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May 2010

Equity

Special report

www.sgresearch.com

Corporate spin-offs and demergers Best-case scenario for developed economies

Our watchlist

Alcatel-Lucent Commerzbank AG. Ericsson Metro AG Repsol YPF S.A. ThyssenKrupp AG

ArcelorMittal SA Deutsche Telekom AG Finmeccanica S.p.A. Motorola Inc. Royal Bank of Scot.Group Plc Vivendi S.A.

BASF S.E. EADS Henkel Munchen Ruck Saint-Gobain S.A

Bayer AG E. ON AG Hochtief AG Philips Siemens AG

Carrefour S.A Enel S.p.A. ING Groep N.V. PPR S.A. Statoil

Source: SG Cross Asset Research

Head of Long-Term Sustainable Research Senior SRI analyst Daniel Fermon Yannick Ouaknine And SG’s equity analysts (33) 1 42 13 58 81 (33) 1 58 98 23 50

[email protected]

[email protected]

Please see important disclaimer and disclosures at the end of the document

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Corporate spin-offs and demergers

May 2010 2


May 2010 3

Contents

4 Has the time come to spin off or demerge?

6 Salutary spin-offs

6 Merger and spin-off cycles

9 Mergers & spin-offs: different situations, different economies

11 Spin-off: the changing face of M&A in developed countries

14 Corporate spin-offs: best-case scenario 14 Three reasons to have a spin-off cycle

17 SG Cross Asset Research spin-off screening tool

17 Sector analysis

18 Results

19 Conclusion - back to focusing on the core

20 Sector review

21 Aerospace & Defence - Only few spin-offs expected

23 Air transport - Ripe for takeovers rather than spin-offs

25 Automobiles - Emerging players are changing the game

27 Banks - Focusing on their core business

30 Capital goods - Focus on core business is the key

34 Construction, Motorways & Building Materials - Companies already focused on sub segments

36 Food products - No spin-offs on the agenda

38 Food & Staples Retailing - Expand in emerging markets or spin off unprofitable assets?

40 General Retailing - Difficult to survive

42 Hotels, Restaurants & Leisure - Still fragmented

44 Household & Personal Care - More consolidation than spin-off

46 Insurance - Changing regulatory rules

48 Luxury goods - No spin-offs to expect

50 Media - Already well split between sub-sectors

52 Metals & Mining - Trend moving from consolidation to spin-off

54 Oil & Gas - Oil leaders ready to spin off non-core assets

56 Pharmaceuticals - Big is beautiful but for how long?

58 Real Estate - Spin-off of industrial groups would be beneficial

60 Software & IT Services - Offshore factor dominates IT services

62 Telecom Equipment - Many spin-off options

64 Telecom Services - Spin off foreign businesses?

66 Utilities - Many assets for sale

Report completed on 5 May 2010

Thanks to Nicolas Harari for his assistance in preparing this report.


May 2010 4

Has the time come to spin off or demerge?

Following our October 2009 �Worst Case Debt Scenario� report that analysed the risk related

to the public debt explosion, we are now focusing on potential positive factors for developed

economies worldwide. As we are coming out of the recession, potential M&A moves may be

coming to the forefront and the idea of spinning off non-core assets looks increasingly

appealing. Companies are seeking opportunities, waiting for recovery signs while benefiting

from low rates and healthy balance sheets. Therefore, we expect a 32% rise in M&A deals in

2010 (see Marc Teyssier�s SG Cross Asset Quant Research report Training your computer to find potential M&A candidates published 2 March 2010). But, with anaemic western

economies, companies in these regions are also looking for acquisitions specifically in

emerging markets where, they believe, future growth could be generated.

Finding growth in emerging markets

Japan

Eurozone

US

UK

Russia

Brazil

China India

Profitability

Low growth

Low profitability

High growth

High profitability

Western companies are looking to

expand in growth areas

GD

P G

row

th


To finance part of their acquisitions with debt, companies will face competition from sovereign

debt. Therefore, one of the solutions would be to divest part of their non-core assets through

spin-offs to fund future growth. For some sectors, this should be fairly easy to do, whereas in

other sectors, there is nothing to sell and competition from emerging companies will also have

to be tackled. In the chart below we show our view of sector spin-off potential.

Sector view of spin-off potential

Air Transport

Household & Personal CareLuxury Goods

Aerospace

Pharmaceuticals

Oil & GasFood products

Telecom ServicesFood & Staples Retailing

Hotels, Restaurants & LeisureTelecom EquipmentConstruction,

Motorways &

Building Materials

Software & IT ServicesMedia

Real Estate General Retailing Utilities

ChemicalsInsurance

BanksCapitals goods

33%

43%

53%

63%

73%

83%

93%

Low Diversification High

Co

nso

lidat

ion

Automobilles & Components

Emerging markets

development: growth

and competition

Metals & Mining

Sectors

where we see

potential spin-offs

Source: SG Cross Asset Research / Datastream

http://www.sgresearch.com/publication/en/AC41C6C40968B3CBC125764E00540414.pub�

http://www.sgresearch.com/publication/en/B55CA91B58A410D5C12576DA0052DE58.pub�



May 2010 5

In company terms, we have highlighted 27 companies which could at some stage decide to

spin off certain businesses. Among the names mentioned, a portion has already announced

that they are thinking of spin-offs, whereas others could be forced to do so by their

shareholders if their stock performance starts to disappoint.

Our 27 stock selection

Company name Sector Country Reco Currency Target Price

(loc cur)

Price (loc cur) 4/05/10

Sales (lc m) 2010e

Market Cap (lc m)

P/E 10e

Return on Equity 10e

EPS Growth 09-10e

EADS Capital Goods France Sell EUR 12 13.85 42584.5 11303.1 17.1 6.1 271.8

Finmeccanica Capital Goods Italy Hold EUR 10 9.6 18662.7 5547.3 9.8 8.6 -7.5

Hochtief Capital Goods Germany Hold EUR 61 62.27 17972.7 4358.9 22.8 8 12

Philips Capital Goods Netherlands Buy EUR 30 25.48 25640.2 25125.3 14.7 7.8 141.6

Saint-Gobain Capital Goods France Buy EUR 47 37.26 38615.1 19114.4 15.4 8.3 85.7

Siemens Capital Goods Germany Buy EUR 92 73.09 73752.1 66819.1 12.8 15.9 9.5

PPR Consumer Durables & Apparel France Buy EUR 121 102.75 16930.3 13006 13.8 7.7 19.4

Repsol-YPF Energy Spain Hold EUR 18 17.71 898.785* 21621.5 9.9 10.7 68.2

Statoil Energy Norway Buy NOK 165 143.6 1760* 457889.7 9.1 23.5 30.5

Carrefour Food & Staples Retailing France Buy EUR 45 36.88 91836.4 25993.3 13.6 15.4 -26.3

Metro Food & Staples Retailing Germany Hold EUR 43 46.76 68161.9 15153.8 15.6 16.5 43

Henkel Household & Personal Prod. Germany Buy EUR 43 40.07 14039.7 7139 16.8 14.2 43.2

ArcelorMittal Materials France Buy EUR 37 29.57 90745.9 46156.3 10.6 8.9 92.1

BASF SE Materials Germany Buy EUR 54 44.6 57800 40959.6 10.2 18.8 46

ThyssenKrupp Materials Germany Hold EUR 26 24.76 45212.1 12738.7 43.7 4 144.7

Vivendi Media France Buy EUR 22 19.93 27588.2 24499.7 8.9 10.3 4.4

Bayer AG Pharmaceuticals & Biotech Germany Hold EUR 52 47.17 32015.2 39007.1 13.7 13.6 18.2

ALCATEL Technology Hardware & Equ. France Hold EUR 2.2 2.39 15233.4 5540.2 58.9 -2.9 117.3

Ericsson Technology Hardware & Equ. Sweden Buy SEK 100 84.2 207654.6 253576.4 13.2 12.2 88.5

Motorola Inc Technology Hardware & Equ. US Hold USD 6.5 7.1 22134.2 16421.4 29.2 5.5 nm

Deutsche Telekom Telecommunication Services Germany Buy EUR 10.8 9.88 64048.9 43081.1 12 9.8 5.2

E.ON Utilities Germany Hold EUR 29 28.19 77523.3 56408.2 8.5 15.3 6

Enel Utilities Italy Buy EUR 5.1 3.96 58594 37237.3 7.2 15.4 19.1

Commerzbank Banks Germany Sell EUR 3.6 5.99 12039.6** 7072.8 nm -5.4 79.4

Royal Bank of Scot. Banks UK Hold GBP 0.55 0.54 22484.8** 31505.5 nm 0.2 33.9

ING Group Insurance Netherlands Buy EUR 9 6.88 50160*** 26361.1 7.4 na 289.1

Munich RE Insurance Germany Buy EUR 125 107.2 4213.9*** 21161.5 9.1 na -3.1

* Production ** Total income *** Operating income Source: SG Cross Asset Research


May 2010 6

Salutary spin-offs

The recent economic crisis has undermined the concept of consolidation, as huge losses from

over-expensive acquisitions have revealed the risks facing large corporations implicated in

M&A deals. As we exit the recession, there is once again a growing buzz around potential

M&As and increasing interest for spin-offs. Companies are seeking opportunities, waiting for

signs of recovery while also benefiting from low interest rates and healthy balance sheets (see

Marc Teyssier�s SG Cross Asset Quant Research report Training your computer to find

potential M&A candidates published 2 March 2010).

And, with anaemic western economies, these companies may now be looking for acquisitions

opportunities specifically in emerging markets where they believe future growth lies. But, what

can be learned from history?

Merger and spin-off cycles Spin-off potential reflects industry maturity Companies are created, expand and gain market share through innovation, and eventually can

become sector leaders, before smaller, innovative entities catch up. This is how we could

summarise the lifecycle of a company.

Business lifecycle

Spinoffs and

Demergers

Maturingvia restructruring

Expansion via externalgrowth to acquire leadership

Growth via Internationalization

Start-up phase:Industry's birth in a country


A solution to tackle this situation could be to become even larger via acquisitions, although in

some cases, this could create monopolistic situations. But, most of the time, a company with

numerous activities sends a blurred image to external financial analysts and its own

shareholders. Indeed, it is particularly complex to value a company with varied core

businesses. An activity requiring heavy investments with growth rates near to zero mixed with

an activity generating strong growth but overdrawn will inevitably make company strategy

more opaque.

A spin-off involves the creation of an independent company from an existing part of another

company through a divestiture, such as a sale or distribution of new shares. Spin-offs (which

represented only 16% of M&A deals in 2007/2008) clearly equate to strategy which pushes

companies to concentrate their financial resources on the core business. History tells us that

this option is the best way to create shareholder value.



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May 2010 7

Legislation favoured spin-offs and demergers in the past If we analyse US stock market history starting from the end of the 19th century, we can

identify four major M&A waves. They last on average nine years and, so far, two of them were

followed by spin-off phases.

Annual number of US mergers and acquisitions

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0

2000

4000

6000

8000

10000

12000

14000

1896 1916 1936 1956 1976 1996

Number of M&As Real S&P 500 Stock Price Index

Source: Nelson series, Thorpe series, FTC “Broad” series, M&A “Domestic” series and from 1984 Thomson Financial, Real S&P 500 Stock Price Index compiled by Schiller

When mergers create a monopolistic situation, the legislator can become less supportive (as

was the case with the Sherman Act, followed by the Clayton Anti-trust Act in 1914 and the Tax

Reform Act in 1969). In 2010, we could see a similar situation arise in the financial sector as

we believe the US administration could decide to downsize banks.

We could also see countries specifically aiming to protect their industries and their national

champions. The recent proposals from Lord Mandelson, the UK�s business secretary, to

review UK takeover laws following the bid from Kraft on Cadbury is a good example of this.

Indeed, political impetus could adjust regulations with the intention of putting a halt to

excessive consolidation. Moreover, the recent warning from Warren Buffet following Kraft�s

bid for Cadbury reminds predators that shareholder interests should come first. Overpaying

for major acquisitions is no longer acceptable. Logically, this would suggest that we have

entered the spin-off phase.

Low volatility is key for spin-offs As we exit the recession, we should now get an idea of those who learnt from the past and

those, owing to ignorance of previous cycles, who have not. Those who disregarded history

are likely to suffer. They applied the old M&A model, continuously expanding as they tried to

gain more and more market share by increasing size/scale and diversifying.

But, those who we believe have learned from past experience and acknowledge that M&A

transactions at the peak of an economic cycle are likely to achieve little, are instead more

likely to favour using cash saved during the peak to find opportunities when the cycle touches

bottom. In other words, they would adopt an expansion strategy through focused M&As, often

when the business cycle has returned to lows.

Spin-off

BankruptciesSpin-off

Fourth wave

Third wave

Second wave First M&A wave

Spin-off?


May 2010 8

Four M&A cycles and valuation

22

11

28

7

20

13

26

12

20

48

30

19

0

10

20

30

40

50

60

0

2000

4000

6000

8000

10000

12000

14000

1896 1916 1936 1956 1976 1996

Number of M&As P/E


On a complementary side with no clear market trend, a spin-off is a way for companies to

differentiate, to push valuations higher than their direct competitors, as fund managers tend to

favour focused companies with clear strategies.

Logically, a spin-off enables a better valuation of a company thanks to clearer visibility on

accounts. Ideally, each spun-off entity would obtain an optimum valuation and, therefore the

valuation of the whole is greater than the sum of its parts. While synergies could be expressed

as 1 + 1 = 3 (a very simplified expression of the reason behind M&A transactions), a spin-off

could, similarly, be expressed as 2 = 1 + 1 (+ 1) (with (+1) reflecting the premium that could be

gained from better legibility/transparency of company accounts).

In summary, after a market crash, companies tend to focus on value creation and profitability.

As a result, we generally see more spin-offs at that time. But, this requires a certain amount of

market stability. It seems that 2010 could see a strong spin-off phase. Already several deals

have been announced not only in the US but also in Europe (see part 2).

Volatility trend of the S&P (VIx)

0

20

40

60

80

100

1928 1938 1948 1958 1968 1978 1988 1998 2008


Spin-off wave

Spike in volatility => No more M&As

Spin off?

End of M&A wave followed by dropping P/E

Reagan reduces

income and capital gains marginal tax

rates


May 2010 9

Mergers & spin-offs: different situations, different economies A new model, but for whom? The last M&A cycle proved to be slightly different as it was longer, with two waves (1997-2001

and 2004-2007) and involved an overall shift from the US to Europe and also very significant

repositioning in favour of emerging markets and Asia. As a matter of fact, for the first time

ever, we saw simultaneous worldwide development of global companies in many sectors

(pharmaceuticals, telecoms, technology, banks, etc.).

The trend towards globalisation in the last decade has led to a race to gain competitive

advantage, and emerging markets have taken advantage of this. Globalisation, deregulation,

privatisation, reform and restructuring have all spurred an extraordinary increase in cross-

border M&A.

Geographical split of M&As activity

0%

20%

40%

60%

80%

100%

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

US Europe Asia + Emerging

Source: Thomson One Banker

Thus, during the Asian financial crisis over a decade ago, unaffected European and American

multi-national companies seized the opportunity of devalued Asian currencies and low

valuations to expand through M&A deals. Now, a role reversal is taking place as the healthy

balance sheets of Asian firms are bringing about a number or cross-border M&A deals in

Europe and the US. In the early 2000s and up until recently, we saw strong signs of expansion

in the eurozone and in eastern European economies. For Q1 10, Europe remained weak in

terms of M&A activity.

M&A volume in the European Union

2500

3000

3500

4000

4500

0

200

400

600

800

1Q 2007

2Q '07 3Q '07 4Q '07 1Q '08 2Q '08 3Q '08 4Q '08 1Q '09 2Q '09 3Q '09 4Q '09 1Q '10

Value of deals in bn$ Number of deals

Source: Dealogic, Bloomberg, SG Cross Asset Research


May 2010 10

Growth in Emerging Markets relative to advanced economies has created a very long M&A

cycle. This new trend, pushed forward by strong international competition, is noticeable in the

M&A world. Some important deals are now taking place in emerging countries and particularly

in Asia which is seen as the growth market of the next decade. Hence we just saw Prudential

bidding for the Asian insurance operations of AIG, the troubled insurance company.

The role of emerging markets in mergers If we take the different criteria needed to spark a new M&A cycle, we realised that these

criteria are fulfilled mainly in emerging countries.

M&A criteria

USA Europe Emerging markets

1996-2000 2004-2007 2010-2013 1996-2000 2004-2007 2010-2013 1996-2000 2004-2007 2010-2013

Low rates XX XXX XXX XX XXX XXX X XXX XXX

Low Gearing + high Cash flow XXX XXX XXX XXX XXX XXX X XX XXX

Low level of consolidation XX XX X XXX XX X XXX XXX XXX

Bullish GDP growth forecast XXX XXX X XXX XXX X X XXX XXX

Possibility of restructuring XX XXX X XX XX X XX XXX XXX Scale from x to xxx, Source: SG Cross Asset Research

Recently, we have also seen interest from companies in emerging countries to develop in

more mature markets. This is clearly linked to the new economic cycle which reflects the rapid

development of emerging companies and their valuation premiums compared to western

companies.

Previous and current business cycle

Current economic cycle

Government debt

increasing

Capex M&A

Emerging Markets IPOs

4 2012-2013e

Economies slow

1 2007- 2009

Crisis in developed economies

Interest rate cuts + fiscal

stimulus

2 2009- 2010e

Recovery in emerging markets and rise in commodity prices

3 2011-2012e

Rise in consumption and investment

Improving consumer confidence

Inflation/ Interest rate hikes

Market stress

Yuan revaluation?

Previous economic cycle

1 2001-2003

US Economic Slowdown

2 2003-…….2004

Start of recovery 3 2004-2006

Recovery and Growth

4 2006-2007

Growth stabilising

Corporatedebt

reduction

Market Stress

Capex

LBO and M&A

Interest rate drop

Low interest rates: consumer borrows

Interest rates rising

High consumer spending and rising inflation

Spin-off


Government debt

increasing

Capex M&A


4 2012-2013e

Economies slow

1 2007- 2009



stimulus

2 2009- 2010e


3 2011-2012e




Market stress

Yuan revaluation?


