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Cautious optimism for 2H20 as threat of COVID-19 second wave clouds M&A

Outbound deal flow overtakes inbound; bilateral and targeted processes rising trends in Norway

Crippled by the COVID-19 pandemic, the first half of 2020 marks a new low in Nordic M&A activity, with just EUR 9.1bn spent across 384 deals, according to Mergermarket's 1H20 Trend Summary. This represents a staggering 75% decrease in value and 281 fewer deals compared to the same period in 2019, with 1Q20 marking the weakest quarter in activity since 3Q09. 

 “M&A in the Nordics has fallen dramatically in the first half of 2020. M&A volumes are similar to 2009, in the immediate aftermath of the financial crisis," said Lars Ingemarsson, Managing Director and Nordic co-Head at Citi. “We are currently at the bottom of the M&A cycle in terms of announced deals," he said.

The region’s largest and only deal to date to surpass the EUR 1bn mark is live casino provider Evolution Gaming’s [STO:EVO] EUR 2.0bn offer for gaming company NetEnt [STO:NET].

A raft of sale processes underway or expected at the beginning of the year were paused or postponed due to the pandemic, including Norvestor’s planned sale of Norwegian infrastructure group Norva 24, and EQT’s potential disposal of enterprise software vendor IFS.

Among the few sale processes that managed to launch and complete is Norvestor’s sale of Norwegian modular space provider Wexus Gruppen to UK-based Algeco Group.

Continuing a trend that emerged in FY19, 1H20 outbound spending overtook inbound activity as Nordic buyers spent EUR 13bn across 122 deals outside the region, compared to EUR 3.0bn spent by international buyers on 99 Nordic assets. "Albeit coming from low volumes, this is a welcome rebalancing of the market," Ingemarsson said.

PE activity was hit hard in 1H20 as the coronavirus drew question marks over valuations and debt financing became harder to obtain. Only 55 PE buyouts were made for just EUR 933m, with only 37 exits at EUR 105m. In comparison, PEs spent EUR 11.5bn on 182 buyouts, and made EUR 19.1bn in 134 exits in FY19.  

The technology sector once again proved to be the most resilient in the face of COVID-19, registering the highest deal count at 79, and is likely to feature strongly in the second half of year with several deals in the pipeline for a 3Q20 launch, including Procuritas’ expected sale of Finnish building automation software provider Fidelix, and Nordic Capital’s anticipated exit of broadcasting technology company Vizrt.

There are indeed signs for optimism for the months ahead, with processes having recently launched or expected to resume since lockdown restrictions were eased in May across the region, including Suez’s [EPA:SEV] planned sale of its Swedish operations.

Capital raising activity in the public markets is also expected to see healthy levels on the back of the M&A rebound witnessed from late 2Q20, Tor Berthelius, Partner at Bryan Garnier & Co., said.

Ingemarsson echoed the sentiment, saying that the equity market in general has had a strong run, with robust investor demand and pricing in primary issues. If this trend continues, the Nordic IPO market will become increasingly active in the second half of the year and in early 2021, he said.

Sweden: Public-to-private, minority deals to dominate in 2H20 

Sweden’s 1H20 deal value plummeted to its lowest level since 2009. The period closed with 144 deals, which added up to a modest EUR 5.3bn valuation. During the corresponding period last year, Sweden closed 233 deals to a value of EUR 10.4bn, which already was a steep decline from the heights of 2018 and 2017. 

The biggest deal by far is the EUR 2bn domestic combination of Evolution Gaming and NetEnt, followed by Electrolux's [STO:ELUX] EUR 486m spin-off of Electrolux Professional on Stockholm Nasdaq.

M&A has not been prioritized this spring as most banks and investors had some degree of exposure towards the hardest hit sectors, Bengt Maunsbach, Partner at Altor Equity Partners, said. Several of the closed deals have been domestic as those processes have been logistically easier to run, Maunsbach said.

Many deals that closed in 1H20 commenced with negotiations ahead of the pandemic, which helped the dealmaking process, Maunsbach said. CapMan’s [HEL:CAPMAN] investment in software services provider PDSVISION, and Verdane’s investment in medical-journal documentation services firm Conscriptor and speech-recognition software company MaxManus, both started last year. Altor’s Eleda investment was made possible as the infrastructure service company was not affected by COVID-19 and there was strong industrial logic to the deal, Maunsbach said.

A few Swedish sales processes have weathered the virus and progressed their planned auctions, albeit some at a slower pace, including Vitruvian’s sale of Swedish transport-management software provider Unifaun, led by Goldman Sachs; founder-owned dental group Distriktstandvarden run by ABG Sundal Collier; and the Valentum-led sale of founder-owned display company Axentia.

