Kobus Louw
By Kristin Cejda
With a growing deal pipeline, opportunities in investment grade credit are growing.
Mergers and acquisitions have been a key theme for investment grade credit thus far in 2024. Companies have mandates to grow, cash to invest, attractive equity valuations to use as currency, and strong balance sheets to use—setting up an environment ripe for deal-making.
The motivations behind M&A tend to fit into four buckets: 1) buying growth, 2) cost savings and scale, 3) regulatory changes and 4) industry disruption. Most deal flow thus far has fallen into the first two buckets. Even in a higher interest rate environment, companies with balance sheet capacity are generally comfortable adding leverage for the right acquisition at the right price. At the same time, deal success is rarely a sure thing, warranting ongoing monitoring to see who, in retrospect, overpaid or mistimed a transaction. Importantly, the regulatory approval environment has become more challenging—something that could be affected by the outcome of the U.S. election this coming fall.
From a sector perspective, we continue to expect an uptick in M&A activity in the Consumer and Retail sectors, given their challenging growth dynamics. For example, Home Depot (HD) just announced a $18.25 billion acquisition of SRS Distribution, a specialty trade distribution company. Coming off strong COVID-induced demand trends for housing investment, Home Depot was likely looking to improve its long-term growth trajectory by expanding its total addressable market.
Other sectors in focus include commodities, where consolidation via all-equity deals has been commonplace as companies seek to improve growth prospects and enhance scale. After a slew of recent Energy transactions, other Basic Materials sectors have followed, with International Paper (IP) announcing an all-share acquisition of DS Smith for $9.9 billion in order to bolster its global packaging capabilities. Healthcare/Pharma has been active in M&A, as well, with recent deals including Johnson & Johnson’s (JNJ) $13.1 billion purchase of Shockwave to enhance its position in a faster-growing segment of medical technology.
All-equity transactions aside, we expect M&A financing to continue to translate into supply opportunities in the investment grade market—starting with the current $100 billion pipeline of announced deals over the balance of 2024.
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