1 2001-2003


2 2003-…….2004


Recovery and Growth

4 2006-2007

Growth stabilising

Corporatedebt

reduction

Market Stress

Capex

LBO and M&A

Interest rate drop





Government debt

increasing

Capex M&A


4 2012-2013e

Economies slow

1 2007- 2009



stimulus

2 2009- 2010e


3 2011-2012e




Market stress

Yuan revaluation?


1 2001-2003


2 2003-…….2004


Recovery and Growth

4 2006-2007

Growth stabilising

Corporatedebt

reduction

Market Stress

Capex

LBO and M&A

Interest rate drop




Spin-off


For example, China�s outbound foreign direct investment has been facilitated lately by

Chinese policy measures. The government is publicly boosting Chinese international

investment appetite by easing and decentralising regulatory procedures but also by

broadening firms� foreign investment financial channels. Further motivation lies in the growth


May 2010 11

drivers needed at home. China has high demand for resources such as iron, oil, cement,

timber for infrastructure projects, and housing as well as production for domestic and foreign

consumption.

Since the start of the economic crisis, Chinese firms have acquired significant positions within

the world�s largest companies. China has 47 companies listed in the FT�s 2009 global 500 list,

and Chinese cross-border investment amounted to of $170 billion in 2008. This is a

tremendous amount of money for a country supposedly lagging in foreign investment terms,

and media coverage has created concerns that Chinese firms may be attempting to buy up

the whole world!

Thus, in 2009, Chinese purchases of US businesses jumped 300%, reaching $3.9bn. China is

rebalancing its growth model, as the country is shifting from an economic model with growth

that had been sustained for 30 years by producing goods for export, to a model that is gaining

increased significance beyond domestic borders. This new model is driven by attractive

valuations abroad, but also because the Chinese know that they can no longer rely on

expanding economies of scale. This could come to a halt however, due to recent tension

between the People�s Republic of China and western corporations.

Emerging market oriented European groups In our emerging markets report Beyond the cycle World consumption: emerging countries

definitively taking the lead published last year, we highlighted 30 European groups which have

a strong focus on emerging markets in their business model. We split this group into three

categories: consumers, industrials and financials.

The 2009 SG EEEM basket

Consumers Capital goods /Industry Financials

Anheuser-Busch InBev ABB BBVA

Beiersdorf Atlas Copco Erste Bank

Carrefour BHP Billiton HSBC

Diageo Lafarge Prudential

Ericsson Holcim Santander

Inditex Saipem Standard Chartered

LVMH Schneider

Nestlé Siemens

Nokia Technip

Renault Veolia Environnement

Telenor Xstrata

Unilever

Volkswagen Source: SG Cross Asset Research

Spin-off: the changing face of M&A in developed countries Spin-offs vs. diversification Firms increasing their focus through the divestment of non-core assets present significantly

positive long-term performance potential. Going forward, we believe that the most successful

firms will be those concentrating on their core businesses. This is in line with our expectations

mentioned above, that large and diversified businesses have managerial constraints, which

render the overall entity less efficient. As the business model shifts from diversification to

focus-driven M&A, the number of spin-offs should create a market for acquisitions of smaller

firms. At present, we observe that the framework is currently favourable for the development

of spin-offs in developed countries.

http://www.sgresearch.com/publication/en/B77FBFD61907ABA6C12576650055A047.pub�

http://www.sgresearch.com/publication/en/B77FBFD61907ABA6C12576650055A047.pub�


May 2010 12

Spin-off criteria

USA Europe Emerging Comments

Diversification XX XX XX Diversified companies in Europe and US will favour spin-offs

Weak value creation XXX XXX X Weak performance in the US and Europe favours spin-offs

Weak ROE XXX XXX X Need for value creation

Scale from x to xxx, Source: SG Cross Asset Research

Pay attention to credit ratings A firm�s overall credit rating reflects an agency�s opinion of an entity�s ability to repay debt and

its capacity to comply with its financial obligations. Credit agencies are concerned with

corporate governance and any weakness can impair a firm�s financial position.

As credit ratings dictate the yields on corporate bonds, there is a huge cost differential

between speculative grade debt and high-yield debt.

The requirement coming out of such a deep crisis is that a company have a sound balance

sheet with a longstanding credit history. Ratings are therefore likely to become ever-more

important, as investors and corporates alike adopt stricter views on capital adequacy. This

new approach to M&As should lead groups to continue their focus on core businesses,

shifting away from diversification, where large losses had been incurred in many cases.

The focus on value creation Focusing time and energy on not missing the new M&A wave has made investors forget the

importance of long-term value creation. As, most of the time, merger strategies prove to be

unsuccessful in the long run, downsizing and spin-offs could be better solutions for improving

profitability and attracting new shareholders.

Investors are also likely to insist that companies adopt a cautious approach to expansion,

considering that these companies are still recovering from losses and the pain suffered during

the recession. The only M&A deals likely to be rewarded by investors will be the �safer� kind,

that is to say deals in line with core businesses and objectives, carried out at attractive

valuations and that are at least partly paid for in cash.

Shift in M&A patterns


Size

Leadership

Cost synergies

Diversification with

new growing

markets

Efficiency

Value creation

Focus driven

Opportunism with

divestment of non-

core businesses

More Mergers than Spin-offs More Spin offs than Mergers


May 2010 13

Corporate spin-offs: best-case scenario

Three reasons to have a spin-off cycle 1) Spin-offs create value The last two M&A waves failed to create value for shareholders as, most of the time,

performances of major companies post acquisitions disappointed. However, below we

highlight spin-offs which chalked up impressive stock market performances as well as

creating value for shareholders.

Recent examples (Time Warner/AOL, Banco Santander and its Brazilian subsidiary, PPR with

CFAO, etc.) illustrate that this kind of transaction allows the parent company to focus capital

and energy on a core business with higher operating margins. When a CEO looks for

alternative strategies to boost ROE, a spin-off could be at the top of the list as it makes sense

to separate non-core business to create new leaders.

The two charts below represent the performance of two different spin-off samples. It is

important to note that the curves represent average performance. To highlight best

performers, a more fundamental approach is required to assess if the parent company

divested underperforming assets or if a growing company was hived off.

1996-2007 performance of major US spin-offs vs S&P 500 (%) 2008 performance of major spin-offs vs respective sector (%)

90

95

100

105

110

115

120

125

0 100 200 300 400 500

Duration (days)

80

90

100

110

120

130

0 50 100 150 200 250

Duration (days)


On the left graph, we present the performance of newly-traded spin-offs in the US from 1996

to 2007. Most US-domiciled spin-offs file a Form 10-12B with the SEC. Therefore, we used

the SEC website to constitute our sample. Then, we compared the relative performance of the

different spin-offs to obtain the average spin-off price trend throughout its lifecycle. We then

compared each value with the S&P500 performance over the same period and compiled the

results to obtain this curve. On the right graph, we picked 2008 spin-offs with market

capitalisation greater than USD 1 bn and studied their performance over 250 trading days. We

used the same method to compile this chart but, our sample being smaller, we compared

each stock to its respective sector: an example being Suez Environment relative to the MSCI

World Utilities.


May 2010 14

2) Spin-offs lead to job creations

Spin-offs could help to tackle the issue of unemployment. In the US, we have observed that, in

the past 15 years, spin-off companies have created employment independently of the

business cycle. Most of the new jobs were created during the first four years after the de-

mergers. The same analysis of the parent company is a much more complex exercise owing

to scale, but it is clear that management is likely to be more efficient in focusing its energies

on one core business rather than on a broad range of different types of business lines.

Evolution of spin-off workforce through time Spin-offs create jobs 60 to 70% of the time

0%

5%

10%

15%

20%

25%

30%

35%

1 3 5 7 9 11 13

Average

Median

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9

% Job-creating companies

% Job-destroying companies

Source: SG Cross Asset Research Source: SG Cross Asset Research

In developed economies, spin-offs are favoured when restructuring and lay-offs are difficult to

justify. When unemployment is high, it is difficult to justify an acquisition, particularly as it may

prove to be more difficult to achieve efficient restructuring. As we are still forecasting a high

level of unemployment in the next two years in developed countries (with a peak at the end of

2010), M&A activities with cost synergies will likely be difficult to achieve. On the contrary, a

spin-off tends to create jobs and value for shareholders.

The point is that the level of employment was exceptionally high during the last M&A cycle at

that time and allowed companies to restructure. But since then, the increase in the

unemployment rate has made restructuring more difficult than ever.

As an example, in Japan, although interest rates have been very low for a number of years,

and companies have been generating high levels of cash flow, we did not see the

development of a major M&A cycle as it has always been difficult to restructure in this country,

particularly with the ever-present issue of steadily increasing unemployment.

Employment/Population ratio (bureau of labor statistics)

50

52

54

56

58

60

62

64

66

0

2000

4000

6000

8000

10000

12000

14000

1948 1958 1968 1978 1988 1998 2008

Number of M&As Employment / population ratio

50

52

54

56

58

60

62

64

66

0

2000

4000

6000

8000

10000

12000

14000

1948 1958 1968 1978 1988 1998 2008

Number of M&As Employment / population ratio



May 2010 15

3) Spin-offs could be good for economic growth The correlation between GDP growth and M&A activity is high and, as we expect weak

economic growth in developed countries, corporates are likely to favour spin-offs. A spin-off

of an activity is a very different choice for management as it allows a company to concentrate

on its core businesses and it is a clear way to stand out from competitors. When GDP growth

is weak, management has no visibility on future industry prospects and therefore does not

wish to embark on risky mergers.

GDP growth and M&A movements – following the same growth path

-0.7

-0.2

0.3

0.8

1.3

-2

0

2

4

6

8

1982 1987 1992 1997 2002 2007

Gdp Growth M&A Value, YoY Growth

Source: SG Cross Asset Research - GDP yoy

If we consider the figures overall, we can see that, in developed countries, there is a high level

of concentration in most industries.

Concentration

Top 5 Top 10 Top 5 Top 10 by sales by market capitalisation

Household & Personal Care 64% 88% 73% 90%

Aerospace 49% 77% 53% 76%

Pharmaceuticals 43% 72% 48% 75%

Food products 48% 68% 59% 75%

Food & Staples Retailing 48% 67% 52% 71%

Automobiles & Components 44% 67% 47% 71%

Software & IT Services 41% 59% 56% 69%

Telecom Equipment 40% 60% 52% 67%

Telecom Services 45% 67% 43% 64%

Oil & Gas 52% 74% 41% 59% Source: SG Cross Asset Research

Following the last wave of mergers and depending on the sector, we estimate that there are

5% to 30% of company assets to divest or spin off.

The high level of concentration and the lack of restructuring possibilities owing to high

unemployment prompts us to think that spin-offs will make a strong contribution to economic

growth thanks to the two factors mentioned above.


May 2010 16

SG Cross Asset Research spin-off screening tool

Sector analysis Our sector analysis shows that the so called diversified sectors should see a wave of spin-offs

(in green) whereas on the left of the graph, the potential for spin-offs is limited given the low

degree of diversification of the companies shown there. On top of that, those sectors may

face competition from emerging market companies which want to expand internationally. In

some cases, the emergence of new leaders from emerging markets is also a threat to future

profitability.

Sector spin-off and demerger potential

Air Transport


Aerospace

Pharmaceuticals




Motorways &

Building Materials



ChemicalsInsurance

BanksCapitals goods

33%

43%

53%

63%

73%

83%

93%


Co

ns

olid

ati

on


Emerging markets

development: growth

and competition

Metals & Mining

Sectors

where we see

potential spin-offs

Air Transport


Aerospace

Pharmaceuticals




Motorways &

Building Materials



ChemicalsInsurance

BanksCapitals goods

33%

43%

53%

63%

73%

83%

93%


Co

ns

olid

ati

on


Emerging markets

development: growth

and competition

Metals & Mining

Sectors

where we see

potential spin-offs

Source: SG Cross Asset Research / Datastream

Methodology: four criteria to identify potential spin-offs

The aim of our screening system is to determine who could decide to spin off non-core

assets. Having tested a range of criteria, we have opted for the three below which we believe

are the most relevant.

Diversification measured by an efficiency ratio (sales/market cap.). We look at below-average

ratios compared to the sector and the size of the company. For the second part of the

document, we have crossed these two criteria on the main companies of each sector, in order

to have a broad view of the results. However, in the list provided in the table overleaf, we

focused only on companies followed by our analysts.

Profitability measured by below-average Return on Equity ratio compared to the sector.

Three-year underperformance versus peers. Behavioural finance shows that market reaction

to news is at times excessive, creating high volatility as markets are pushed above or below

fundamentals before reverting. The psychology behind the overreaction to unexpected or

dramatic news based on empirical evidence reflects inefficiencies. Based on these

inefficiencies we can conclude that the market reaction tends to overweight recent news and

events. Therefore, we will focus on a three-year timeframe and concentrate on companies


May 2010 17

which could spin off activities which are then likely to generate higher-than-average returns

after being hived off.

Testing these three criteria suggests that the first is the most important, so we focus on these

in our quantitative screening for the sector-by-sector review. But, to determine the final list

from the companies followed by our analysts, if the criteria match, we consider the company

to offer the potential for a spin-off. Logically, we have eliminated stocks where there are no

non-core assets to divest.

Results The table below gives a list of 27 companies highlighted by our screening that are covered by

SG analysts and could be considered as having potential spin-off candidates. Note that, in

some cases, our sector analysts do not believe the companies flagged are in the mood to

consider spin-off possibilities in the short term.

Our 27 stock selection

Company name Sector Country Reco Currency Target Price

(loc cur)

Price (loc cur) 4/05/10

Sales (lc m) 2010e

Market Cap (lc m)

P/E 10e

Return on Equity 10e

EPS Growth 09-10e

EADS Capital Goods France Sell EUR 12 13.85 42584.5 11303.1 17.1 6.1 271.8

Finmeccanica Capital Goods Italy Hold EUR 10 9.6 18662.7 5547.3 9.8 8.6 -7.5

Hochtief Capital Goods Germany Hold EUR 61 62.27 17972.7 4358.9 22.8 8 12

Philips Capital Goods Netherlands Buy EUR 30 25.48 25640.2 25125.3 14.7 7.8 141.6

Saint-Gobain Capital Goods France Buy EUR 47 37.26 38615.1 19114.4 15.4 8.3 85.7

Siemens Capital Goods Germany Buy EUR 92 73.09 73752.1 66819.1 12.8 15.9 9.5

PPR Consumer Durables & Apparel France Buy EUR 121 102.75 16930.3 13006 13.8 7.7 19.4

Repsol-YPF Energy Spain Hold EUR 18 17.71 898.785* 21621.5 9.9 10.7 68.2

Statoil Energy Norway Buy NOK 165 143.6 1760* 457889.7 9.1 23.5 30.5

Carrefour Food & Staples Retailing France Buy EUR 45 36.88 91836.4 25993.3 13.6 15.4 -26.3

Metro Food & Staples Retailing Germany Hold EUR 43 46.76 68161.9 15153.8 15.6 16.5 43

Henkel Household & Personal Prod. Germany Buy EUR 43 40.07 14039.7 7139 16.8 14.2 43.2

ArcelorMittal Materials France Buy EUR 37 29.57 90745.9 46156.3 10.6 8.9 92.1

BASF SE Materials Germany Buy EUR 54 44.6 57800 40959.6 10.2 18.8 46

ThyssenKrupp Materials Germany Hold EUR 26 24.76 45212.1 12738.7 43.7 4 144.7

Vivendi Media France Buy EUR 22 19.93 27588.2 24499.7 8.9 10.3 4.4

Bayer AG Pharmaceuticals & Biotech Germany Hold EUR 52 47.17 32015.2 39007.1 13.7 13.6 18.2

ALCATEL Technology Hardware & Equ. France Hold EUR 2.2 2.39 15233.4 5540.2 58.9 -2.9 117.3

Ericsson Technology Hardware & Equ. Sweden Buy SEK 100 84.2 207654.6 253576.4 13.2 12.2 88.5

Motorola Inc Technology Hardware & Equ. US Hold USD 6.5 7.1 22134.2 16421.4 29.2 5.5 nm

Deutsche Telekom Telecommunication Services Germany Buy EUR 10.8 9.88 64048.9 43081.1 12 9.8 5.2

E.ON Utilities Germany Hold EUR 29 28.19 77523.3 56408.2 8.5 15.3 6

Enel Utilities Italy Buy EUR 5.1 3.96 58594 37237.3 7.2 15.4 19.1

Commerzbank Banks Germany Sell EUR 3.6 5.99 12039.6** 7072.8 nm -5.4 79.4

Royal Bank of Scot. Banks UK Hold GBP 0.55 0.54 22484.8** 31505.5 nm 0.2 33.9

ING Group Insurance Netherlands Buy EUR 9 6.88 50160*** 26361.1 7.4 na 289.1

Munich RE Insurance Germany Buy EUR 125 107.2 4213.9*** 21161.5 9.1 na -3.1

* Production ** Total income *** Operating income Source: SG Cross Asset Research


May 2010 18

Conclusion - back to focusing on the core We expect to see fewer major M&A deals than in 2007, especially in mature markets, however

we will most probably see an increase in small- and medium-sized M&A transactions, one

major contribution being large groups spinning-off some of their assets. Furthermore, renewed

activity is likely to come from foreign bidders, as cross-border M&A is continuing on a strong

expansionary trend, in line with the fast-growing contribution to global GDP from emerging

markets. Regulatory change and policy choices could play a role in how far China is able to

extend its expansion, and one could certainly envisage large cross-border deals in the near

future as economic uncertainty fades.

But, as we can see from recent history, the future of non-focused companies is never bright.

