Industrial consolidation trends transform corporate Europe

Over the last 20 years, industrial consolidation has transformed the face of corporate Europe, according to Fidelity International.

Analysis conducted by the company to mark the 20th anniversary of the FIF European Opportunities Fund shows Telefonica, the Spanish telecoms giant, is the only company to have retained its ranking among the Continent's top ten blue-chips by market capitalisation since 1988.

"Industrial consolidation has been a major trend of the last two decades and today's top ten in the FTSE Europe ex-UK index is characterised by companies which have taken advantage of the liberalisation of European markets and growing M&A activity." comments Colin Stone, manager of the Fidelity European Opportunities Fund.

Large scale mergers, series of small acquisitions, and opportunities in emerging markets have seen national champions give way to pan-European multi-nationals. The sole survivor in the top ten, Telefonica - which enjoyed a monopoly in the Spanish telecoms market in 1988 - saw early opportunities in emerging markets such as Latin America and is today a global company. ‘Super-Utilities' like EDF and E.on have emerged by successfully building on domestic strength to break into neighbouring markets - creating larger groups which can benefit from cost synergies.

Oil and gas major, Total, has risen to the number two spot thanks to two successive mergers - Petrofina in 1999 and Elf Acquitaine a year later - and Nestlé won a takeover battle for Rowntree Macintosh in 1988 before undertaking further acquisitions in the late 90s. ENI, the Italian integrated energy company, has grown strongly in recent years through a series of smaller acquisitions.

Roche has grown its business both organically and through acquisitions. Numerous deals to collaborate or acquire smaller specialist drug makers have allowed the company to continue to generate fresh ideas and maintain earnings momentum. Novartis, created by the merger of Ciba-Giegy and Sandoz Laboratories in 1996, followed a broadly similar growth path and has also entered the top ten.

At the sector level, banks, automobiles and insurance stocks are among the sectors that have lost favour among investors while energy - in the form of oil & gas producers and gas, water and utilities - has grown in significance. Companies producing alternative fuels, which were languishing at the bottom of the sector rankings in 1988, have also seen an increase in stature.

The Fidelity European Opportunities Fund, which celebrated its 20th anniversary on 12th September, has benefited from identifying and investing in many of the beneficiaries of European restructuring since its launch.

Mr Stone comments: "Europe has seen many significant changes over the last two decades including the reunification of Germany, the fall of communism in the Eastern Bloc, the expansion of the European Union and the introduction of the ECB and the Euro currency. This has resulted in more freedom in European markets, a wider and more easily accessible consumer base and increased competition. Many of the most successful companies around today - not just the blue-chips but also small and medium sized companies - have taken advantage of these changes and have restructured their businesses accordingly.

"Different sectors have also come to the fore. I joined Fidelity as an oil analyst over 20 years ago and during this time there have been tremendous technological advances in the sector with the advent of the 3D seismic, horizontal drilling and deep water exploration which have benefited companies such as Seadrill, the deep water drilling company, which I have held in the portfolio for some time.

"Higher energy prices have also encouraged the rise of alternative energies, such as solar and wind power. One company at the forefront of wind power generation is Vestas Wind Systems, a Danish company that has grown to become the market leader in the manufacture of wind turbines. This stock is one of my favoured holdings and offers excellent growth prospects, as well as the potential that it could be the target of M&A activity."