pretax cost savings over the long run and boost per-share earnings.

Meanwhile, BAT's deal to acquire the 57.8% of Reynolds it doesn't already own gives the U.K. tobacco company's Kent brand the opportunity to expand in the U.S. while allowing U.S.-based Reynolds the chance to grow its Newport brand overseas.

In the case of Luxottica and Essilor, the planned merger gives the combined company about 27% of the eyewear market and guards against the two competing against each other. Ray-Ban maker Luxottica had been expanding into Essilor's market of optical lens manufacturing while Essilor was moving to compete against Luxottica in frames.

Write to Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

January 20, 2017 02:48 ET (07:48 GMT)

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