While one could be fooled into thinking that diversified companies offer a well-balanced

portfolio of assets, suggesting that they are low-risk companies, it should be borne in mind

that these companies often suffer from an inability to generate strong growth in all businesses.

Furthermore, management could miss a problem in a non-core asset. Therefore, we believe

that the time is right to spin-off non core assets. We anticipate a strong spin-off cycle in 2010-

2012 and expect industries such as capital goods, utilities, banks, chemicals and building

materials to hive off non-core assets.


May 2010 19

Sector review

Below, we present a series of two-page sector analyses of spin-off possibilities.

In each case, the first page contains:

A sector data/valuation table and a chart showing sector performance.

A brief overview of industry trends.

A chart showing the top ten companies ranked by market capitalisation.

The second page contains:

Our sector map, using just two of the three spin-off criteria: sales/market cap and sales:

In the top right-hand section of the map are located many companies that have historically

been active in M&A deals and probably now have assets to sell. Basically the theory is that

when sales are substantial and the sales/market cap ratio is high, the sales are not fully valued

and the company probably has assets to spin off. In this area, we find many conglomerates

and/or groups which made major acquisitions in the past, thus inheriting non core assets.

The top left-hand section shows industry leaders with generally solid positions in their core

business and few non-core assets.

The bottom left-hand section shows growth companies � generally medium-sized

companies with low market cap in relation to their sales.

On the bottom right, we present what we call doldrum companies which generally have a

high market caps but relatively low levels of sales.

After this map, we have our analysts� fundamental view on the prospects of spin-offs in their

sector and we conclude with a list of the key potential spin-off candidates in the sector, based

on their coverage, when there is one.

We used MSCI World indexes to constitute our samples.

In the Sector Valuation table, the �Median� and the �Total� lines are calculated from the entire

sample and include companies from geographical areas which are not displayed in the table.


May 2010 20

Aerospace & Defence Only few spin-offs expected

Sector valuation Sector performance Sector

Market. Cap ($m)

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 342,837 14.6 2.95 2.06 3.77

Eurozone 40,109 16.4 1.27 2.28 3.08**

UK 39,244 13.4 2.87 2.27 3.99

Japan NA NA NA NA 1.29

Median* 12,962 15.0 2.62 2.20 NA

Total* 429,093

50

80

110

140

170

2005 2006 2007 2008 2009 2010

MSCI World Aerospace & Defence MSCI World

* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: new entrants from emerging markets We believe that in the next five years, the most important factors affecting aerospace and

defence sector performance will relate to: 1) European market consolidation, and 2) new

market entrants.

The European aerospace and defence industry saw a major wave of consolidation six to eight

years ago. We note that in defence, in particular, Europe has a large number of prime

contractors relative to the size of the European defence market. By comparison, the US has

five main contractors, only two of which attempt to maintain full combat aircraft manufacturing

capability (Boeing and Lockheed Martin).

The US defence procurement budget is considerably larger than the combined EU defence

procurement budget, making the European manufacturer base appear overcrowded.

However, we believe this is largely due to each country wishing to maintain a defence

capability.

Top ten companies (by market cap)

0 10 20 30 40 50 60 70 80

UNITED TECHNOLOGIES

BOEING

HONEYWELL INTL.

LOCKHEED MARTIN

GENERAL DYNAMICS

RAYTHEON 'B'

NORTHROP GRUMMAN

PREC.CASTPARTS

BAE SYSTEMS

ROLLS-ROYCE GROUP

in $bn



May 2010 21

SG view

Sector map

BAE SYSTEMS

BOEING

BOMBARDIER 'B'

CAECOBHAM

EADS (PAR)

FINMECCANICA

GENERAL DYNAMICS

GOODRICH

HONEYWELL INTL.

ITT

L3 COMMUNICATIONS

LOCKHEED MARTINNORTHROP GRUMMAN

PREC.CASTPARTS

RAYTHEON 'B'

ROCKWELL COLLINS

ROLLS-ROYCE GROUP

SAFRAN

SINGAPORE TECHS.ENGR.

THALES

UNITED TECHNOLOGIES

Sales

S/M*

Industry Leaders

Larger than necessary?

Growth companies

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

In recent years (2006-2008), the focus for European companies was on expansion into the US

market, not only because of its size, but also as a hedge against the eight-year depreciation of

the US dollar.

Given the state of the M&A market, transactions are likely to be confined to smaller bolt-on

acquisitions. Aerospace companies have tended to acquire small businesses over the past

few years, and this should continue.

In shareholding structures where the state has true power as a shareholder and/or client, spin-

offs may end up being a political decision. However, overall many groups appear to have a

fairly low efficiency ratio as shown in our map above.

Among the groups followed by SG analysts, we believe that spin-offs could be a solution for

companies like Finmeccanica or EADS which failed to deliver performance and are not

focused enough.

Finmeccanica: The group has identified the Transport and Energy activities as non-core. Transport

has been subject to an IPO with the retention of a 40% stake. Energy is poised either for an IPO or

for a stake to be sold to an industrial partner in the medium term.

EADS: The Airbus and non-Airbus businesses are run as distinct entities but a recent initiative has

been to integrate the support functions. The group is dominated by Airbus which perhaps leaves

the non-Airbus activities undervalued in the depressed valuation of the overall group. A partial IPO

of either the Airbus or non-Airbus activities would give a better valuation for each part.

Stocks to watch

Company Country Reco Target Price (loc cur)

Price loc cur) 04/05/10

’09 Sales (€m)

Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

EADS France Sell EUR 12 13.85 42584.5 11303.1 17.1 6.1 271.8

Finmeccanica Italy Hold EUR 10 9.6 18662.7 5547.3 9.8 8.6 -7.5



May 2010 22

Air transport Ripe for takeovers rather than spin-offs

Sector valuation Sector performance

Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 19,911 13.5 NA 0.13 3.77

Eurozone 22,776 NA 1.22 NA 3.08**

UK 4,011 NA 1.60 NA 3.99

Japan 7,961 NA 1.75 NA 1.29

Median* 7,632 20.7 1.51 NA NA

Total* 82,163

50

80

110

140

170

2005 2006 2007 2008 2009 2010

MSCI World Airlines MSCI World


Industry trend: looking for a new development model The rate of global fleet growth fell in 2009 and should flatten out in 2010 and 2011. This

should remain below the historical average rate of 4.7% until 2015. The low cost carrier

segment has increased its share of intra-European traffic primarily through organic growth,

although there have been some notable acquisitions, most recently Easyjet�s acquisition of GB

Airways in 2008. Their share of intra-European seats was around 35% in 2008, up from 9% in

2000. Biggest among the low cost carriers are Ryanair (8%) and Easyjet (6%). We expect low

cost carriers to continue to grow their share, albeit at a slower rate.

In order to boost consolidation between European airlines and those of other regions,

governments will need to agree to regulatory changes to lower the barriers to foreign

ownership. Talks between the EU and the US include an intention to lower barriers to

ownership, but we believe that it may be unrealistic to expect foreign ownership limits to

exceed 49% (currently 25% in the US, but 49% in the EU) in the near to medium term.


0 2 4 6 8 10 12 14

SINGAPORE AIRLINES

SOUTHWEST AIRLINES

DELTA AIR LINES

CATHAY PACIFIC AIRWAYS

ALL NIPPON AIRWAYS

DEUTSCHE LUFTHANSA (XET)

RYANAIR HOLDINGS

QANTAS AIRWAYS

AIR FRANCE-KLM

BRITISH AIRWAYS

in $bn



May 2010 23

SG view

Sector map

AIR FRANCE-KLM

ALL NIPPON AIRWAYS

BRITISH AIRWAYS

CATHAY PACIFIC AIRWAYS

DELTA AIR LINES

DEUTSCHE LUFTHANSA (XET)

IBERIA

QANTAS AIRWAYS

RYANAIR HOLDINGS

SINGAPORE AIRLINES

SOUTHWEST AIRLINES

Sales

S/M*

Industry Leaders


Growth companies Doldrums


There have been some significant steps in the consolidation of the European airline sector in

recent years, including Air France�s acquisition of KLM in 2004 and Lufthansa�s acquisition of

SWISS (consolidated in 2007).

Lufthansa now has a number of pending acquisitions: Brussels Airlines, Austrian Airlines and

BMI. Merger talks are also ongoing between British Airways and Iberia. If all these deals go

through, the top three players will control 72% of the traffic of the Association of European

Airlines (compared with 48% in 2000). This sector was identified last month as the most likely

to consolidate.

Our efficiency map shows that European leaders are not well valued, but spin-offs could be

difficult as Airlines is a global business and companies are already focusing on their core

business.

Consequently, we do not see any potential spin-offs in this sector. However, we believe that in

relative terms, Lufthansa and Air France are the two companies which should restructure their

business.


May 2010 24

Automobiles Emerging players are changing the game


Sector

Market. Cap lc m

P/E 10eDATE

P/BV 09

Dividend Yield 09

LT Interest rates

US 91,922 22.1 2.40 NA 3.77

Eurozone 268,646 19.0 1.01 1.25 3.08**

UK NA NA NA NA 3.99

Japan 360,948 23.3 1.29 0.82 1.29

Median* 7,863 21.1 1.24 0.79 NA

Total* 721,516

50

80

110

140

170

2005 2006 2007 2008 2009 2010

MSCI World Automobiles & Components MSCI World


Industry trend: emergence of new players Recent shifts in the sector reflect the difficulties at US players. Confronted with a depressed

domestic market, they may have to sell or withdraw brands such as Hummer, Saturn and

Saab in the case of GM and Volvo at Ford, or to find partners to shore up their finances (e.g.

GM�s Opel subsidiary, if it survives). With an average 70/30 variable/fixed cost breakdown,

operating leverage should be extremely unfavourable and is likely to result in losses for many

manufacturers. Even historically solid Japanese groups are suffering from the collapse in US

sales. The recent crisis, which has exceeded all forecasts, is forcing the sector into effective

restructuring.

Some players look set to downsize significantly and there may be opportunities for car

manufacturers with the best financial positions to grow more rapidly or strengthen existing

businesses. Some more recent, highly ambitious carmakers are emerging, such as Hyundai

(ranked No. 5 worldwide) and SAIC (Shangai Automotive Industry Corp.). China�s SAIC is now

producing about 1.7m units annually, thanks to a successful JV with VW and GM in China,

and is looking to grow very rapidly. It recently merged with another Chinese carmaker,

Nanjing, the owner of MG Rover operations in Europe. Asia (excl. Japan) is clearly driving

growth. Between 2004 and 2008, worldwide sales increased by only 8% while sales in Asia

(excl. Japan) increased by 30%, and China became the biggest Auto market in 2009.


0 20 40 60 80 100 120 140 160

TOYOTA MOTOR

HONDA MOTOR

DAIMLER (XET)

FORD MOTOR

NISSAN MOTOR

BMW (XET)

VOLKSWAGEN (XET)

DENSO

JOHNSON CONTROLS

FIAT

in $bn



May 2010 25

SG view

Sector map

AISIN SEIKI

BMW (XET)

BORGWARNER

BRIDGESTONE

DAIHATSU MOTOR

DAIMLER (XET)

DENSO

FIAT

FORD MOTOR

FUJI HEAVY INDS.GOODYEAR TIRE & RUB.

HARLEY-DAVIDSON

HONDA MOTOR

ISUZU MOTORS

JOHNSON CONTROLS

MAGNA INTL.'A'

MAZDA MOTORMICHELIN

MITSUBISHI MOTORS

NGK SPARK PLUG

NISSAN MOTOR

PEUGEOT

PORSCHE AML.HLDG. (XET) PREF.

RENAULT

STANLEY ELECTRIC

SUZUKI MOTOR

TOYODA GOSEI

TOYOTA MOTOR VOLKSWAGEN (XET)

YAMAHA MOTOR

Sales

S/M*

Industry Leaders




Big was beautiful for carmakers until recently when groups like General Motors understood it

was no longer possible to maintain so many different brands.

GM is trying very hard to slash costs and to sell non-core assets; however, this is less feasible

in the current economic environment. For example, Sichuan Tengzhong was unable to

complete the Hummer acquisition in February 2010. The M&A model shows that there could

be a wave of sector deals in 2010 but mostly among manufacturers. For the manufacturers,

we see almost no big mergers but some spin-offs may be possible.

We also expect aggressive development in Asia, especially China. For example, Zhejiang

Geely Holdings Group, a Chinese carmaker, is completing the Volvo acquisition. We believe

two companies could spin-off some assets, Renault and Peugeot.

Fiat announced on 21 April the spin-off of the group�s industrial units by year-end. The new

company, Fiat Industrial SpA � FI - will be the majority owner of the agricultural and

construction equipment manufacturer, CNH; the truck maker, Iveco, and the engine producer

Fiat Powertrain Technologies FPT Industrial & Marine activities. Fiat SpA will remain the parent

company of the other units, which comprise the auto activities, the components and FPT auto.

Stock price jumped by 9.3% the day of this announcement.

Renault: To reduce net financial debt of close to �6bn, we believe that the group will have to

sell some assets, such as properties, and, in a much bigger move, its 20% stake in Volvo AB

(trucks) worth around �3bn. There are no obvious links between Renault and Volvo AB, except

limited partnerships in small trucks.

Peugeot SA does not need to make disposals to rapidly improve its financial situation.

However, our view is that a deconsolidation of Faurecia (57%-held component supplier) could

take place via acquisitions made using share swaps, reducing Peugeot�s stake from a majority

to a minority shareholding. At �1.4bn end-2009, Faurecia�s net debt currently represents most

of Peugeot group�s debt (�2bn).

Stocks to watch


Price 04/05/10 (lc)

’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Peugeot Citroen PSA France Buy EUR 34 22.63 52400 5133.8 9 5 166.3

Renault France Buy EUR 43 35.58 35200 10523.3 15.5 3.6 119



May 2010 26

Banks Focusing on their core business Sector valuation Sector performance

Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 677,306 14.5 1.46 2.53 3.77

Eurozone 726,494 12.3 0.79 2.01 3.08**

UK 408,911 14.5 0.93 0.82 3.99

Japan 253,540 18.3 0.89 1.41 1.29

Median* 9,579 13.9 1.03 1.88 NA

Total* 2,481,999

20

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Banks MSCI World


Industry trend: re-prioritising towards core businesses The past investment banking cycle was dominated by the growth of the major Investment

banking players in Europe and Asia, both by the US Investment banks and their major

European peers. The recent crisis has concentrated market share in the hands of fewer

players as some market participants have disappeared, a trend which we believe will persist

given the increasing capital and regulatory hurdles facing investment banking businesses in

the post-crisis environment. For Universal banks, the lending excesses in more geared

consumer markets combined with mispricing and over-lending in some commercial lending

businesses (e.g. commercial real estate lending) exacerbated the cyclical downturn, inhibiting

the generation of capital against the backdrop of a growing need to do so, leading to potential

restraints on future growth and more limited distributions to stakeholders.

Banks cannot be divorced from the macro conditions in which they operate. The common

trends we envision across banking markets for the next few years will be lower volumes as

banks increase margins to compensate for higher funding costs, reduced revenue-generating

capacity from lower levels of invested assets in a risk-averse environment and loan loss

impairments, which, although they should peak in H1 10, may be sticky and are unlikely to fall

back close to pre-crisis levels. Regulatory reform with increased capital demands is likely to

be the primary focus for bank managements, determining both external growth development

and distribution policies.


0 20 40 60 80 100 120 140 160 180 200

BANK OF AMERICA

HSBC HDG. (ORD $0.50)

WELLS FARGO & CO

JP MORGAN CHASE & CO.

CITIGROUP

BANCO SANTANDER

ROYAL BANK CANADA

COMMONWEALTH BK.OF AUS.

BNP PARIBAS

GOLDMAN SACHS GP.

in $bn



May 2010 27

Higher capital needs should result in a re-prioritising towards core businesses. The need to prioritise

capital generation will have a number of consequences: 1) businesses which are lacking in scale

or which have structurally low profitability will be de-emphasised; 2) with capital demands

increasing under Basel 3, some banks may decide to withdraw entirely from some businesses

in order to focus their capital resources on core business areas, leading to some retrenchment

towards domestic/home markets vs international operations; 3) competition in many

businesses will be lower, further enhancing pricing power and market share of the biggest

players; and 4) the diversification profile of some banks will worsen in the near term, leaving

them more exposed to the macroeconomic outlook for domestic economies.

SG view

Sector map

AMERICAN EXPRESS

AUS.AND NZ.BANKING GP.

BANCO SANTANDER

BANK OF AMERICA

BANK OF NEW YORK MELLON

BARCLAYS

BBV.ARGENTARIA

BK.OF NOVA SCOTIA

BLACKROCK

BNP PARIBAS

CITIGROUP

COMMERZBANK (XET)

COMMONWEALTH BK.OF AUS.

CREDIT SUISSE GROUP N

DEUTSCHE BANK (XET)

DEXIA

FRANKLIN RESOURCES

GOLDMAN SACHS GP.

HSBC HDG. (ORD $0.50)

ING GROEP

INTESA SANPAOLO

JP MORGAN CHASE & CO.

KBC GROUP

LLOYDS BANKING GROUP

MITSUBISHI UFJ FINL.GP.

MORGAN STANLEY

NATIONAL AUS.BANK

NORDEA BANK

PNC FINL.SVS.GP.

ROYAL BANK CANADA

ROYAL BANK OF SCTL.GP.

STANDARD CHARTERED

TORONTO-DOMINION BANK

UNICREDIT

US BANCORP

WELLS FARGO & CO

WESTPAC BANKING

Sales

S/M*

Industry Leaders




A number of asset sales are required by the EU Some banks are already required to make asset sales, which is the price to pay governments

and/or regulators for the financial support given during the crisis.

Commerzbank: The group has to sell Eurohypo by 2013, which may prove quite difficult given

the state of the Commercial Property markets. Commerzbank must pay back over �17bn of

the �silent stake� provided by the German state�s �Soffin� fund, which supported the Dresdner

acquisition and credit crisis costs. This will require a combination of capital raisings and

possible further asset sales, although the scale of the task appears daunting, increasing the

likelihood of some form of debt/equity swap. Dexia must sell Crediop, Dexia Sabadell and

Dexia Banka Slovensko within three years.


