European M&A activity is expected to increase further over the next 12 months, following a bumper year of dealmaking in the region, according to a new survey by Mergermarket.
- 73% of respondents to new survey expect European M&A activity to increase
- Carve-outs and spin-offs could be a defining trend for the region
- Valuation gap and financing conditions are top concerns for execs
European M&A activity is expected to increase further over the next 12 months, following a bumper year of dealmaking in the region, according to a new survey by Mergermarket.
Seventy-three per cent of 330 respondents expect an increase, with 31% expecting a significant increase. Only 11% expect a decrease while none of the respondents think activity is going to decrease significantly.
Dealmaking in Europe has so far been defying worrying events in the macroeconomy such as the war in Ukraine, decades-high inflation and rising interest rates. Total deal value in the first half of the year came to €529.2bn, up 1% on the same period last year, although deal count has dropped 8% to 5,536 transactions. The largest transaction in H1 was the €42.7bn acquisition of Italian infrastructure firm Atlantia by Blackstone Group and Edizione, an investment vehicle associated with the Benetton family.
Looking ahead, close to a quarter (22%) of the survey respondents see an increase in carve-outs and spin-offs as a defining trend for the region in the next 12 months. The Mergermarket survey expects that debt-laden corporates will potentially be looking at more divestment activities as a means of capital raising, benefiting specialist buyout funds with a track record of undertaking complex transactions.
Sixteen per cent of respondents consider the level of dry powder held by buyout firms to be a primary driver fuelling deal demand, while 14% believe corporate consolidation in an overcrowded market to be the main driver of M&A. However, undervalued targets and distressed sales was expected to be the leading driver with 21%.
In terms of market obstacles, 16% of the respondents said vendor/acquirer valuation gaps is the biggest concern while financing came second place at 15%.
It was reported in January that telecom company Altice pulled off the sale of its Portuguese business after buyers failed to meet the $7.8bn price expectation. Sources quoted by Reuters said the non-binding proposals by EQT and CVC Capital Partners came with the highest indicative bid at just above $5.9bn. Walgreens also recently halted the sale for Boots chain in the UK saying that no offers received reflected the potential value of Boots and its No.7 beauty brand.
The Mergermarket report suggests that periods of volatility can complicate price expectations as sellers struggle to let go of previous all-time-high valuations and buyers wish to acquire repriced assets. It can take a period of equity markets signalling a bottom and showing upside and volatility subsiding before the bid/ask spread narrows, according report.
Mergermarket also found financing conditions deteriorated from the same time last year as credit markets price in elevated risks and the tighter access to debt financing can have a knock-on depressive effect on deal pricing.
Key Takeaway: Specialist PE firms with experience in distressed assets might find themselves at better footing than their general counterparts. Valuations of deals might fluctuate throughout the negotiation of the vendor/acquiror price gap.
