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Summer deals lift banks' hopes of M&A tipping point

By Anjuli Davies and Sophie Sassard

LONDON (Reuters) - Verizon's deal to buy Vodafone out of their U.S. wireless venture for $130 billion may have been years in the making, but bankers hope it could be an inflexion point that marks the revival of big dealmaking.

The telecoms deal, the third-biggest takeover on record, crowns a string of transactions this summer that the bankers say could boost boards' confidence that the time is right to pursue transformational M&A.

"This has been a great summer to remember," said Hernan Cristerna, global co-head of M&A at JP Morgan, which advised Verizon and also helped Nokia with its decision to sell its mobile phone business to Microsoft, announced on Tuesday.

"We have to be slightly cautious, but what these deals signal is that there's a shift in sentiment. We're changing gears in the M&A mindset."

In the wake of the 2007-09 financial crisis, dealmaking declined and executives shied away from large leveraged transactions, cutting debt instead and slimming down to their core businesses through asset disposals. Big became synonymous with greater risk and lower performance.

After a slow start, the summer's activity has pushed global M&A activity across all sectors to $1.55 trillion so far this year, up 1 percent on the same period last year.

The telecoms, media and technology (TMT) sector has led the charge.

"This could be the beginning of a big wave of M&A in the TMT sector; we are beginning to see a shifting of the telco tectonic plates globally," said Eric Benedict, Co-Head TMT at AlixPartners in London.

"There has been a lot of action in the U.S., but more could start happening in Europe," said Benedict.

TMT was already the biggest contributor to M&A activity in the first half of 2013, and Vodafone-Verizon has taken the total to $447.9 billion, more than two thirds higher than last year and making 2013 the best year for TMT dealmaking since 2007, according to Thomson Reuters data.

"There are really punchy, 'life's great' sort of deals going on, but they're really sector specific," said Tom Massey, head of European M&A at Citi.

"But like in past cycles, once one domino goes, the rest fall."

Data also show reasons for optimism, with 15 deals above $10 billion so far this year, the highest number since 2009, according to Thomson Reuters data.

"The acid test for the M&A market is beyond the natural evolutions of add-ons. It's about seeing M&A used to transform rather than just add on or peel off," said Cristerna.

Bankers say companies and their shareholders are warming to more weather-changing deals.

"Companies are dusting off some deals they have been studying for a long time. In addition to divestiture of non-core assets and bolt-on acquisitions, CEOs are starting to look at large industry-transforming strategic transactions," said Gilberto Pozzi, head of European M&A at Goldman Sachs.

The acquisition of Telecom Italia is among the long-expected deals that could soon happen, as the firm is being circled by potential investors including China's Hutchison Whampoa and Egyptian media tycoon Naguib Sawiris, bankers say.

In the UK, the owners of mobile operator EE could also sell it to leveraged buyout funds or trade players like AT&T in what would be a 10-12 billion pound ($16-20 billion) deal, bankers say.

Long-flagged sizeable takeover targets in the pharmaceutical field such as Shire, Astrazeneca and private equity-owned Smith & Nephew could also change hands.

Buoyant financing markets could facilitate larger transactions and encourage some to take companies back into private hands, deals that have been largely confined to the United States, with Dell, Virgin and Heinz, say the bankers.

"The level of M&A activity seen to date has not sated the demand for acquisition-related loan deals from loan investors," said Charlotte Conlan, head of loan syndications for EMEA at BNP Paribas.

"Bank liquidity remains deep, easy to access and flexible for the right deal. The much-talked-about M&A uptick is what the loan market is looking for."

Industrials conglomerates such as Smiths Group and consumer group Reckitt Benckiser are also on bankers' radar as possible break-up candidates.

With the Vodafone-Verizon announcement, 2013 would be the best year for mega-deals - those over $50 billion - since 2008, according to TR data. There have been only seven such deals since 2007.

"This could be kicking off broader M&A activity in other sectors. Everybody will be pitching like crazy. Mega-deals are outliers, though; the universe of possible mega-deals is limited, and they're what people remember, but the vast majority of deals that take place are in the $1-5 billion bracket. 2013 could be the year that kicked it all off," said Massey.

Ultimately, CEOs need to pull the trigger, and that could be as much about psychology as funding or commercial logic.

"Will people be bold enough to do transformational deals? That's very specific to particular companies, but it's easier to do when there is an encouraging environment," said Mark Warham, head of M&A for EMEA at Barclays.

($1 = 0.6439 British pounds)

(Additional reporting by Tessa Walsh; Editing by Will Waterman)

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