May 2010 28

ING must sell its Insurance activities via a trade sale or IPO, divest ING Direct US, ING

Investment Management and Inter-Advies by the end of 2013. Given the size of the overall

ING insurance operations (�24.6bn embedded value), the company is likely to run a dual track,

and weigh its options, either doing an IPO or selling various operations. In our opinion, the

Benelux and US operations are too large to be sold to trade buyers, each with reported

embedded values of �7-8bn. However, we believe there would be significant interest in the

leading franchises ING operates in various emerging markets.

Royal Bank of Scotland is being forced by the EU to sell RBS Insurance, the RBS/Natwest

branches, William & Glyns, Global Merchant Services and RBS Sempra (partly complete) by

2013.

Revised business models may lead to more businesses being put up for sale In addition to these forced sales, revised business models prompted by regulatory reform may

precipitate asset sales. AIB intends to sell its Polish business, its MIT stake and its UK banking

businesses in order to reach the Irish regulator�s demands in relation to equity Tier 1 capital

even before the new Basel 3 rules are decided. Although there has been some political

support in the US for the break-up of the largest financial institutions, this does not appear to

have found international support. Hence, the wholesale break-up of Universal banks into their

constituent Commercial banking and Investment banking parts does not seem likely at the

present time. There also has been some pressure on banks to reverse some of the unbridled

expansion from the pre-crisis period, e.g. Unicredit, where operations in 22 emerging

European economies is seen by many as an unfocused approach which has left the group

with limited distribution capacity as it seeks to rebuild its capital base.

UBS: Although UBS is now well capitalised post the difficulties it faced throughout the crisis,

should it fail to turnaround its US Wealth Management business, this could be yet another

asset put up for sale. However, the bank remains focused on rebuilding its integrated Wealth

Management/Investment banking Group rather than moving back to its pure Private Wealth

Management roots.

There will be other banks wanting to acquire these assets The flip side of the need for some banks to sell assets is that there will be others, e.g. HSBC,

JP Morgan, Bank of America, Barclays, Goldman Sachs, Morgan Stanley and Deutsche Bank,

which may see opportunities to gain market share via the acquisition of assets put up for sale

by weaker banks. The lack of clarity on the future regulatory regime is a constraint for even the

better capitalised banks, but we think that the process will accelerate as the regulatory fog

clears. We think that the UK banking market may prove attractive for non-UK banks over the

medium-term given its size and currently shifting competitive environment.

Emerging markets remain a focus, as does wealth management Expanding emerging markets activities, particularly in Asia, remain a focus for the stronger

banks, as does increasing the weight of wealth management activities, which consume little

capital. The likely interest in AIB�s Polish assets suggests that European banks remain

interested in the long-term potential for emerging Europe banking markets.

We think the most likely scenario will be for banks to exchange assets as the focus on core

businesses continues. Some banks may need to raise capital in order to continue expanding,

e.g. Deutsche Bank with the future acquisition of the Postbank minorities. Should the Basel 3


May 2010 29

proposals pass relatively intact, a number of banks with significant minority interests may

need to increase these stakes to avoid being penalised from a capital perspective, and stakes

in financial companies (e.g. Barclays� 20% stake in Blackrock) may also need to be sold,

increasing opportunities for investors to participate.

Stocks to watch

Company Country Reco Local Currency

Target Price (loc cur)

Price 04/05/10 (loc cur)

’09 Sales (€m)

Market Cap (€m)

P/E 10e Return on Equity 10e

EPS Growth 09-10e

Commerzbank Germany Sell EUR 3.6 5.99 12039.6 7072.8 nm -5.4 79.4

Royal Bank of Scotland United Kingdom Hold GBP 0.55 0.54 22484.8 31505.5 nm 0.2 33.9

ING Group Netherlands Buy EUR 9 6.88 50160.8 26361.1 7.4 na 289.1

UBS Switzerland Sell CHF 12.4 17.04 32834.4 65276.7 13.1 11.6 410.3



May 2010 30

Capital goods Focus on core business is the key


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 1,025,457 18.6 2.66 1.74 3.77

Eurozone 647,049 16.9 2.44 2.59 3.08**

UK 67,282 14.7 2.87 2.98 3.99

Japan 365,510 23.6 1.49 1.16 1.29

Median* 7,132 17.7 2.19 1.83 NA

Total* 2,200,709

40

70

100

130

160

2005 2006 2007 2008 2009 2010

MSCI World Capital Goods MSCI World


Industry trend: emerging markets take the lead By definition, emerging markets have a bigger appetite for capital goods than developed

economies. Much of the strong investment in China and India is not cyclical. It is structural in

that it is meeting the social goals of the government and is unlikely to change, regardless of

what happens to the US and European consumer. Capital goods investment has been the key

driver of China�s 10%+ growth co-existing with low inflation over the past five years. Due to

the rising proportion of sales in emerging markets (on average 30% of sales), capital goods

companies have to continue relocating production and sourcing in these areas in the coming

years. This ongoing process likely will be achieved in three ways:

Transfer of sourcing from developed economies (mainly euro-denominated) to developing

markets (primarily in dollar-pegged currencies). Schneider, for example, plans to transfer

around �250m of purchases per annum to low-cost countries (LCCs).

Relocation of production and R&D centres to regions outside Europe, primarily to LCCs.

Closing and relocating plants to developing countries, which is a costly process. On the

whole, although the expansion of emerging markets should boost sector growth in the

medium term, European companies could find their margins squeezed. New rivals of global

scale are set to emerge.


0 50 100 150 200 250

GENERAL ELECTRIC

SIEMENS (XET)

3M

ABB 'R'

CATERPILLAR

EMERSON ELECTRIC

MITSUBISHI

PHILIPS ELTN.KONINKLIJKE

SCHNEIDER ELECTRIC

HUTCHISON WHAMPOA

in $bn



May 2010 31

SG view

Sector map

3M

ABB 'R'

ALSTOM

ATLAS COPCO 'A'

CATERPILLAR

CUMMINSDANAHER

DEERE

EATON

EMERSON ELECTRIC

FANUC

FIRST SOLAR

GENERAL ELECTRIC

HUTCHISON WHAMPOA

ILLINOIS TOOL WORKSINGERSOLL-RAND

ITOCHU

KOMATSUMAN (XET)

MITSUBISHIMITSUI

PACCAR

PHILIPS ELTN.KONINKLIJKE

SANDVIK

SCHNEIDER ELECTRIC

SIEMENS (XET)

SUMITOMO

TYCO INTERNATIONAL

VESTAS WINDSYSTEMS

VOLVO 'B'

Sales

S/M*

Industry Leaders




Sector consolidation could mark time in several regions, as new emerging market rivals arrive on

the scene and become more aggressive in international markets, putting additional pressure on

prices. We have identified three main potential spin-offs in this environment: General Electric,

Philips, and Siemens, which are all diversified. However, their sound balance sheets mean they do

not have to make this tough decision. Most of them will probably prefer to remain diversified and

make acquisitions in non-euro countries. Thus, leaders, such as Siemens and ABB, are likely to

continue external growth in emerging markets.

Siemens: The group�s strategy is to focus on its three core sectors (Industry, Energy and

Healthcare). As a result, two of its current divisions could be put up for sale in the medium term:

1) SIS (�4,686m sales, �90m in earnings in 2009): SIS is a provider of IT services which generates

one-third of its sales internally. SIS will also be carved out (put into a separate legal entity), which

makes possible an exit (via sale or IPO) in the medium term. 2) Hearing aids (sales of �700m): The

business has a significant break-up value (probably worth >�2bn). A disposal would highlight

management's willingness to continue to streamline the portfolio and dispose of non-core

businesses. But given the business is highly profitable (margins of around 20%), this would have a

slightly dilutive impact on margins (-10bp) and EPS (-0.7%). Finally Siemens could also exit from its

Mobility business. The transport business is isolated within Siemens and holds back the overall

margin and growth profile of the group.

Philips: The group has had a very active portfolio streamlining strategy over the past 10 years. We

believe that the sale of the Television business (2009 sales �3.1bn, EBIT losses -�180m) is the last

necessary step in the group�s strategic repositioning. Fixing the Television business is difficult given

structural pricing pressure and rising competition. As a result, this business is holding back the

company�s growth profile, depresses group margins and, in our view, explains the stock�s below

average earnings rating (10% discount to the European Capital Goods sector on 2010e EV/EBITA).

Stocks to watch

Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Philips Netherlands Buy EUR 30 25.48 25640.2 25125.3 14.7 7.8 141.6

Siemens Germany Buy EUR 92 73.09 73752.1 66819.1 12.8 15.9 9.5



May 2010 32

Chemicals Spin-offs should take off


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 280,758 16.8 3.42 1.47 3.77

Eurozone 207,897 16.8 2.34 2.21 3.08**

UK 5,698 20.1 3.18 2.37 3.99

Japan 114,254 21.5 1.34 1.40 1.29

Median* 7,055 18.0 2.08 1.66 NA

Total* 624,381

50

80

110

140

170

2005 2006 2007 2008 2009 2010

MSCI World Chemicals MSCI World


Industry trend: focus when possible The current environment means that even financially strong listed companies are typically

avoiding all but the smallest bolt-on deals for now. Some planned M&A has been derailed.

This includes, for example, Akzo Nobel�s plan to sell the former ICI speciality starches

business, and Dow�s failed $9bn joint venture deal with Petrochemicals Industries Company of

Kuwait in commodity petrochemicals and plastics operations. This deal was intended to partly

finance the now renegotiated US$19bn Rohm & Haas specialty chemicals acquisition.

This situation is made more likely by the precarious financial position of an increasing number

of companies, which need to refinance debt and are seeing their credit ratings come under

pressure. This includes several leading players, notably the private groups built on debt

(LyondellBasell�s US operations are now in Chapter 11), and the need for companies involved

in recent M&A to strengthen their balance sheets. This is already resulting in M&A activity.


0 10 20 30 40 50 60

BASF (XET)

E I DU PONT DE NEMOURS

DOW CHEMICAL

MONSANTO

POTASH CORPORATION OF SASKATCHEWAN

AIR LIQUIDE

PRAXAIR

SHIN-ETSU CHEMICAL

SYNGENTA

MOSAIC

in $bn



May 2010 33

SG view

Sector map

AGRIUM

AIR LIQUIDE

AIR PRDS.& CHEMS.

AKZO NOBEL

ASAHI KASEI

BASF (XET)DOW CHEMICAL

DSM KONINKLIJKE

E I DU PONT DE NEMOURS

ECOLAB

GIVAUDAN 'N'K + S (XET)

LINDE (XET)

MITSUBISHI CHM.HDG.

MONSANTO

MOSAIC

NITTO DENKO

NOVOZYMES

ORICA

POTASH CORPORATION OF SASKATCHEWAN

PPG INDUSTRIES

PRAXAIRSHIN-ETSU CHEMICAL

SIGMA ALDRICH

SOLVAY

SUMITOMO CHEMICAL

SYNGENTA

TORAY INDS.

WACKER CHEMIE (XET)

YARA INTERNATIONAL

Sales

S/M*

Industry Leaders




Over the past three years, chemicals companies have started refocusing on their core

business, for instance divesting plastics (see Dow�s last deal) or selling pharma (see Solvay), in

order to improve efficiency. The best example comes from the gas business where the refocus

is almost complete. On the other hand, this is not the case for the other businesses.

Of the top 10 leading chemical companies by sales, only three � BASF, Dow, and Du Pont �

are listed �standalones�, while five are the chemicals operations of oil majors and two,

LyondellBasell and Ineos, are privately-held.

In this industry, some deals are already taking place, e.g. Air Products for Airgas and CF for

Terra (Yara made an attempt).

BASF has said it will look to sell Styrenics again; however, apart from this, it is hard to imagine

big disposals at the moment.

Akzo is a buyer not a seller, outside of Specialty Starches, or of a company that could again

catch the eye of private equity.

Stocks to watch


BASF SE Germany Buy EUR 54 44.6 57800 40959.6 10.2 18.8 46



May 2010 34

Construction, Motorways & Building Materials Companies already focused on sub segments


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 39,181 18.0 2.32 0.92 3.77

Eurozone 96,891 14.7 1.76 4.73 3.08**

UK 2,892 8.4 1.93 5.09 3.99

Japan 20,850 17.4 1.00 1.86 1.29

Median* 4,381 16.4 1.61 2.46 NA

Total* 169,931

50

80

110

140

170

200

2005 2006 2007 2008 2009 2010

MSCI World Construction & Engeneering MSCI World


Industry trend: no clear trend In the construction sector, we expect companies� desire to expand in concessions to continue to

drive consolidation. The combination of steady revenue streams and tighter risk control offered by

the concessions model provides construction sector majors with a means of stabilising their

earnings base. Market leadership looks more like a key strategic objective than in the past. Overall,

we believe there is still scope for consolidation in more traditional construction activities in

Spain, unlike in France, where the substantial market share already held by the three main

players restricts the potential for major deals.

In the building materials sector, with market leadership a real advantage, the race for strategic

positions looks set to continue. Potential opportunities are becoming scarcer and the gap

between the majors and non-majors is widening. However, the current crisis has prompted

several cement majors to put some assets up for sale, which could provide opportunities for

medium-sized players to catch up. In the cement segment, the focus is likely to be on

emerging markets, primarily India, China and Africa. In aggregates, opportunities are mainly to

be found in the developed world: the value of a quarry depends on its rarity and there is very

little environmental pressure in emerging markets.


0 5 10 15 20 25 30 35

VINCI (EX SGE)

SAINT GOBAIN

HOLCIM 'R'

LAFARGE

CRH

BOUYGUES

ACS ACTIV.CONSTR.Y SERV.

ASAHI GLASS

HEIDELBERGCEMENT (XET)

DAIKIN INDUSTRIES

in $bn



May 2010 35

SG view

Sector map

ACS ACTIV.CONSTR.Y SERV.

ASAHI GLASS

ASSA ABLOY 'B'

BOSKALIS WESTMINSTER

BOUYGUES

CIMENTOS DE PORTL.SGPS

CRH

DAIKIN INDUSTRIES

EIFFAGEFERROVIAL

FLUOR

GEBERIT 'R'

HEIDELBERGCEMENT (XET)

HOCHTIEF (XET)

HOLCIM 'R'

IMERYS

JACOBS ENGR.

JGC

JS GROUP

LAFARGE

LEIGHTON HOLDINGS

MARTIN MRTA.MATS.

MASCO

QUANTA SERVICES

SAINT GOBAIN

SKANSKA 'B'

SNC-LAVALIN GP.

URS

VINCI (EX SGE)

VULCAN MATERIALS

Sales

S/M*

Industry Leaders



*S/M: Sales / Market capitalization; Source: SG Cross Asset Research

The rationale for consolidation in the construction and building materials sectors varies greatly

depending on the segment and the specific features of the trade concerned. As a result, the

degree of domination must be assessed based on geographic criteria.

The worldwide consolidation process is more advanced in building materials than in

construction and this is likely to remain the case in the coming years.

Based on our screening, some companies expanded outside their core business during the

last M&A cycle and could now be tempted to refocus.

The economic crisis had a strong and direct effect on companies making them more

vulnerable. This situation could push diversified groups like Saint-Gobain, or Hochtief to

refocus on their core business.

Hochtief: At the end of 2009, Hochtief had planned to launch an IPO of its concessions

business which is mainly minority stakes in several airports. The IPO was cancelled as market

conditions were not good enough for the company to obtain a price attractive enough.

Hochtief could at some point try to get some value out of its concession business.

Saint-Gobain announced the disposal of its Glass packaging unit in 2007. The economic crisis

delayed the sale as the business is generating large cash flows and the company does not

want to sell it cheap. Nevertheless, we expect the disposal to take place this year or next.

Stocks to watch


Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Saint-Gobain France Buy EUR 47 37.26 38615.1 19114.4 15.4 8.3 85.7

Hochtief Germany Hold EUR 61 62.27 17972.7 4358.9 22.8 8 12



May 2010 36

Food products No spin-offs on the agenda


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 680,241 14.5 3.01 2.74 3.77

Eurozone 488,233 15.3 2.86 1.83 3.08**

UK 283,168 15.4 4.18 3.65 3.99

Japan 94,552 21.5 1.36 1.71 1.29

Median* 8,683 15.5 2.49 2.28 NA

Total* 1,602,759

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Food Beverage & Tobacco MSCI World


Industry trend: a multiple sub segment to spin off There may be more M&A activity in the US, where the sector has struggled more than in

Europe. Under pressure from retailers (which are highly concentrated and often discount),

European food products companies have constantly restructured to improve efficiency in

order to be able to pay their customers various types of off-invoice margins (including

�wedding presents� for a merger). In the US, retailers have not yet focused their strength

enough to get to this point. In the past, European food producers have often looked for

targets in the US because of this lessened competition.

The food products sector is mature in developed markets. Growth is found more easily on

emerging markets, which is where consumption increases year after year.

We have seen little change in leadership among the sector�s top international companies.

Nestlé remains the world leader by a wide margin both in terms of market capitalisation and

sales. Based on our two main criteria, Nestlé scores more than twice as high as its closest

competitor.


0 20 40 60 80 100 120 140 160 180 200

NESTLE 'R'

COCA COLA

PEPSICO

PHILIP MORRIS INTL.

ANHEUSER-BUSCH INBEV

BRITISH AMERICAN TOBACCO

KRAFT FOODS

SABMILLER

UNILEVER CERTS.

ALTRIA GROUP

Mv in dollars



May 2010 37

SG view

Sector map

ALTRIA GROUP

ANHEUSER-BUSCH INBEV

ARCHER-DANLS.-MIDL.

