LONDON - Merger & acquisition (M&A) activity is set to pick up in European pharmaceuticals, mining and telecoms with deal volumes to climb in 2010 as balance sheets improve and borrowing costs stay close to long-term lows.

Some analysts say investors could see take-out premiums of up to 40 percent on potential targets, if they can time buying a stock, say, a month before a bid, though sudden bid failures and attendant price collapses are always a possibility.

Over the past two years, European M&A has fallen steeply and stands at $536 billion in the year to date, according to Thomson Reuters data -- barely a third of 2007's full-year total.

But now analysts see the conditions for M&A activity improved: business confidence is rising and credit spreads are tighter as the risk of a double-dip recession fades.

M&A is going to be one of the major things underpinning the market next year. It would not surprise me if M&A activity doubled in 2010. It is coming from very low levels and this is the ideal point in the cycle to do it because prices are low, said Kevin Lilley, manager of the Royal London European Growth Trust.

Analysts at Exane BNP Paribas expect European M&A volumes to more than double next year, though this is not the consensus and UBS only sees an increase of 15 percent.

Investors could benefit from M&A activity in the drugs sector as Big Pharma will need to generate growth through acquisitions as sales growth slows.

In the sector, Exane BNP Paribas expect sales compound annual growth rate (CAGR) to shrink from the 7 percent average between 2005 and 2009 to 3 percent between 2010 and 2015.

If you look at the pharmaceutical sector and look at the earnings growth in total it is barely improving for the next three years. They need to do deals to get their earnings moving again and increase their pipeline, said Lilley.

Exane BNP Paribas analysts said possible targets include Qiagen, Intercell and Stallergenes, with potential upside of 23 percent, 40 percent and 34 percent respectively.

In the telecommunications area, stocks could gain as companies combat their low growth outlook through M&A, while in the mining sector shares may be boosted as consolidation is used to help improve their pricing power.


Data shows business confidence is improving and credit spreads narrowing. In November, German business sentiment rose by more than expected to reach its highest level since August 2008, while confidence among British businesses climbed to a six-year high.

Over the past year, the investment-grade Markit iTraxx Europe index has tightened 55.4 basis points.

The banks appear to be increasingly confident that the worst is behind us, said Jim Wood-Smith, head of research at Williams de Broe.

Together, increasing confidence and availability to debt finance indicate higher levels of M&A to come.

A survey by UBS and The Boston Consulting Group (BCG) showed almost one in five European companies is likely to make a major acquisition next year.

Companies have already started to look at deals, either to slim down or to gain a footprint in areas in which they do not have a presence.

Shares in British confectioner Cadbury have risen 39 percent since early September on a 10 billion pound ($16.2 billion) hostile bid from U.S. group Kraft.


In the telecom sector, Exane BNP Paribas said KPN and Tele2

are potential targets and see possible upside of 25 percent and 19 percent respectively to each stock.

JP Morgan has also said telecom is an area where M&A is likely to occur and Deutsche Bank picks KPN as a possible target.

In late November, France Telecom and TDC agreed to merge units with Orange Switzerland and Sunrise.

The great thing about France's Telecom's Swiss transaction the other week is that I think a lot of management will be sitting there and thinking that is quite an interesting price, said Neil Dwane, chief investment officer at RCM.

They might think maybe if I got that it would be enhancing to my shareholders and business and maybe I should be looking at a deal.

In the mining sector, analysts said companies that produce gold could be another target following the difficulties in accessing new gold resources.

There's going to be a lot of consolidation within gold to get access to ownership or entitlement over gold reserves, said Mark Wellesley-Wood, head of mining M&A at Ambrian.

Deutsche Bank said there would be deals among midcap miners.

(Additional reporting by Quentin Webb, Editing by Sitaraman Shankar)