Distressed assets present an opportunity in European M&A sector
Dublin, 30 June 2009. The European M&A market has fallen back significantly from its peak in 2007 with private equity deals falling by 59 percent in 2008 as the trouble in debt markets curtailed many leveraged deals. Corporates with strong balance sheets and cash-rich private equity firms can take advantage of companies disposing of non-core subsidiaries writes Ted Webb, Joint Managing Director of M&A International Inc.’s member in Ireland, IBI Corporate Finance.2008 proved to be a tumultuous year for mergers and acquisitions in Europe. Following the crash of the financial markets in September 2008 and the infiltration of the credit crunch into the real economy, it is hardly surprising that the value and volume of M&A activity has fallen from the dizzy heights seen in 2007.
Recent statistics from M&A intelligence provider, mergermarket, show that total European deal values have declined from a peak of €428bn in Q2 2007 to just €173bn in the last quarter. While the volume of M&A activity held steady for the first half of the year, there was a significant fall-off in the last two quarters of 2008 with just over 800 deals in Q4, a level not seen since 2003.
Across Europe, the UK and Ireland accounted for almost a quarter of all deals in 2008 while the other major European economies of Germany, France and Italy recorded around 10 per cent of deals each. Central and Eastern Europe continues to see a significant volume of deals, accounting for 13 per cent of activity.
The outlook for the European economy is far from rosy and the downward trend in the M&A cycle is likely to continue from its 2007 peak. Turbulent equity markets mean that the appetite for acquisitions was much reduced in the latter part of 2008 and whether these stabilize throughout 2009 will play a big part in determining levels of M&A activity.
The largest announced deal in Europe in 2008 was BHP Billiton’s failed €130bn attempt to acquire Rio Tinto – this signaled the peak of the commodities bubble and was the last of the “super” deals. It seems this was only one of many deals which fell victim to the uncertainty in the markets as pricing disputes developed.
In addition to funding difficulties, competition authority conditions also proved to be an insurmountable obstacle for this deal. It is, however, worth keeping an eye on competition rulings in the new deal making landscape. It could be that various banking tie-ups have set precedents whereby competition considerations are relaxed to assist deal making in key sectors. M&A opportunities may arise in 2009 in situations where previously there would have existed an anti-trust brick wall.
For the second year running, the financial services sector accounted for the highest aggregate value of M&A activity in 2008 with almost 30 per cent of the total. However, this is not testament to a buoyant M&A environment, but rather to dramatic government bailouts of banks globally.
Being a cyclical sector and coupled with the lack of confidence in the market currently, it is unsurprising that the consumer space has been affected by the economic downturn. Nevertheless, consumer deals still accounted for a sizeable 21 per cent of overall deal value in Europe. This included some large deals such as Pernod-Ricard’s €5.6bn acquisition of Vin & Sprit, taking over Absolut Vodka, the company’s flagship brand, and Inbev’s €36.8bn hostile takeover of Anheuser-Busch, creating the largest brewer in the world.
One of the more resilient sectors in Europe in deal making terms was energy, mining and utilities (which accounted for 17 per cent of overall value). A recent PwC report shows that electricity and gas deal values only fell 13 per cent by target and 20 per cent by bidder compared with the 41 per cent drop in power deal value worldwide. European bidder numbers rose by a third, reflecting the continued appetite for consolidation. However, apart from French company EDF’s expansion of its nuclear footprint, there was an absence of mega deals internationally, such as those made by E.ON, Enel, Iberdrola and National Power in previous years. The credit crunch has coincided with a natural pause for breath as companies integrate previous acquisitions.
The Candover Private Equity Barometer 2008 report paints a suitably gloomy picture of European private equity investment activity, with a total value of €87bn representing a near 59 per cent decline against the record total of €198bn seen in 2007.
However, the death knell for the industry may not have sounded just yet. The slide in activity terms was fairly moderate with just 14 per cent fewer private equity deals in 2008 compared to 2007 and still ahead of the 2006 mark. This suggests a hard core in the market with the resources and the desire to continue to seek out investments.
Those private equity firms with cash reserves are prepared to inject equity into companies if they are satisfied with strategy. However, more equity will have to be committed in the future as the lack of debt finance continues to hamper the volume and size of deals being done.
With many companies predicted to struggle, the growth of distressed assets is likely to be a feature of 2009. For the M&A community, this will mean opportunities as undervalued assets begin to look attractive, particularly to large corporates with conservative balance sheets or cash-rich private equity firms. However, since there will be a glut of distressed assets in the market, it will be vital to selectively choose fundamentally sound businesses with proven revenue streams in order to be well-positioned for the eventual recovery.
We will see profitable, non-core subsidiary disposals over the coming months as corporates have begun to accept that peak sale values will not return anytime soon and they themselves choose to focus on core operations.
There will also be opportunities for financial advisers to work with companies needing to alter their capital structures, whether requiring new external finance or a restructuring involving existing stakeholders.
2009 will be a year of obstacles and opportunities. The speed and depth of the recession will dictate how quickly, if at all, activity picks up in the year ahead.
For further information, please contact:
M&A International Inc.
Christopher Scales, Executive Director, +34 678 549 330, mailto:cps@mergers.net
Melanie Berthelot-Verhaeghe, Head of Marketing, +34 646 740 259, mailto:melanie.berthelot@mergers.net