ASSOCIATED BRIT.FOODS

BRITISH AMERICAN TOBACCO

CAMPBELL SOUP

COCA COLA

CONAGRA FOODS

DANONE

DIAGEO

FOSTER'S GROUP

GENERAL MILLS

HEINEKEN

HJ HEINZ

IMPERIAL TOBACCO GP.

JAPAN TOBACCO

KELLOGG

KIRIN HOLDINGS

KRAFT FOODS

LORILLARDMEAD JOHNSON

NUTRITION

NESTLE 'R'

PEPSICO

PERNOD-RICARD

PHILIP MORRIS INTL.

REYNOLDS AMERICAN

SABMILLER

SARA LEE

UNILEVER CERTS.

WILMAR INTL.

Sales

S/M*

Industry Leaders




The top 10 ranking shows that there are already significant sector leaders, and the sector

includes a multitude of sub-segments. It does not make sense for groups to merge if they do

not share common interests. Conversely, spin-offs could be seen as a solution to focus solely

on core assets.

Unsurprisingly, Unilever would appear to be a good candidate for a spin-off given its wide

range of businesses. However, the company has decided to do otherwise. Over the past three

years, it has implemented a program called �One Unilever�, for which the main goal is to

locally merge the three operational management teams in Food, Personal Care and Household

Care. That way every country has only one management and one headquarter for all the

group�s activities. This strategy has proven to be efficient so far, hence a split would not make

sense.

Other diversified groups like ABF are well placed on our Sector Map, but not many diversified

groups are part of the Food products sector.


May 2010 38

Food & Staples Retailing Expand in emerging markets or spin off unprofitable assets?


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 406,221 13.5 2.15 1.67 3.77

Eurozone 106,862 15.9 2.36 2.55 3.08**

UK 74,272 13.3 1.69 3.33 3.99

Japan 41,772 20.5 1.22 2.22 1.29

Median* 9,715 15.7 2.09 2.24 NA

Total* 727,931

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Food & Staples Retailing MSCI World


Industry trend: saturated market The larger European markets no longer lend themselves to a growth strategy based solely on

opening new stores. One reason is restrictive legislation. Most European countries, Germany

and France especially, are already saturated with retail facilities.

The likelihood for consolidation is also somewhat diminished by Wal-Mart's faltering

expansion ambitions in Europe, following the company�s withdrawal from Germany in 2006.

Legislative uncertainties in France largely have been resolved, allowing more scope for

domestic consolidation; however, this is likely to be a mid-term trend as the market is

dominated by independent players. The US market remains highly fragmented and offers

some interesting consolidation possibilities. It is difficult to talk of a worldwide food retailing

sector when even the biggest player, Wal-Mart ($375bn in sales in 2007), operates in only ten

countries. In Europe, Wal-Mart operates just in the UK, where it is number two by sales, but

has no presence in France, the continent's second-largest market, or Germany. Across

Europe, the market fragmentation picture is much the same. Carrefour, the largest European

retailer by sales and No. 2 worldwide, has only a 10.5% share of the European market. In

second place is Tesco, with just 5.3%.


0 50 100 150 200 250

WAL MART STORES

TESCO

CVS CAREMARK

WALGREEN

CARREFOUR

WOOLWORTHS

WESFARMERS

COSTCO WHOLESALE

SEVEN & I HDG.

METRO (XET)

in $bn



May 2010 39

SG view

Sector map

AEON

AHOLD KON.

CARREFOUR

CASINO GUICHARD-P

COLRUYT

COSTCO WHOLESALE

CVS CAREMARK

DELHAIZE GROUP

FAMILYMART

JERONIMO MARTINS

KROGER

LAWSON

LOBLAW

METCASH

METRO (XET)

MORRISON(WM)SPMKTS.

OLAM INTERNATIONAL

SAFEWAY

SAINSBURY (J)

SEVEN & I HDG.

SHOPPERS DRUG MART

SUPERVALU

SYSCO

TESCO

WAL MART STORES

WALGREEN

WESFARMERS

WESTON GEORGE

WHOLE FOODS MARKET

WOOLWORTHS

Sales

S/M*

Industry Leaders


Growth companies

Doldrums


A key focus for development has been eastern Europe where Metro is a clear pioneer and leader

and Asia, with China still considered to be the Holy Grail. The market potential of these regions and

the investments that European retailers have already made in these countries stand to make them

long-term sources of growth.

The majority of Europe's food retailers are still heavily exposed to western Europe, and the US

retailers to North America; however, Tesco, Carrefour and Metro buck this trend with extensive

overseas business. The model has been for profitable domestic markets to finance emerging

markets expansion. We saw Casino spin off its real estate portfolio two years ago. Now, we

consider whether a geographical spin-off would be possible for a company like Carrefour. For its

part, Metro has many assets to sell.

Carrefour (Buy, TP �45). We have believed for some time that Carrefour will be the most successful

turnaround in the sector after the �3.1bn of cost savings are delivered in 2012e. In the event of

failure, Carrefour�s main shareholder, Blue Capital (50/50 Bernard Arnault and Colony Capital)

would push for a partial break-up (sale of non-G4 operations), in our view. Our conservative sum-

of-the-parts valuation gives �50, i.e. 43% upside from the current level.

Metro (Hold, TP �43). Metro�s management has made no mystery about several potential

disposals: 1) Kaufhof (German Department stores) is considered �non core�, i.e. on sale. Recently,

the Metro CEO was cited in the Financial Times (30/03/10) as saying that the assumption of

Kaufhof being sold to a private equity company in 2010 could be realistic. The value of this asset is

based on its 50% store ownership. 2) IPO of Consumer Electronics: Metro is the European leader

in Consumer Electronics delivering the Best in Class top line and margin. It clearly announced that

going public is a mid-term goal. 3) REAL (Food Retail): although less likely today, as Metro recently

published encouraging top-line and margin improvements for the division, management has made

clear that if REAL was not back at a 2-3% EBIT margin in 2012, the asset would be sold.

Stocks to watch

Company Country Reco Target price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Carrefour France Buy EUR 45 36.88 91836.4 25993.3 13.6 15.4 -26.3

Metro Germany Hold EUR 43 46.76 68161.9 15153.8 15.6 16.5 43



May 2010 40

General Retailing Difficult to survive


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 489,828 16.6 3.14 1.50 3.77

Eurozone 110,350 19.3 NA 4.08 3.08**

UK 28,055 12.3 2.01 3.88 3.99

Japan 66,471 20.7 1.96 1.14 1.29

Median* 7,043 16.6 2.78 1.56 NA

Total* 736,540

40

70

100

130

2005 2006 2007 2008 2009 2010

MSCI World Retailing MSCI World


Industry trend: profitable groups are highly focused The tough retail environment has prompted numerous high profile exits from the industry,

offering market share opportunities to the larger listed retailers that survive.

In addition, beneath the radar of the larger, listed private chains, rising corporate bankruptcy

figures in the UK point to large numbers of casualties among independent retailers.

Clothing retailers are finding it easier to survive than those in the �hardline� sector, particularly

in big-ticket or home-related areas. This is not surprising, as the clothing market has been

more resilient than other parts of non-food retail. Moreover, clothing retailers also produce

higher gross and EBIT margins, as well as healthier returns on capital, than hardline retailers.

The clothing market looks set to remain very fragmented and competitive, while the already-

consolidated home improvement market should become increasingly focused.

The electricals market is also likely to become more consolidated, with some smaller chains

and independents continuing to drop out.


0 10 20 30 40 50 60 70

AMAZON.COM

HOME DEPOT

HENNES & MAURITZ 'B'

TARGET

LOWE'S COMPANIES

INDITEX

BEST BUY

TJX COS.

LI & FUNG

KOHL'S

in $bn



May 2010 41

SG view

Sector map

AMAZON.COM

AUTOZONE

BED BATH & BEYOND

BEST BUY

ESPRIT HOLDINGS

FAST RETAILING

GAPHENNES & MAURITZ 'B'

HOME DEPOT

INDITEX

JARDINE CYC.& CARR.

KINGFISHERKOHL'S

LI & FUNG

LIBERTY MDA.INTACT.'A'

LIMITED BRANDS

LOWE'S COMPANIES

MACY'S

MARKS & SPENCER GROUP

NORDSTROM

PENNEY JC

PPR

PRICELINE.COM

RAKUTEN

SEARS HOLDINGS

SHERWIN-WILLIAMS

STAPLES

TARGET

TJX COS.YAMADA DENKI

Sales

S/M*

Industry Leaders




UK companies, which are not a homogenous group, have seen some spin-offs in the past

(Kesa Electricals). Administrators were appointed at many retailers from 2008 onwards

including Woolworths, MFI, Zavvi, Land of Leather and Sofa Workshop. Some of the brands

were sold, either to management or a third party, which usually involved closing part of the

store portfolio. As such they should continue to exist, even if only online (e.g. Zavvi and

Woolworths). Nevertheless, some capacity has disappeared.

The trend to specialise itself will probably continue as retailers seek to improve profitability

following the competition of distribution through internet.

PPR is probably the most complex stock to analyse in the retail sector. Management has

developed several business areas (retail luxury, lifestyle), and the group now resembles a

conglomerate. This aspect should lessen in the future as the group focuses on �personal

equipment� by selling all retail banners in 3-5 years. However, for the time being, investors

may have difficulty seeing which areas of value creation should yield the best returns and the

best upside potential for the shares.

We believe there are two: the repositioning of the Gucci brand (+�20/share) and the value

created by future acquisitions. In our SOP we estimate the value of retail assets at �3.7bn.

Stocks to watch


PPR France Buy EUR 121 102.75 16930.3 13006 13.8 7.7 19.4



May 2010 42

Hotels, Restaurants & Leisure Still fragmented


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 262,058 17.6 NA 1.12 3.77

Eurozone 34,856 19.5 3.26 3.64 3.08**

UK 68,016 15.8 1.88 2.70 3.99

Japan 14,043 27.6 1.79 1.51 1.29

Median* 6,407 18.1 3.19 1.76 NA

Total* 422,282

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Hotels Restaurants & Leisure MSCI World


Industry trend: a change in the business model Most of the largest hotel companies have deeply changed their business models, switching

from asset-driven to asset-light structures, implying less capital expenditure and higher

margins, linked to management or franchise contracts. However, the ongoing deep downturn

demonstrates that cyclicality remains strong in the industry despite those changes.

In the US, the hotel industry was primarily built in the 20th century, along with hotel chains and

the franchise system. In Europe, the current trend is to replace or integrate independent

hotels, which is why the penetration rate for hotel chains is continuously rising and the race for

market share continues. The ten largest hotel groups account for just 20% of hotel rooms

worldwide, of which there are close to an estimated 18 million, including 6.0 million in Europe

and 4.8 million in the US.

The restaurant market is still highly fragmented despite a wave of consolidation in the late

1990s. The three leading restaurant groups account for under 15% of the global catering

market (company and school canteens, offshore oil rigs, army bases, etc.).


0 10 20 30 40 50 60 70 80 90

MCDONALDS

CARNIVAL

STARBUCKS

YUM! BRANDS

LAS VEGAS SANDS

COMPASS GROUP

MARRIOTT INTL.'A'

SANDS CHINA

ACCOR

WYNN RESORTS

in $bn



May 2010 43

SG view

Sector map

ACCOR

APOLLO GP.'A' BENESSE HOLDINGS

CARNIVAL

COMPASS GROUP

CROWN

DARDEN RESTAURANTS

DEVRY

GENTING SINGAPORE

H&R BLOCK

ICTL.HTLS.GP. INTL.GAME TECH.

LAS VEGAS SANDS

MARRIOTT INTL.'A'

MCDONALDS

MGM MIRAGE

OPAP

ORIENTAL LAND

ROYAL CARIBBEAN CRUISES

SANDS CHINA

SHANGRI-LA ASIA

SODEXO

STARBUCKS

STARWOOD HTLS.& RSTS. WORLDWIDE

TABCORP HOLDINGS

TIM HORTONS

TUI TRAVEL

WHITBREAD

WYNN RESORTS

YUM! BRANDS

Sales

S/M*

Industry Leaders




It has become increasingly difficult to expand organically in Europe because of regulations

and high real estate prices, making acquisitions a prized source of growth. The main hotel

groups have therefore made many acquisitions (Accor with Dorint in Germany, Hilton with

Stakis and Scandic, etc.), as this is a rapid way of rounding out regional coverage and

facilitating brand development. The recent emergence of specialised investment funds could

kick-start hotel development, but barriers to entry remain strong, and financing is currently

extremely rare in the sector. The long-term potential in Europe and other regions looks high

however.

Accor: Accor, one of the main hotel groups, has decided to spin off its non-hotel operations in

order to focus on the hotel market, and reveal additional value as Vouchers are expected to

trade at a clear premium to Hotels (our DCF valuation for vouchers gives a prospective

EBITDA of 13.2x).

We think that:

1) The two future stocks combined offer considerable upside over the next 12 months (�29.5

for hotels and �22.5 for the prepaid services division based on the net debt split announced

by the group on 24 February 2010); and

2) Meanwhile, Accor could announce favourable news, including perhaps further asset

disposals in line with its asset-right strategy which is at the root of the operating issues facing

the hotel entity. Also, Accor is likely to IPO its share in Casino group Lucien Barrière (49% of

shares) in H2 10e, which could be worth between �400m and �500m, plus a �220m debt

impact.

Stocks to watch

Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales(€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Accor France Buy EUR 53 43.32 7296.6 9766.8 28.1 9.2 10.7



May 2010 44

Household & Personal Care More consolidation than spin-off


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 292,263 15.4 3.89 2.76 3.77

Eurozone 118,024 20.5 3.02 1.63 3.08**

UK 37,560 16.8 NA 3.26 3.99

Japan 28,367 23.3 2.34 2.52 1.29

Median* 13,947 17.3 3.21 2.53 NA

Total* 476,214

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Household & Personal Products MSCI World


Industry trend: consolidation is likely Barriers to entry are high depending on the distribution channel and the product category,

as establishing a global brand takes time.

Acquisitions help round out a brand portfolio, strengthen category diversification or improve

geographical coverage.

The personal, household and healthcare industries are still fragmented, although a closer

analysis by product category or distribution channel highlights contrasting situations.

Scale issues are striking for A&P spending on media agencies (the biggest cost line in

personal care) and for raw materials purchases from suppliers (the biggest cost for household

care).

Critical mass is needed and constantly growing due to retailers� current scale in addition to a

continued shift towards more local concentration and geographical diversification.


0 20 40 60 80 100 120 140 160 180 200

PROCTER & GAMBLE

L'OREAL

COLGATE-PALM.

RECKITT BENCKISER GROUP

KIMBERLY-CLARK

BEIERSDORF (XET)

AVON PRODUCTS

KAO

HENKEL (XET)

CLOROX

in $bn



May 2010 45

SG view

Sector map

AVON PRODUCTS

BEIERSDORF (XET)

CHURCH & DWIGHT CO.

CLOROX

COLGATE-PALM.

ENERGIZER HDG.

ESTEE LAUDER COS.'A'

HENKEL (XET)

KAO

KIMBERLY-CLARK

L'OREAL

PROCTER & GAMBLE

RECKITT BENCKISER GROUP

SHISEIDO

UNI CHARM

Sales

S/M*

Industry Leaders




Sector consolidation remains on the agenda for both the personal care and the household

sub-sectors, but now there are fewer listed targets (after the takeover of the The Body Shop

and the minority buyout of Clarins), particularly when it comes to targets free of a controlled

shareholding structure. The primary hurdle to consolidation in the HPC industry is the scarcity

of decent-sized companies. That said, the deteriorating environment creates more

opportunities but not necessarily at more affordable prices.

In this environment, Henkel appears to be one of the few diversified companies in this sector.

However, at the moment, management does not seem keen to divest unless it finds an

acquisition in its own area of expertise.

We believe the main players will wait for big conglomerates to refocus on fewer core

businesses and dispose of appealing assets or brands (as was the case with L�Oréal, when it

acquired YSL Beauty from PPR, or Reckitt Benckiser, when it acquired BHI from Boots the

Chemist). For several conglomerates, personal, household or healthcare businesses are small

relative to their own size, and as such are often considered to be non-core. However, these

businesses would offer an attractive fit and strengthen the portfolio of focused HPC groups.

Henkel announced in 2009 the sale of some of its business including the do-it-yourself (DIY)

line of adhesives, office and houseware products, including Duck brand products. If Henkel

follows this trend, in order to continue to focus on its core activity, a major spin-off is

conceivable by splitting one of its three main businesses: Adhesive Technologies, Laundry &

Home Care and Cosmetics.

Stocks to watch

Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales €m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Henkel Germany Buy EUR 43 40.07 14039.7 7139 16.8 14.2 43.2



May 2010 46

Insurance Changing regulatory rules


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 682,657 10.7 1.09 2.39 3.77

Eurozone 300,278 9.3 1.06 4.70 3.08**

UK 75,525 8.9 1.23 4.56 3.99

Japan 87,727 23.3 1.97 1.77 1.29

Median* 8,866 11.0 1.15 2.81 NA

Total* 1,209,933

30

60

90

120

150

2005 2006 2007 2008 2009 2010

MSCI World Insurance MSCI World


Industry trend: solvency 2 process on its way The sector has suffered a clear de-rating in recent years, despite constantly improving

operating margins and business rationalisation. Insurance companies have already largely

rationalised their asset bases. Minority interests have mostly been bought back and we would

expect only cosmetic rationalisation measures (AXA APH deal for example).

Balance sheets have recovered quickly from low levels seen early in 2009 as the entire

business is under mark to market.

While the European Commission will be the final decision-maker in the solvency II process,

Thomas Steffen, who heads the German insurance industry supervisory authority, has stated

that he would not object to delaying the introduction of Solvency 2 to 2013 from 2012. He

points to the challenges for small- and medium-sized players, which �might come under

severe pressure�. We have probably heard the worst about the potential impact of Solvency 2

on the industry (�300bn in capital requirements for the industry, of which roughly �80bn for

UK, or �50bn for Germany or France). The first signs of regulatory easing are appearing:

grandfathering, review of the liquidity premium, ongoing discussion on intangibles.


