M&A pickup eyed for back half of year; related IG supply up; Microsoft deal deadline nears

By Cristal Cody

Tupelo, Miss., June 9 – Mergers and acquisitions activity is expected to ramp up in the back half of 2023, though the potential for high-grade funding needs has dropped and some deals are finding opposition.

North American merger and acquisition announcements climbed to $188 billion in May, its highest in a year in May, from $147 billion in April, according to BofA Securities Inc. analysts this week.

M&A-related high-grade bond supply jumped to $40.5 billion in May from $500 million in April.

The pipeline of announced deals with potential high-grade funding implications declined in May to $313 billion from $372 billion in April, BofA said.

An “M&A revival” is expected in the second half of the year as interest rates stabilize, equity volatility eases and earnings run higher, said Christine Short, vice president of research at Wall Street Horizon.

“Capital markets have been cruddy lately,” Short said in a report this week. “Higher interest rates and stubbornly elevated volatility in the fixed-income market have done little to instill confidence among corporate executives looking to make strategic financial moves. M&A activity has been soft, but there are a handful of intriguing deals.”

On the near horizon, the high-grade space could see some primary action from Microsoft Corp.’s acquisition of Activision Blizzard Inc., a deal valued at $67.9 billion and expected to be completed in June. The transaction was announced in January 2022.

BofA analyst Jason Kilgariff estimates Microsoft could issue $20 billion to $30 billion of investment-grade paper to fund the deal.

However, Microsoft is waiting on regulatory approvals.

Fitch Ratings said in a report on Thursday that Microsoft could face a break-up fee of $3 billion if the merger does not close by July 18.

“Recent press reports have suggested that Microsoft may close its $69 billion acquisition of video game maker Activision Blizzard before obtaining all of the necessary regulatory approvals,” Fitch said. “MSFT would run the risk of a disruptive divestiture process if it moves forward and the FTC wins its suit to block the merger that it filed last December. The U.K.’s Competition and Markets Authority moved to block the deal in early May, while the EU recently approved the merger after MSFT agreed to some competitive concessions.”

Regulatory hurdles are weighing on overall M&A action, Fitch noted.

Fitch said that the “Biden administration has stepped up legal challenges to mergers and strategic partnerships on anticompetitive grounds, with mixed success to-date, including lawsuits brought by the Federal Trade Commission and the Department of Justice.”

The FTC sued to block Amgen Inc.’s $28 billion acquisition of Horizon Therapeutics plc on anticompetitive grounds in May.

“Intensified regulatory and legal challenges to mergers and strategic partnerships under the Biden administration could temper external growth and limit scale efficiency opportunities, pressuring cash flows,” Fitch said. “Issuers that litigate regulatory disputes could face operational uncertainty and distraction. However, the sector wide credit effects from tougher antitrust enforcement should be positive for rating stability over the next cycle, assuming it lowers M&A event risk and promotes a competitive playing field.”

Energy deals

Meanwhile, the energy space is seeing a resurgence in mergers with some major deals that offer potential high-grade funding needs expected to close this year.

“The energy and materials sectors enjoyed rising commodity prices during the first half of last year, but 2023 has been a different story so far,” Short reported. “With the broad commodity index sinking to 52-week lows in May, and oil straddling the $70 mark after trading north of $120 per barrel 12 months ago, there are deals to be had.”

At the start of June, Constellation Energy Corp. announced plans to acquire NRG Energy Inc.’s 44% ownership stake in the South Texas Project Electric Generating Station, a source said. The transaction, valued at $1.75 billion, is expected to be funded with cash and debt and close by the end of the year.

Another energy deal that could impact the high-grade market is on the calendar, sources said.

Chevron Corp.’s $7.6 billion valued acquisition of PDC Energy Inc. was announced May 24 and is expected to close by the end of 2023.

Market sources also have anticipated possible high-grade funding supply from Oneok Inc.’s $18.9 billion acquisition of rival Magellan Midstream Partners LP, which was announced May 14 and expected to close in September – if the deal is completed.

On Thursday, Energy Income Partners, LLC, the fourth largest shareholder in Magellan Midstream Partners, notified Magellan's board of its intention to vote against the combination.

Energy Income said in a release that it “believes that taxes paid by investors will exceed the premium offered by Oneok and any other potential benefits from the merger.”

In addition, the shareholder wants Magellan to remain a stand-alone entity “whose returns on invested capital are far superior to Oneok.”

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