Citi Sees Virus Paving Way for National Champions in Europe

(Bloomberg) -- European authorities could push companies to combine and create national champions when the region's economy emerges from the coronavirus pandemic, according to top dealmakers at Citigroup Inc.

Manolo Falco, co-head of the U.S. firm's investment banking operation, said in a phone interview that the recent turmoil may spur long-overdue consolidation on the continent.

“This crisis could be a defining moment for Europe and the creation of industry national champions will definitely be a theme,” Falco said. “We have seen a growing sentiment toward protecting companies from foreign takeovers in pretty much every European country.”

The need for tie-ups in sectors such as banking and industrials have been talked about for years in Europe, though few landmark deals have been struck. In 2019, regulators blocked Siemens AG and Alstom SA's plan to create a European rail champion, and a long-touted combination of Germany's Deutsche Bank AG and Commerzbank AG also failed to materialize.

European governments have warned that the economic slump from the coronavirus could leave the bloc's important industries vulnerable to hostile takeovers. Authorities in countries such as Germany and Italy have also spoken about protecting their companies against approaches by foreign parties.

Debt Bankers Busy

The banking sector in Europe in particular is seen as ripe for consolidation, as the persistent low-interest environment and dominance of Wall Street investment banks have combined to squeeze revenues at the region's major lenders. Executives at firms including UBS Group AG have said consolidation may be necessary if European banks are to stay competitive.

So far the spread of Covid-19 has hobbled mergers and acquisitions activity, with the volume of transactions globally down 36% this year, according to data compiled by Bloomberg. Philip Drury, who leads Citigroup's banking, capital markets and advisory business in Europe, the Middle East and Africa, said the pandemic will eventually force some companies into strategic dealmaking.

“There will be companies coming out of this crisis in a robust position, and there will be others in a more vulnerable position,” Drury said. “Whenever you have a situation like that, invariably there will be more M&A and strategic activity.”

The crisis has been keeping Citigroup's debt bankers busy. The bank has participated in 14 of the 15 syndicated loan transactions that closed in EMEA since the virus began ravaging markets, according to Drury. It's also been involved in more than $50 billion of corporate bond sales and $56 billion of sovereign note issues in the region.

“While M&A has been slow, our debt capital markets team will deliver one of their best first-half year performances,” Drury said. Citigroup has also assembled a team of senior advisers from its structured financing and corporate banking teams to provide restructuring advice to companies, he said.

Hiring Plans

Citigroup is still pursuing new hires to help it rise up the league tables and become one of the world's top-three investment banks, according to Falco.

“We will continue to look for top talent,” Falco said. “Some of the best talent we have hired in the investment bank has been during times of crisis, and we think there will be a big opportunity for us to do that in this crisis as well.”

Citigroup has previously lagged behind its global rivals in advising major corporations on M&A. It reshuffled its investment banking and capital markets operations in 2018 in an attempt to close that gap, appointing Falco and Tyler Dickson to lead the combined businesses.

The bank ranked fourth among advisers on M&A transactions globally last year, according to data compiled by Bloomberg. It was the fifth-busiest underwriter of equity offerings in 2019, the data show.

Like its rivals, Citigroup has thousands of employees working from home amid global coronavirus lockdowns. The bank has been hosting podcasts and town halls with senior leaders to help improve coordination, Drury said.