0 10 20 30 40 50 60 70

BERKSHIRE HATHAWAY 'B'

ALLIANZ (XET)

AXA

METLIFE

GENERALI

ZURICH FINANCIAL SVS.

MANULIFE FINANCIAL

PRUDENTIAL FINL.

MUENCHENER RUCK. (XET)

GREAT WEST LIFECO

in $bn



May 2010 47

SG view

Sector map

ACE

AFLAC

ALLIANZ (XET)

ALLSTATE

AVIVA

AXA

BERKSHIRE HATHAWAY 'B'

CHUBB

CNP ASSURANCES

DAI-ICHI LIFE INSURANCE

GENERALI

GREAT WEST LIFECO

HARTFORD FINL.SVS.GP.

LOEWS

MANULIFE FINANCIAL

MARSH & MCLENNAN

METLIFE

MS&AD INSURANCE GP.HDG.

MUENCHENER RUCK. (XET)

POWER FINL.

PROGRESSIVE OHIO

PRUDENTIAL

PRUDENTIAL FINL.

QBE INSURANCE GROUP

SAMPO 'A'

SUN LIFE FINL.

SWISS RE 'R'

TOKIO MARINE HOLDINGS

TRAVELERS COS.

ZURICH FINANCIAL SVS.

Sales

S/M*

Industry Leaders




The global insurance industry landscape has been radically modified as a result of the

financial crisis. The biggest change concerns AIG, the world�s largest insurance company by

premiums, which is now no bigger than a mid cap.

AIG�s collapse is a unique opportunity for the strongest players to �pick and choose� assets.

The largest assets have now been sold (ALICO and AIA) but smaller pieces are still for sale.

The insurance assets of ING (see Banks) are also on the table.

We are confident we will see dynamic M&A in the medium term following the AIG deals.

Insurance companies will emerge from the crisis either weaker or stronger. The stronger ones,

i.e. those who did not need to call on the market during the crisis, should be best-placed to

take advantage of M&A opportunities over the next 2-3 years. The biggest players are

probably the best placed to consolidate the market and therefore take advantage of the

current M&A environment via financial flexibility. The impact of Basel 2 and 3 on banks also

may trigger a good pipeline for Bankinsurance assets to be sold (see ING).

Muenchenen Ruck: The insurer long has been saying that splitting insurance activities from

reinsurance activities would create more value for shareholders. We doubt that management

will finally decide to go through with this, although a spin-off of Ergo, the primary business,

would not be irrational in this period.

Stocks to watch

Company Country Reco FV (loc cur) Price 04/05/10 (l c) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Munich RE Germany Buy EUR 125 107.2 4213.9 21161.5 9.1 na -3.1



May 2010 48

Luxury goods No spin-offs to expect


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 73,536 20.2 3.70 1.05 3.77

Eurozone 173,610 20.0 3.00 1.39 3.08**

UK 4,461 19.8 NA 2.00 3.99

Japan 3,810 NA 1.48 1.36 1.29

Median* 12,459 20.0 3.00 1.55 NA

Total* 263,982

50

80

110

140

170

2005 2006 2007 2008 2009 2010

MSCI World Textiles Apparel & Luxury Goods MSCI World


Industry trend: focused on development in Asia The top 10 companies represent 45% of the world luxury goods market, which remains very

fragmented. Some large markets have reached maturity, due in part to their demographic

profile (Japan, Europe). The price structure might have to be adjusted on some product

categories in order to stimulate demand. Markets with a lot of potential (China, Russia) are

likely to experience slower returns on investment than mature markets. Companies have not

yet begun the necessary streamlining of their brand portfolio or their distribution networks.

As Asia currently provides 100% of sector growth, sector investment should continue to focus

on this region (at present, it is estimated that two-thirds of store opening investments are

made in Asia, especially China). Sales generated by Chinese customers are currently

estimated at 10-15% of the world luxury goods market, with an estimated 9% generated by

other Asian consumers (excluding Japan).

However, it remains to be seen whether they will be able to offset the weak growth from

Japanese (34% of market) and European customers (30% of market) which reflects the

demographic profile of these markets. Finally it remains to be seen whether growth in Asia will

continue to be strong in 2009.


0 10 20 30 40 50 60

LVMH

NIKE 'B'

CHRISTIAN DIOR

RICHEMONT

HERMES INTL.

COACH

LUXOTTICA

ADIDAS (XET)

V F

THE SWATCH GROUP 'B'

in $bn



May 2010 49

SG view

Sector map

YUE YUEN INDL.HDG.

V F

THE SWATCH GROUP 'B'

RICHEMONT

PUMA RUDOLF DASSLER(XET) SOT.

POLO RALPH LAUREN 'A'

NISSHINBO HOLDINGS

NIKE 'B'

LVMH

LUXOTTICA

HERMES INTL.

GILDAN ACTIVEWEAR

COACH

CHRISTIAN DIOR

BURBERRY GROUPBILLABONG

INTERNATIONAL

ASICS

ADIDAS (XET)

Sales

S/M*

Industry Leaders




Sector consolidation remains on the agenda for the luxury goods sector given that: 1) entry

barriers are high, as establishing a global brand takes time; 2) acquisitions help round out a

product portfolio or improve geographical coverage; and 3) this industry is still relatively

fragmented, although a closer analysis by product or distribution segment highlights

contrasting situations.

The luxury goods sector can already be considered a global market given the balanced

breakdown of its sales. However, this is somewhat misleading as an analysis by customer

nationality appears more meaningful in order to get past the problem of tourist flows.


May 2010 50

Media Already well split between sub-sectors


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 555,172 16.8 1.92 1.84 3.77

Eurozone 120,476 15.4 2.35 4.33 3.08**

UK 60,939 14.4 1.72 3.51 3.99

Japan 23,866 27.2 1.42 1.04 1.29

Median* 8,268 16.5 2.02 2.78 NA

Total* 770,912

40

70

100

130

2005 2006 2007 2008 2009 2010

MSCI World Media MSCI World


Industry trend: segmented sector Other drivers should prove more significant in the short/medium term:

Client needs. The ability to service clients on a global basis has gradually become critical in

some sub-sectors. The consolidation process seen over the last two decades in the

advertising agencies sector (and potential Aegis/Havas tie-up) is, therefore, likely to be

replicated in some marketing services activities. In particular, market research should see

steady consolidation (started with TNS/WPP), driven by the main agencies or marketing

services groups.

Sub-sector maturity. In markets that are already very segmented, such as magazine

publishing, acquisitions are the main way of gaining additional penetration, either in the

Consumer or B2B fields.

Given the highly diverse nature of the Media sector, we have used a market capitalisation

ranking (30 March 2009). On this basis, the top 10 global Media & Entertainment companies

are clearly dominated by US groups.


0 10 20 30 40 50 60 70 80

WALT DISNEY

COMCAST 'A'

TIME WARNER

DIRECTV 'A'

VIVENDI

THOMSON REUTERS

NEWS CORP.'A'

VIACOM 'B'

BRITISH SKY BCAST.GROUP

OMNICOM GP.

in $bn



May 2010 51

SG view

Sector map

BRITISH SKY BCAST.GROUP

CABLEVISION SYS.

CBS 'B'

COMCAST 'A'

DENTSUDIRECTV 'A'

DISCOVERY COMMS.'A'

DISH NETWORK 'A'

EUTELSAT COMMUNICATIONS

JCDECAUX

JUPITER TELECOM.

LAGARDERE GROUPE

MCGRAW-HILL

MEDIASET

NEWS CORP.'A'

OMNICOM GP.

PEARSON

PUBLICIS GROUPE

SCRIPPS NETWORKS INTACT. 'A'

SES FDR (PAR) SHAW COMMS.'B'

SINGAPORE PRESS HDG.

THOMSON REUTERS

TIME WARNER

VIACOM 'B'

VIRGIN MEDIA

VIVENDI

WALT DISNEY

WOLTERS KLUWER

WPP

Sales

S/M*

Industry Leaders


Growth companies

Doldrums


The main "traditional" consolidation driver (i.e. the search for cost savings) has limited cross-

border relevance in the Media sector, mostly due to local cost dynamics.

For commercial TV, there are strong potential cost-savings synergies from merger operations

on the domestic market, but margins depend on the local context (multichannel players vs

single channel players, cost inflation etc). As the degree of consolidation is high, we do not

see any major move and the same applies for spin-offs.

Following the Time Warner spin-off of AOL, only Vivendi now appears to be a good candidate

for spinning off the telecom business. The spin-off process has already begun with the

disposal of Universal which should be complete by H2 10. This is clearly a favourable asset

reshuffle and there may be more ahead.

However, while the group's structure lends itself very well to potential spin-offs (discount to

SOP, diversified portfolio, no tax liabilities), its effective strategy focuses on gaining fuller

control of its main activities, except when local specifics favour continuing a market listing

(Maroc Telecom, Activision Blizzard). The SG Media team therefore deems the odds of a spin-

off as rather low.

Stocks to watch

Company Country Reco Target price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Vivendi France Buy EUR 22 19.93 27588.2 24499.7 8.9 10.3 4.4



May 2010 52

Metals & Mining Trend moving from consolidation to spin-off


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 286,412 20.3 2.25 0.66 3.77

Eurozone 130,602 23.0 1.33 1.69 3.08**

UK 495,813 12.2 3.06 0.82 3.99

Japan 96,226 17.5 1.34 0.74 1.29

Median* 7,782 19.2 1.65 0.80 NA

Total* 1,366,547

50

110

170

230

290

2005 2006 2007 2008 2009 2010

MSCI World Metals & Mining MSCI World


Industry trend: super cycle theory still alive

World-class assets are scarce: Most companies are facing mine depletion, lower head grade

and difficulty finding new mines in �investment-friendly� areas. The scarcity of world-class

assets makes it difficult for mining super majors to find new projects to develop. For the sake

of consistency with the �super-cycle theory� endorsed by all players, it is also fair to ask

whether the currently strong cash flows should primarily fuel organic growth, capital

management and balance sheet flexibility or serve a more acquisitive growth strategy.

The top 10 companies represented 30% of world steel production in 2008. The market is

still fragmented, with the top 20 steel producers representing 45% of total production.

ArcelorMittal clearly dominates the steel industry and is four times bigger than its closest

competitor.

The top 10 mining companies are clearly diversified. Industry fragmentation varies depending

on the business segment: in iron ore, the top 10 companies represent 97% of world

production vs 71% for coking coal, 54% for copper, and 49% for aluminium.


0 20 40 60 80 100 120 140

BHP BILLITON

RIO TINTO

ARCELORMITTAL

ANGLO AMERICAN

XSTRATA

BARRICK GOLD

FREEPORT-MCMOR.CPR.& GD.

GOLDCORP

NEWMONT MINING

NIPPON STEEL

in $bn



May 2010 53

SG view

Sector map

AGNICO-EAGLE MINES

ALCOAANGLO AMERICAN

ANTOFAGASTA

ARCELORMITTAL

BARRICK GOLD

BHP BILLITON

CLIFFS NATURAL RESOURCES

ELDORADO GOLD

ERAMETEURASIAN NATRES.CORP.

FORTESCUE METALS GP.

FREEPORT-MCMOR.CPR.& GD.

FRESNILLO

GOLDCORP

JFE HOLDINGS

KAZAKHMYSKINROSS GOLD

NEWCREST MINING

NEWMONT MINING

NIPPON STEEL

NORSK HYDRONUCOR

RIO TINTO

SUMITOMO METAL INDS.

TECK RESOURCES 'B'

THYSSENKRUPP (XET)

VEDANTA RESOURCES

XSTRATA

YAMANA GOLD

Sales

S/M*

Industry Leaders


Growth companies

Doldrums


Contrary to spin-off activity, there may be ongoing consolidation in the sector. Greater

industry consolidation (especially vertical integration) is becoming increasingly important and

may receive growing attention as corporate activity continues. As some markets become

oligopolies, many producers seek the benefits from concentration�s critical influence on price.

Synergies albeit at a limited level: in our view, M&A-linked synergies in the mining industry are

usually modest, as they are limited to cuts in E&P and capex spending through project

prioritisation within expanded exploration portfolios (historically -20%). However, we question

consolidators� leeway to trim development costs against the current backdrop of expansion

cost overruns and delays. Indeed, the mining industry�s ability to reduce cost bases through

mergers is generally limited, as such reductions imply geographical/portfolio overlaps that

conflict with the search for risk diversification.

BHP Billiton: In 2004, BHP Billiton�s former CEO Chip Goodyear was quoted as saying that

more had to be done to convince investors of the value of the oil & gas division. He stressed

that if this failed, management would come up with an alternative. We believe BHP Billiton

remains committed to high returns and its differentiating petroleum unit, and that a spin-off

may no longer be on the horizon.

ThyssenKrupp announced the reorganisation of its operating segments into two divisions in

order to: 1) adapt to further deteriorating economic conditions, 2) increase the group�s

efficiency, and 3) increase flexibility for M&A measures (disposals, restructuring, JV�s). We are

of the view that TK is unlikely to spin off its steel divisions as it considered doing in FY00.

ArcelorMittal is likely to maintain its iron ore and coking coal activities within the group to fully

capture the benefit of vertical integration.

Stocks to watch

Company Country Reco Target Price (loc cur) Price 04/05/10 (l c) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e

ArcelorMittal France Buy EUR 37 29.57 90745.9 46156.3 10.6 8.9 92.1

BHP Billiton plc United Kingdom Hold GBP 23.5 20.26 54479.7 44702.9 13.4 29.4 6.2

ThyssenKrupp Germany Hold EUR 26 24.76 45212.1 12738.7 43.7 4 144.7



May 2010 54

Oil & Gas Oil leaders ready to spin off non-core assets


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 1,411,952 19.2 2.14 1.29 3.77

Eurozone 353,983 10.3 1.41 3.64 3.08**

UK 627,656 12.6 1.47 3.21 3.99

Japan 46,351 20.2 0.89 2.37 1.29

Median* 11,614 18.3 1.95 1.92 NA

Total* 2,510,835

50

80

110

140

170

2005 2006 2007 2008 2009 2010

MSCI World Oil & Gas MSCI World


Industry trend: many spin-off options FY09 results publications impacted by rising oil prices have drawn attention to growth. The oil

price has picked up (prices have moved in a $70-85 band over the past three months) and is

expected to increase further, or to stabilise at a high level, which has put the spotlight on

growth prospects for 2010 and 2011. Hence, markets reacted relatively negatively when BP

guided for a decline and BG for slower growth in production for 2010. Conversely, Total�s

results were positively welcomed, particularly the return to growth expected for 2010. Oil

companies which reported strong growth in production volumes in 2009 (notably BP and

Chevron) clearly will have more difficulty doing so in 2010.

On the other hand, companies that disappointed relative to peers in 2009 � many with project

start-ups scheduled for end 2009 or early 2010 � stand to benefit. If we add to this the strong

European gas positions for RD Shell, ExxonMobil and Total (affected by lower demand and

relatively mild weather in Q4), there is every reason to believe that in 2010 oil groups should

benefit from the improving economy and the cold spell in Q1 10.

Top ten companies (by market cap) cf RDSA

0 50 100 150 200 250 300 350

EXXON MOBIL

ROYAL DUTCH SHELL

CHEVRON

BP

TOTAL

CONOCOPHILLIPS

ENI

STATOIL

OCCIDENTAL PTL.

BG GROUP

in $bn



May 2010 55

SG view

Sector map

ANADARKO PETROLEUM

APACHE

BG GROUP

BP

CANADIAN NATURAL RES.CENOVUS ENERGY

CHESAPEAKE ENERGY

CHEVRONCONOCOPHILLIPS

DEVON ENERGY

ENBRIDGE

ENCANA

ENI

EOG RES.

EXXON MOBIL

HESS

HUSKY EN.

IMPERIAL OIL

INPEX

MARATHON OIL

OCCIDENTAL PTL.

REPSOL YPF

ROYAL DUTCH SHELL

STATOIL

SUNCOR ENERGY

TALISMAN EN.

TOTAL

TRANSCANADA

WOODSIDE PETROLEUM

XTO EN.

Sales

S/M*

Industry Leaders




The sector is already very concentrated. There was a big consolidation wave when oil prices

plummeted in 1998-99. Majors are so big now that we believe consolidation would create

companies that would be too big and make it difficult to sustain growth.

Many oil companies are looking to improve shareholder value via divestment of non-core

assets:

Statoil: The Board of Directors unanimously agreed in February to consider a new ownership

structure for the energy and retail business (E&R), with a stock-exchange listing currently

viewed as the most likely solution in the fourth quarter of 2010 at the earliest.

Repsol-YPF issued a press release with and without Gas Natural, signalling a possible

medium-term withdrawal from its c.30%-owned subsidiary. Thus, Repsol-YPF�s debt which

currently stands at �10,928m (�14,654m including preferential shares) could be reduced to

�4,905m (or �8,453m including the preferential shares) if Gas Natural is excluded. Repsol-YPF

is a diversified oil company with upstream, downstream LNG and Gas Natural businesses.

Total also could potentially spin off its specialty chemical division, which would resemble the

group�s strategy when it successfully spun off Arkema four years ago.

ConocoPhillips has announced it will cut its stake in Lukoil by half. It currently owns 20% of

Lukoil, a stake worth $9.4bn, which means that it may be selling c.$4.7bn in shares.

Stocks to watch


Repsol-YPF Spain Hold EUR 18 17.71 898.785 21621.5 9.9 10.7 68.2

Statoil Norway Buy NOK 165 143.6 1760 457889.7 9.1 23.5 30.5

ConocoPhillips United States Hold USD 58 59.7 2188.292 91155.9 9.4 14.3 71.7

Total France Buy EUR 49 41.16 2355 96661.1 8.5 19.5 38.7



May 2010 56

Pharmaceuticals Big is beautiful but for how long?


