When some of the smarter guys in the room look for the door, it’s always worth taking note. While the US corporate scene has been re-energised by President Donald Trump’s tax cuts and bumper share buybacks, worries are emerging among some of the more bearish traders about “peak Europe”. And US companies bailing out of European ventures are adding to fears that Europe’s growth may be slowing.
This week, Liberty Global succumbed to the advances of Vodafone, selling large parts of a European cable empire carefully assembled over the past decade for a price lower than some had expected. Not long ago Liberty had been on the other side, trying to coax Vodafone into selling or merging. Instead, John Malone, Liberty’s “cable cowboy”, looks set to ride out of parts of Europe, even as the group continues its push into Latin America.
Last week, Walmart signalled a similar shift with plans to sell Asda to J Sainsbury in the UK — as well as revealing plans this week to refocus on emerging markets in Asia and Latin America, starting with India’s Flipkart.
Both US groups are seeking growth outside Europe — even if they will keep some exposure to the region (with Walmart keeping a stake in the merged Sainsbury’s business and Liberty holding on to its UK operation).
Data suggest they may be right. This week’s downbeat French manufacturing numbers added to data pointing to a slowdown in European growth. Purchasing managers’ index numbers and business confidence gauges — such as the Citi Economic Surprise Index — during the first quarter raised concerns about growth as central bankers consider when to rein in stimulus measures. UK retail numbers continue to deliver surprisingly negative feedback on the health of the consumer — as seen this week in the supposedly recession-proof purveyors of booze and sausage rolls at Wetherspoons and Greggs.
Other entrepreneurs are also calling time on parts of their business. Rupert Murdoch is scaling back in Europe while keeping his US TV news business (and his newspaper empire).
There are renewed worries about bad debt still lying on the balance sheets of eurozone banks. Throw in some divisive political shifts — most notably in the UK and Italy — and the argument for caution is clear. Consumer-facing businesses look the most precarious, and even more so should interest rates tick up and housing markets slow.
But does this all add up to a red flag for investors? Not yet. In many of the deals, it is simply that the price is right. Liberty may not have snared as much as some Vodafone shareholders feared, but the multiple of about 11 times 2017 earnings is still respectable. For every seller there is a counter-party willing to take the trade — and the second quarter could see further mega-M&A given the Takeda offer for Shire. Comcast and Disney both seem keen enough to expand in the region with their rival bids for Sky.
A stronger US economy should end up boosting the eurozone too, notwithstanding trade tensions. This should help ensure economic numbers prove a quarterly blip, with normal service to be resumed later this year. Some slowdown from impressive growth rates was inevitable.
But while they have their own good reasons to sell, history suggests that betting against the likes of Malone and Murdoch doesn’t always end well. The pause in economic growth should cause a pause for thought — and a quick look at the doors again to make sure no one is getting out early.