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 644,744 12.2 2.89 3.46 3.77

Eurozone 497,697 12.1 2.09 3.28 3.08**

UK 171,748 10.0 NA 5.60 3.99

Japan 124,786 16.4 1.55 2.28 1.29

Median* 10,091 13.5 2.09 3.28 NA

Total* 1,438,975

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Pharmaceuticals MSCI World


Industry trend: sector highly concentrated There are three key positive long-term trends for the pharmaceutical sector: an ageing

population in the developed world, rising economic standards in the developing world

(primarily BRICs), and new drug therapies with identifiable clinical benefits. At the same time,

pharma is responding to shifting industry dynamics including health reform in the United

States. The sector is increasingly competitive for a myriad of reasons and that has caused a

gradual rerating over time. Still, there are opportunities to be found.

Bids by Big Pharma for established local players in emerging markets look set to feature

prominently among pharmaceutical transactions as the majors seek to position themselves for

long-term growth in these high potential markets. A more common route explored by Big

Pharma is the acquisition of smaller biotech companies with innovative compounds or

platform technologies. Most Big Pharma mergers could result in estimated savings amounting

to a high single-digit percentage of the combined cost base.

Globally, we expect markets outside of North America and Europe to account for more than

40% of world pharmaceutical sales by 2012, up from 23% in 2007, on the back of rising GDP

and the associated increase in healthcare spending.


0 20 40 60 80 100 120 140 160 180 200

JOHNSON & JOHNSON

PFIZER

NOVARTIS 'R'

MERCK & CO.

ROCHE HOLDING

GLAXOSMITHKLINE

SANOFI-AVENTIS

ABBOTT LABORATORIES

ASTRAZENECA

BAYER (XET)

in $bn



May 2010 57

SG view

Sector map

ABBOTT LABORATORIES

ALLERGAN

ASTELLAS PHARMA

ASTRAZENECA

BAYER (XET)

BRISTOL MYERS SQUIBB

CHUGAI PHARM.

DAIICHI SANKYO

EISAI

ELI LILLY

FOREST LABS.

GLAXOSMITHKLINE

JOHNSON & JOHNSON

KYOWA HAKKO KIRIN

MERCK & CO.

MITSUBISHI TANABE PHARMA

MYLAN

NOVARTIS 'R'

NOVO NORDISK 'B'

PERRIGO

PFIZER

ROCHE HOLDING

SANOFI-AVENTIS

SHIONOGISHIRE

TAISHO PHARM.

TAKEDA PHARM.

UCB

WARNER CHILCOTT CL.A

WATSON PHARMS.

Sales

S/M*

Industry Leaders




We see the diversification approach of the industry falling into three main categories: 1) Big

Pharma diversifying into new businesses and geographies; 2) Big Pharma shedding non-core

businesses and focusing on fewer geographic regions; and 3) Specialty care companies

expanding globally.

We have seen an increase in M&A activity as some majors have been unable to replace

blockbusters and grow new business lines and markets quickly enough. We note that for most

recent deals in Europe, the market did not appear to penalise the acquirer for significant

premiums, provided the deals were accretive. This could make the trend a net positive for

investors.

We see the Big Pharma model continuing for some time, although in an adapted form. The

industry has been focusing on improved R&D productivity, restructuring to drive operating-

margin improvements and searching for growth opportunities via new blockbusters,

diversification and emerging markets, with M&A a theme throughout.

Bayer: Management staying the conglomerate course, but nothing can be ruled out over a

longer time period.

Our quantitative model shows Bayer as a leading candidate for spin-off deal. This comes as

no surprise as the group�s presence in healthcare, chemicals and crop science has often

given rise to speculation about a break up. Indeed, pharma peers Sanofi-Aventis, Novartis and

AstraZeneca have all spun off their non-core businesses in the past. However, current Bayer

CEO Werner Wenning has been a staunch defender of the current model, and CEO designate

Dr. Marijn E. Dekkers has publicly committed to stick to the conglomerate path. It would likely

be much easier for Bayer to divest units than to invest the proceeds from such a deal into new

businesses. Hence, a spin-off transaction does not appear imminent, but cannot be ruled out

over a longer time period.

Stocks to watch


Bayer AG Germany Hold EUR 52 47.17 32015.2 39007.1 13.7 13.6 18.2



May 2010 58

Real Estate Spin-off of industrial groups would be beneficial


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 231,882 37.5 2.20 3.99 3.77

Eurozone 49,601 14.8 1.13 6.63 3.08**

UK 26,083 19.1 1.03 4.72 3.99

Japan 92,760 25.6 1.10 1.73 1.29

Median* 6,209 18.0 1.25 3.77 NA

Total* 688,467

40

70

100

130

160

2005 2006 2007 2008 2009 2010

MSCI World Real Estate MSCI World


Industry trend: a new status for the sector The move towards tax-transparent vehicles should continue in the Netherlands, Belgium,

France, the UK, Germany and Italy. Some improvements are expected in Italy. A special status

could be created for listed real estate companies in Spain. The new status should enhance

sector transparency and attract new investors.

Industrial and services groups should continue to outsource their real estate holdings. The

situation should eventually mirror that in the US, where real estate is predominantly

outsourced.

We therefore expect an increase in the number and market capitalisation of sector players in

line with the US experience.


0 5 10 15 20 25 30 35 40

SUN HUNG KAI PROPERTIES

CHEUNG KONG HOLDINGS

WESTFIELD GROUP

SIMON PR.GP.

MITSUBISHI ESTATE

UNIBAIL-RODAMCO

PUBLIC STORAGE

MITSUI FUDOSAN

VORNADO REALTY TST.

HANG LUNG PROPERTIES

in $bn



May 2010 59

SG view

Sector map

ANNALY CAPITAL MAN.

AVALONBAY COMMNS.

BOSTON PROPERTIES

BROOKFIELD AM

CAPITALAND

CHEUNG KONG HOLDINGS

CITY DEVELOPMENTS

EQUITY RESD.TST.PROPS. SHBI

HANG LUNG PROPERTIES

HCP

HENDERSON LD.DEV.

HOST HOTELS & RESORTS

KERRY PROPERTIES

LAND SECURITIES GROUP

MITSUBISHI ESTATE

MITSUI FUDOSAN

NEW WORLD DEV.

PLUM CREEK TIMBER

PUBLIC STORAGE

SIMON PR.GP.

SINO LANDSTOCKLAND

SUMITOMO REAL.&DEV.SUN HUNG KAI PROPERTIES

SWIRE PACIFIC 'A'

UNIBAIL-RODAMCO

VENTAS

VORNADO REALTY TST.

WESTFIELD GROUP

WHARF HOLDINGS

Sales

S/M*

Industry Leaders




This map shows property developers (high sales, low capital intensity) and pure rental

businesses (low rent, high capital intensity).

Real estate sectors could benefit from the determination of certain industrial groups to refocus

on their core business and therefore we could have more spin-offs such as Mercialys which

was previously part of the Casino group.

The sector�s renewed appeal should last over the next few years.

The development of funded pension schemes should benefit long-term investment vehicles

that offer good visibility on cash flow and underlying asset values. Even in the event of a real

estate crisis, investors can reasonably expect property values to rise over the long term in line

with local economic growth.

Institutional investors are likely to switch increasingly to real estate assets in the wake of the

general disenchantment with equities. Listed real estate companies, which represent more

liquid investments than direct real estate holdings, stand to benefit from this trend.

The sector�s renewed appeal should lead to an increase in the number of players. The

introduction of new investment vehicles could help to match demand for real estate equities.

Although we do not expect any major move in the industry, demerging is a possibility even for

the Small & Mid Caps. A few weeks ago Liberty International announced it was demerging its

portfolio of central London properties from its regional shopping centres, as the company

reported a narrowing in pre-tax losses in 2009. It has planned to complete the demerger by

May. Liberty International will then be renamed Capital Shopping Centres.


May 2010 60

Software & IT Services Offshore factor dominates IT services


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 1,042,451 16.1 3.92 0.86 3.77

Eurozone 84,100 15.8 3.57 1.58 3.08**

UK 11,527 18.1 3.13 1.69 3.99

Japan 108,047 18.2 2.08 2.16 1.29

Median* 7,610 17.5 3.44 1.74 NA

Total* 1,252,225

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Software & Services MSCI World


Industry trend: small players fight to survive Recent growth in IT Services mainly has been driven by the rise of the Indian players. The

sector as a whole has yet to recover the 2000 peak.

In the software sector, traditional large firms are likely to get even larger thanks to their strong

balance sheets. Smaller players are likely to find it more difficult to survive due to market

and/or financing issues. We believe that software consolidation will focus on filling the

technology gap and winning market share.

Convergence and offering suites: the major subjects in Software

Instead of diversification, we expect a convergence trend in the software sector. Acquisitions

would be the easiest and fastest way for companies to achieve convergence, we estimate.

Leading players such as Microsoft could also diversify into other sectors to enhance their

technology leadership in the software industry and diversify their sources of revenue into

growing segments. Given Microsoft�s unsuccessful bid for Yahoo, we do not rule out the

possibility of Internet companies being acquired by software makers, or vice versa.


0 50 100 150 200 250 300

MICROSOFT

ORACLE

GOOGLE 'A'

SAP (XET)

NINTENDO

VISA 'A'

EBAY

ACCENTURE

MASTERCARD

YAHOO

in $bn



May 2010 61

SG view

Sector map

ACCENTURE

ACTIVISION BLIZZARD

ADOBE SYSTEMS

AKAMAI TECHS.

AUTODESK

AUTOMATIC DATA PROC.

BMC SOFTWARE

CA

CAP GEMINI

CITRIX SYS.

COGNIZANT TECH.SLTN.'A'

COMPUTER SCIS.

DASSAULT SYSTEMES

EBAY

FIDELITY NAT.INFO.SVS.

FISERV

GOOGLE 'A'

INTUIT

MASTERCARD

MICROSOFT

NINTENDO

NTT DATA

ORACLE

PAYCHEX

SALESFORCE.COM

SAP (XET)

SYMANTEC

VISA 'A'

WESTERN UNION

YAHOO

Sales

S/M*

Industry Leaders




Software companies and IT Services companies are priced differently by the market. Hence,

the main Software companies are located on the left side of our Map, as they are better

priced, and the main IT Services companies are on the right.

In our view, M&A activity is also likely to continue in the IT services sector, with larger players

taking advantage of low valuations. The main motivations are to increase the client base,

acquire operational capacity such as low cost resources, and gain business expertise. We

believe the consolidation trend will continue to focus on offshore.

However, following the HP-EDS merger, we cannot rule out the possibility of another mega

consolidation in the sector driven by market-share dynamics. IT Services� goal to become

�one-stop� shops could continue to push major vendors to acquire small companies.

Furthermore, we believe that cross-border consolidation will increase as offshore vendors,

such as Indian companies, focus on acquiring business. As these companies already have

strong positions in the US, we believe their next targets likely will be European.

Given the emergence of cloud computing, the major technology shift in the industry for the

next ten years, we believe the industry could move back to a semi-integrated model, providing

customers with an all-in-one offering, including hardware, software and services. In our view,

companies would better protect their profitability in the IT industry by adopting this approach

and partially lock in their customers. Against this backdrop, hardware companies actively

would continue to acquire software companies, e.g. IBM, Cisco and HP's strategy over the

past few years, while software vendors would acquire hardware companies, e.g. Oracle's

acquisition of Sun Microsystems.

In the Services sector, some companies such as Indra or Sopra have a hybrid model, offering

both proprietary software solutions and traditional services activities. For example, Sopra, a

mid-cap French company, will spin off its software division Axway in Q3 10.


May 2010 62

Telecom Equipment Many spin-off options


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 1,058,697 13.7 3.57 0.81 3.77

Eurozone 95,727 15.6 2.59 2.38 3.08**

UK NA NA NA NA 3.99

Japan 293,361 23.9 1.52 0.99 1.29

Median* 9,566 20.5 2.05 0.99 NA

Total* 1,454,144

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Technology Hardware & Equipment MSCI World


Industry trend: convergence The telecom equipment sector is already highly concentrated and, although there are still calls

for further consolidation, we believe major acquisitions are unlikely in the near term. Part of the

problem is the currency with which to make acquisitions. Share prices are down substantially

and companies are generally hoarding cash. Therefore, even if consolidation were a favoured

tactic, we believe that it is a difficult time to employ it.

Furthermore, our review of the telecom equipment markets indicates that individual markets

are already showing a form of consolidation. However, this is more through companies exiting

or being forced out of certain businesses than consolidation specifically.

Recent examples of this include Nortel (its bankruptcy should effectively mean its withdrawal

from a number of telecom equipment markets) and Motorola (where its weakness in handsets

has changed the company from a major competitor to a small, regional player).


0 50 100 150 200 250 300

APPLE

INTERNATIONAL BUS.MCHS.

CISCO SYSTEMS

HEWLETT-PACKARD

QUALCOMM

CANON

NOKIA

EMC

RESEARCH IN MOTION

ERICSSON 'B'

in $bn



May 2010 63

SG view

Sector map

AGILENT TECHS.

ALCATEL-LUCENT

AMPHENOL 'A'

APPLE

CANONCISCO SYSTEMS

CORNING

DELL

EMC

ERICSSON 'B' FUJIFILM HDG.

FUJITSU

HARRIS

HEWLETT-PACKARDHITACHI

HOYA

INTERNATIONAL BUS.MCHS.

JUNIPER NETWORKS

KEYENCE

KYOCERA

MOTOROLA

MURATA MANUFACTURING

NEC

NETAPP

NIDEC

NIPPON ELEC.GLASS

NOKIA

QUALCOMM

RESEARCH IN MOTION

RICOH

SANDISK

SEAGATE TECH.

TDK

TOSHIBA

TYCO ELECTRONICS

WESTERN DIGITAL

XEROX

Sales

S/M*

Industry Leaders




In a depressed sector, some leaders are looking for a new strategy. Motorola is already thinking

of a full spin-off after several quarters of losses from its handset business unit, whereas groups

like Alcatel-Lucent and Ericsson are fighting to keep a leading position in their business. We

believe that any further consolidation is likely to continue to be driven by companies exiting

certain markets and/or regions. In addition, larger manufacturers may still acquire smaller

manufacturers to gain access to specific technologies and/or customer lists. We do not

anticipate any major acquisitions or mergers between larger companies.

Alcatel-Lucent � The company has been through a huge reorganisation which has included a

large number of asset sales. However, we believe that there is now little to sell and that the

company will be forced to focus on its existing businesses rather than acquisition or selling

further assets. There has been speculation about a potential merger of Alcatel-Lucent�s mobile

business with that of Nokia Siemens, but we believe that an American/Finnish/French/German

group would be too complex to even contemplate.

Ericsson � After a flurry of purchases in the fixed line business a few years ago, Ericsson has not

made any recent acquisitions recently. We believe that the company has little intention of

acquiring large new companies but is interested in �bolt-on� acquisitions. Given its very large

cash pile, further small acquisitions could well be on the horizon.

Motorola � The company has announced its intention to split the business, and keep the handset

business with the other businesses spun off. However, we believe that the handset business still

has major hurdles to overcome and so this spin-off still represents a difficult challenge for the

company, particularly as it is struggling to make a credible comeback in the market.

Stocks to watch


Alcatel France Hold EUR 2.2 2.39 15233.4 5540.2 58.9 -2.9 117.3

Ericsson Sweden Buy SEK 100 84.2 207654.6 253576.4 13.2 12.2 88.5

Motorola Inc United States Hold USD 6.5 7.1 22134.2 16421.4 29.2 5.5 nm



May 2010 64

Telecom Services Spin off foreign businesses? Sector valuation Sector performance

Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 393,921 13.3 1.66 6.03 3.77

Eurozone 424,438 11.8 2.77 5.96 3.08**

UK 140,274 10.6 NA 2.98 3.99

Japan 177,323 11.6 1.26 3.00 1.29

Median* 11,716 12.2 2.18 5.66 NA

Total* 1,215,573

50

80

110

140

2005 2006 2007 2008 2009 2010

MSCI World Telecommunication Services MSCI World


Industry trend: after consolidation, spin-off Global business models are not applicable given the low level of synergies derived from

international diversification and the capital intensity of the current activities. Although

deregulation and competition were introduced more than a decade ago, incumbent operators

still dominate their domestic markets as the industry�s high capital intensity makes it difficult

to even out market shares.

Acceleration in consolidation remains unlikely We believe that the M&A flow will remain light in continental Europe.

Mergers between incumbents appear difficult to achieve due to political roadblocks and the

lack of obvious synergies between what essentially remain local businesses.

In-market consolidation faces regulatory hurdles. The local dominant players will not be in a

position to make acquisitions due to anti-trust concerns.

Moreover given the increasing risk aversion towards emerging markets, European operators

are unlikely to use their balance sheets to expand their footprint.

Given the country-based nature of the industry, it is not surprising that large GDP countries

are overrepresented. Most of the companies in the table below have been in the top 10

throughout the last decade as consolidation has enabled them either to reinforce their

domestic presence or to expand internationally.


0 20 40 60 80 100 120 140 160 180

AT&T

VODAFONE GROUP

TELEFONICA

VERIZON COMMUNICATIONS

NTT DOCOMO INC

NIPPON TELG. & TEL.

FRANCE TELECOM

DEUTSCHE TELEKOM (XET)

TELSTRA

SINGAPORE TELECOM

in $bn



May 2010 65

SG view

Sector map

AMERICAN TOWER 'A'

AT&T

BCE

BELGACOM

BT GROUP

CENTURYTEL

CROWN CASTLE INTL.

DEUTSCHE TELEKOM (XET)

FRANCE TELECOM

KDDI

KPN KON

NII HDG.

NIPPON TELG. & TEL.

NTT DOCOMO INC

PORTUGAL TELECOM SGPS

QWEST COMMS.INTL.ROGERS COMMS.'B'

SINGAPORE TELECOM

SOFTBANK

SPRINT NEXTEL

SWISSCOM 'R'

TELE2 'B'

TELECOM ITALIA

TELEFONICA

TELENORTELIASONERA

TELSTRA

TELUS

VERIZON COMMUNICATIONS

VODAFONE GROUP

Sales

S/M*

Industry Leaders




We have seen many changes in this sector in the past 10 years with many mergers in Europe,

but also some spin-offs, for example O2 bought by Telefonica.

Vodafone changed its strategy following Chris Gent�s departure in mid-2005, divesting non-

core assets. Now it appears that Deutsche Telecom is considering listing its US subsidiary.

Deutsche Telekom's (Buy, TP �10.8) US mobile operation T-Mobile US is currently

experiencing operational difficulties (revenue decline driven by market share losses at the high

end to competitors AT&T and Verizon). While management is committed to turning around this

situation in 2010, we believe there are realistic scenarios for the medium to long term where

the company could consider a partial sell-off in the form of a partial IPO or a trade sale of a

stake to an industrial partner. One scenario, against our own expectations, is that

management is unable to turn around the asset in 2010. We believe the likelihood of a

strategic solution would rise significantly in this case in early 2011. However, even if operating

trends stabilise, there is a question mark over the return on capital achievable by T-Mobile US

during the inevitable longer-term move to a next-generation (4G) network. While this is more a

2012-13 story for T-Mobile US, a partnership with (selling a stake to) an industrial company,

preferably one with access to the required radio spectrum, would make sense.

Stocks to watch


Deutsche Telekom Germany Buy EUR 10.8 9.88 64048.9 43081.1 12 9.8 5.2



May 2010 66

Utilities Many assets for sale


Sector

Market. Cap lc m

P/E 10e P/BV 09

Dividend Yield 09

LT Interest rates

US 413,119 13.5 1.39 4.31 3.77

Eurozone 605,081 12.9 1.35 5.52 3.08**

UK 81,430 11.0 3.35 6.19 3.99

Japan 140,797 21.4 1.14 2.57 1.29

Median* 8,096 13.8 1.38 4.33 NA

Total* 1,305,626

50

80

110

140

170

2005 2006 2007 2008 2009 2010

MSCI World Utilities MSCI World


Industry trend: big is no longer beautiful The process of consolidation in individual countries is well advanced in the utilities sector.

Liberalisation has rapidly shown that a lack of integration represents a risk, resulting in efforts

to match downstream assets with upstream assets, and to back up trading activities with

physical assets. In electricity, an oligopoly has emerged: EDF, E.ON, etc. Differences between

electricity and gas have become blurred as the activities have increasingly converged.

In view of the current financial climate, companies will no longer be able to continue the race

for size that began in 2005.

We believe the last phase of M&A activity (around $200bn over 2005-2008) needs to be

digested before companies again turn to growth through acquisitions.

While some transactions may take place in the near term, they should not be anything like the

scale of past deals in the sector and instead are more likely to be tuck-in acquisitions.

One area in which oil companies are competing with utilities head-on is the purchase of oil

and gas reserves, reflecting the push to secure medium-term energy supply sources.


0 20 40 60 80 100 120

EDF

GDF SUEZ

E ON (XET)

ENEL

RWE (XET)

IBERDROLA

TOKYO ELECTRIC POWER

EXELON

SOUTHERN

DOMINION RES.

in $bn



May 2010 67

SG view

Sector map

AMER.ELEC.PWR.

CENTRICA

CLP HOLDINGS

CONSOLIDATED EDISON

DOMINION RES.

DUKE ENERGY

E ON (XET)

EDF

EDP ENERGIAS DE PORTUGAL

ENEL

ENTERGY

EXELON

FIRSTENERGY

FORTUM

FPL GROUP

GAS NATURAL SDG

GDF SUEZ

HONG KONG AND CHINA GAS

HONG KONG ELECTRIC

IBERDROLA

IBERDROLA RENOVABLES

NATIONAL GRID

PG&E

PUB.SER.ENTER.GP.

RWE (XET)

SCOT.& SOUTHERN ENERGY

SEMPRA EN.

SNAM RETE GAS

SOUTHERN

VEOLIA ENVIRONNEMENT

Sales

S/M*

Industry Leaders




Some of the large utilities have indicated they want to sell off assets. We believe the market

will pay particular attention to this theme given the increasing difficulty of obtaining financing.

We estimate the value of assets up for sale at around �30bn. Some assets could be listed on

the stock market. The sale of assets will naturally come under close scrutiny as the

programmes are carried out. We believe asset divestments could create potential for rerating

depending on the price obtained.

Example of assets up for sale

Company Divestment programme Period

E.ON €10bn 2009/2010

Enel €10bn 2009/2013

EDF €5bn 2009/2010

Veolia Environnement €3bn 2008/2010 Source: SG Equity Research

E. ON � the company has already sold some assets (hydro generation to Verbund, generation

assets to EnBW, Thüega). One of the remaining assets for sale is E.ON�s US business, LG&E

in the Midwest.

Enel � the Italian company has launched the process to IPO its renewable energy arm, Enel

Green Power. We think this company (worth �10-13bn) could attract a lot of interest and help

Enel to reduce its debt pile by year end.

EDF � The group may sell its distribution network in the UK. The value of the regulated assets

is £3.6bn with non-regulated assets valued at c.£200m. We think EDF may sell these assets

only if it obtains a premium.

Stocks to watch


E.ON Germany Hold EUR 29 28.19 77523.3 56408.2 8.5 15.3 6

Enel Italy Buy EUR 5.1 3.96 58594 37237.3 7.2 15.4 19.1

EDF France Buy EUR 55 41 72283.2 75803.5 21 12.1 -9.5



May 2010 68


May 2010 69


May 2010 70

IMPORTANT DISCLOSURES

Accor SG is acting as financial advisor in its demerger project.

Aegis Group plc SG acted as joint bookrunner of Aegis' convertible bond issue.

Air France-KLM SG acted as joint book runners to Air France-KLM inaugural bond issue.

Air France-KLM SG acted as joint bookrunner in the issue of senior unsecured bonds convertible into new shares and/or exchangeable for existing shares of Air France

KLM (OCEANE)

ALCATEL SG acted as joint bookrunner in the issue of bonds convertible into new shares and/or exchangeable for existing shares of Alcatel Lucent (OCEANE)

American Water

Works

SG acted as co-manager in American Water Works' equity raising.

American Water

Works

SG acted as co-manager in the secondary offering of American Water Works shares by RWE

American Water

Works

SG acted as co-manager in the secondary offering of American Water Works shares by RWE and in the capital increase of American Water Works.

Anheuser-Busch

InBev

SG acted as co-manager of Anheuser-Bush Inbev's senior bond issue

Anheuser-Busch

InBev

SG acted as joint bookrunner of Anheuser-Busch Inbev's bond issue (4% 26/04/18 EUR).

Banco De

Sabadell

SG acted as joint bookrunner in the Banco De Sabadell's senior bond issue.

Banco De

Sabadell

SG acted as joint bookrunner in the Banco Sabadell's covered bond issue (3.125% 20/01/14 EUR).

BANK OF

AMERICA

SG acted as co-manager in Bank of America's secondary offering.

Barclays SG acted as Co-manager of Barclays plc's bond issue.

Barclays SG acted as co-manager in the Barclays senior bond issue.

Barclays SG acted as co-manger in Barclays' senior high grade bond issue.

BASF SE SG acted as joint bookrunner in the BASF's senior bond issue (TAP) (5.125% 09/06/15 EUR).

BBVA SG acted as joint bookrunner in BBVA's covered bond issue (3% 09/10/14 EUR).

BG Group SG acted as Joint Bookrunner in the BG Group's senior bond issue (3.375% 15/07/13).

Boeing SG acted as co-manager in the Boeing's senior high grade bond issue.

Carrefour SGSP is managing a liquidity contract on behalf of Carrefour

Carrefour SG is a long-standing banker of Carrefour as well as the Halley Family

Casino SG acted as bookruner in Casino's exchange offer.

Casino SG is acting as Dealer Manager for Casino's tender offer.

CFAO SG acted as joint-global coordinator, joint-lead manager and joint-bookrunner in CFAO's IPO.

Deutsche Bank SG acted as Joint bookrunner in the Deutsche Bank covered bond issue.

Deutsche

Telekom

SG acted as co-manager in Deutsche Telekom's high grade senior bond issue.

Dexia SG acted as joint bookrunner in the Dexia's senior bonds issue (5.375% 21/07/14).

EADS SG acted as joint bookrunner in the EADS's senior bond issue (4.625 12/08/16 EUR).

EADS SG is mandated lead arranger of the loan granted to Republic of Brazil to finance the acquisition of helicopters from EADS Group.

EDF SG acted as joint bookrunner in EDF's bond issue (4.625% 26/04/30 EUR).

EDF SG acted as co lead manager in the EDF bond issue to retail customers (4.5% - 2014).

EDF SG acted as joint bookrunner in EDF's senior bond issue (4.625% 11/09/2024 EUR).

Enel SG makes a market in Enel warrants

Enel SG acted as senior co-lead manager of Enel right issue

Enel SG is participating in a medium-term bank loan to Enel Rete Gas for the operation of disposal by Enel of its majority stake.

Enel SG acted as bookrunner in Enel's senior high grade bond issue (4% 14/09/16 EUR, 5% 14/09/22 EUR, 5.625% 14/08/24 GBP, 5.75% 14/09/40 GBP).

Faurecia SG was sole bookrunner and sole global coordinator for the placement of Faurecia's shares.

Faurecia SG was acting as global coordinator, lead manager and bookrunner of the rights issue of Faurecia

Faurecia SG acted as global coordinator, joint bookrunner and joint lead manager in the issue of bonds convertible into new shares and/or exchangeable for

existing shares of Faurecia (Oceane).

Finmeccanica SG makes a market in Finmeccanica warrants

Finmeccanica SG acted as joint bookrunner in the Finmeccanica's senior bond issue.

Finmeccanica SG acted as co-manager in the Finmeccanica's senior unsecured HG bond issue.

France Télécom SG acted as joint bookrunner of France Telecom's bond issue (3.875% 09/04/20 EUR).

Gas Natural

SDG

SG acted as passive bookrunner in Gas Natural's bond issue

Gas Natural

SDG

SG acted as Bookrunner and Mandated Lead Arranger in the acquisition financing of Union Fenosa by Gas Natural

Gas Natural

SDG

SG acted as financial advisor to Mitsui in the purchase from Gas Natural of natural-gas-fired power stations in Mexico

Gas Natural

SDG

SG acted as joint bookrunner in the issue of GAS NATURAL's senior bond (5.25% 09/07/14 EUR & 6.375% 09/07/19 EUR).

Gas Natural

SDG

SG acted as joint bookrunner in Gas Natural's senior bond issue (3.375% 27/01/15 EUR ; 4.125% 26/01/18 EUR ; 4.5% 27/01/20 EUR).

ING Group SG acted as co-lead manager in the ING's rights issue.

Lafarge SG acted as joint bookrunner of the rights issue of Lafarge

Lafarge SG acted as joint bookrunner in Lafarge's bond issue (5.5% 16/12/19 EUR).

Lafarge SG acted as joint bookrunner in the Lafarge senior bond issue (7.625% 24/11/16 EUR).

Lafarge SG acted as joint bookrunner in the Lafarge's senior bond issue (7.625% 27/05/14 EUR).

LVMH SG acted as joint bookrunner in the LVMH's senior bond issue. (4.3275% 12/05/14 EUR)

Metro SG acted as joint bookrunner in the Metro's senior bond issue.

Nokia SG acted as co-Manager of in NOKIA 's senior unsecured bond issue.

Novartis AG SG acted acting as joint bookrunner in Novartis' senior bond issue.

Peugeot Citroen

PSA

SG was acting as global coordinator, lead manager and bookrunner of the rights issue of Faurecia

Peugeot Citroen

PSA

SG acted as global coordinator and joint book runner in the issue of unsecured bonds convertible into new shares and/or exchangeable for existing shares

of PSA Peugeot (OCEANE).

PPR SG acted as joint bookrunner of PPR's senior bond issue.

PPR SG acted as joint-global coordinator, joint-lead manager and joint-bookrunner in CFAO's IPO

Prudential SG will act as Co-lead Manager in Prudential PLC announced right issue

Repsol-YPF SG acted as joint dealer manager for a Repsol's bond exchange offer.

Saint-Gobain SG acted as joint bookrunner in the Saint-Gobain's senior bond issue (6% 20/05/13 EUR).

Saipem SG makes a market in Saipem warrants

Sanofi-Aventis SG acted as joint bookrunner in the SANOFI-AVENTIS' senior bond issue (3.5% 17/05/13 EUR & 4.5% 18/05/16 EUR).

Santander SG acted as joint bookrunner of Santander's covered bond issue (3.625% 06/04/17 EUR).

Santander SG acted as joint bookrunner in the Santander's covered bond issue (3.875% 27/05/14 EUR).

Schneider SG is acting as financial advisor to Alstom for the acquisition of Areva T&D.

Schneider SG acted as sole manager in the Schneider Electric's senior bonds issue.

Société

Générale

SG issues no recommendation on Société Générale's own financial instruments.

Sopra Group SG holds between 10% and 20% of Sopra

TELEFONICA SA SG is acting as joint bookrunner in Telefonica's senior bond issue.

TELEFONICA SA SG acted as joint bookrunner in Telefonica's senior bond issue (3.406 24/03/15 EUR).

TELEFONICA SA SG acted as joint bookrunner in the Telefonica's senior bond issue (5.496% 01/04/16 EUR).


May 2010 71

Thomson SG is one of the banks of Thomson.

Thomson SG holds between 5% and 10% of Thomson as a result of its trading activites

Total SG acted as exclusive financial advisor to Total for a disposal project.

UBS SG acted as joint bookrunner in the UBS' covered bond issue.

Unicredit Group SG makes a market in Unicredito warrants

Unicredit Group SG acted as co-lead manager in Unicredit's rights issue.

Unicredit Group SG acted as joint bookrunner in the Unicredit's subordinated bond issue (8.125 10/12/49 EUR).

Veolia

Environnement

SG is acting as financial advisor to CDC for the merger of Transdev with Veolia Transport.

Vivendi SG acted as financial advisor to Vivendi for the disposal of its stake in NBCU

Vivendi AG acted as joint bookrunner of Vivendi's senior bond issue (4% 31/03/17 EUR).

Vivendi SG acted as joint bookrunner in Vivendi's bond issue (4.25 01/12/16 EUR & 4.875 02/12/19).

Volkswagen

(Pref.)

SG is acting as co bookrunner for Volkswagen's right issue

US THIRD PARTY FOREIGN AFFILIATE RESEARCH DISCLOSURES: SG and its affiliates beneficially own 1% or more of any class of common equity of Accor, BBVA, Carrefour, Iberia, ING Group, Philips, Santander, Sopra Group.

SG or its affiliates act as market maker or liquidity provider in the equities securities of ABB, Accor, Air France-KLM, ALCATEL, Atlas Copco, AXA, Banco De Sabadell, BBVA,

Carrefour, Casino, Deutsche Bank, Deutsche Telekom, Dexia, E.ON, EADS, Enel, Ericsson, Finmeccanica, France Télécom, Gas Natural SDG, Inditex, L'Oréal, Lafarge, LVMH,

Munich RE, Nestlé, Nokia, Novartis AG, Peugeot Citroen PSA, PPR, Renault, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, Siemens, Société Générale, Technip,

TELEFONICA SA, Total, UBS, Unicredit Group, Veolia Environnement, Vivendi, Volvo.

SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from Accor, Aegis Group plc, AIG, Air France-KLM,

ALCATEL, Anheuser-Busch InBev, ArcelorMittal, Arkema, AXA, Banco De Sabadell, Barclays, BASF SE, BBVA, BHP Billiton plc, Boeing, Carrefour, Casino, Commerzbank,

Deutsche Bank, Deutsche Telekom, Dexia, EADS, EDF, EnBW, Enel, Erste Bank, ExxonMobil, Faurecia, Finmeccanica, France Télécom, Gas Natural SDG, Hochtief, Holcim,

L'Oréal, LVMH, Novartis AG, Peugeot Citroen PSA, Philips, PPR, Prudential, Renault, Repsol-YPF, Royal Bank of Scotland, Saint-Gobain, Saipem, Sanofi-Aventis, Santander,

Schneider, Sopra Group, Technip, TELEFONICA SA, Total, UBS, Unicredit Group, Veolia Environnement, Vivendi, Volvo.

SG or its affiliates have received compensation for investment banking services in the past 12 months from Accor, Aegis Group plc, Air France-KLM, ALCATEL, American

Water Works, Anheuser-Busch InBev, Banco De Sabadell, BANK OF AMERICA, Barclays, BASF SE, BBVA, BG Group, Boeing, Carrefour, Casino, CFAO, Deutsche Bank,

Deutsche Telekom, Dexia, EADS, EDF, Enel, Faurecia, Finmeccanica, France Télécom, Gas Natural SDG, ING Group, Lafarge, LVMH, Metro, Nokia, Novartis AG, Peugeot

Citroen PSA, PPR, Prudential, Repsol-YPF, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, TELEFONICA SA, Thomson, Total, UBS, Unicredit Group, Veolia

Environnement, Vivendi, Volkswagen (Pref.).

SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of Aegis Group plc, Air France-KLM, ALCATEL, American Water Works,

Anheuser-Busch InBev, Banco De Sabadell, BANK OF AMERICA, Barclays, BASF SE, BBVA, BG Group, Boeing, CFAO, Deutsche Bank, Deutsche Telekom, Dexia, EADS,

EDF, Enel, Faurecia, Finmeccanica, France Télécom, Gas Natural SDG, ING Group, Lafarge, LVMH, Metro, Nokia, Novartis AG, Peugeot Citroen PSA, PPR, Prudential, Repsol-

YPF, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, Société Générale, TELEFONICA SA, UBS, Unicredit Group, Vivendi, Volkswagen (Pref.).


May 2010 72

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represented on the board of such persons, firms or entities. SG is acting as a principal trader in debt securities that may be refered to in this

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