The current down period could see a gradual upswing this autumn with key M&A trends likely to include higher activity levels involving COVID-19 resilient companies, public-to-private and minority M&A deals, as well as a return to structured auctions, Ingemarsson said.

Companies that operate in healthcare and technology have proven coronavirus-resistant and can quickly return to M&A, Maunsbach said. The Swedish gaming sector has overall remained strong throughout the pandemic and could consolidate further, partly following last year’s market regulation and the Evolution Gaming and NetEnt tie-up. Media group MTG’s [STO:MTG] efforts to sell its online gaming business was, however, put on hold this spring.

Active buyers in other sectors that have not been adversely impacted by the pandemic include DIY supplier BHG Group [STO:BHG] and poultry group Scandi Standard’s [STO:SCST].

There could also be an uptick of sponsor led mid-cap deals in the EUR 400m-EUR 1bn deal size bracket, Ingemarsson said. Sponsor-led minority acquisitions could be another trend that will increase in 2H20 and going forward. Recent private equity firms’ minority stake deals include Nordic Capital’s fintech company Trustly, which received a minority investment from a consortium of investors, including BlackRock Private Equity Partners, Aberdeen Standard Investments, Neuberger Berman, Investment Corporation of Dubai and RSIC

It is not clear yet whether foreign investors may think twice about investing in Sweden due to the government’s relaxed handling of the pandemic. The low inbound activity registered so far is more likely down to falling M&A levels globally and travel restrictions rather than investor’s risk appetite. Inbound deals to Sweden have nonetheless fallen dramatically, reporting a YTD value of EUR 1.3bn spread across 35 deals, compared to EUR 11.7bn spread across 110 deals last year, according to Mergermarket data. 

Sweden’s political approach to the pandemic is highly unlikely to deter foreign investors going forward, Ingemarsson said. Overall, the region is seen as a safe haven for foreign buyers, partly due to its robust macro fundamentals, high quality assets, low barriers to foreign investment, and strong debt financing market, he said.

Sweden’s central bank Riksbanken’s SEK 5bn (EUR 460m) rescue package helped avoid a market meltdown which indirectly benefited the M&A market, Maunsbach said. To date, Sweden has avoided a financial crisis but is not yet out of the woods, he added. If a second coronavirus wave is avoided, there is good scope for a healthy Swedish M&A market during 2H20 and 2021 as there is still plenty of cash available and certain sectors have not been badly affected by the pandemic, Maunsbach concluded.

Denmark: Pharma, renewables, robotics provide budding optimism for 2H20 pipeline 

The number of transactions and deal value in Denmark took a nosedive in 1H20. A total of 91 deals worth a mere EUR 1.7bn took place in the period, according to Mergermarket's data. This is a significant decline compared with the same period the year before, which saw 147 deals worth EUR 6.4bn.

 “We’ve had a couple of very good years, and the start of 2020 looked rather good too. But by mid-March everything stopped because of corona and fears it would be a prolonged situation,” Jakob Kristensen, partner and Head of M&A Corporate at Bech Bruun law firm, said.

The first half of 2020 saw some decent transactions, including Glycom’s acquisition by Royal DSM [AMS:DSM] for EUR 765m, and Japan’s Yokogawa Electric Corp's [TYO: 6841] acquisition of Grazper Technologies. Among PE buyouts was Verdane Capital’s investment in marine technology firm Danelec Marine and Silverfleet Capital’s in debt collector Collectia.

However, many processes came to a halt, including that of ICG’s [LON:ICP] sale of its 35% stake in Euro Cater, which had attracted a lot of attention at the start of the year. 

The fundamentals for M&A are, however, intact, interest rates are low, and there is plenty of capital in the market. Sponsors have accumulated substantial amounts of capital that needs to be invested, and some, including Copenhagen Infrastructure Partners and Axcel, have raised recent funds. In June, Copenhagen Infrastructure Partners announced that it has reached EUR 1.5bn first close on its CI IV fund, which is set to be the largest renewable energy infrastructure fund globally. Axcel, which began raising its VI fund in 2019, has committed capital of more than EUR 500m and  made its first investment when it acquired Norwegian CRM supplier SuperOffice this spring.

“There is light at the end of the tunnel now and I expect much more activity in 2H20,” Carsten Heinild, Head of Corporate Finance at SEB Denmark, said. This will include new processes as well as those that were halted due to COVID-19 in the first half, he said. 

Apart from the sale of Euro Cater, which could resume in 4Q20, Nordic Capital’s paused exit from Unisport, could also kick off in the second half of 2020. Among new processes is the sale of Royal Dutch Shell’s [LON:RDSA] Danish subsidiary Dansk Shell.

The Danish Ministry of Finance forecasts a 5.3% fall in 2020 GDP, largely due to a steep halt in economic activity during 2Q20. However, 2021 GDP is forecast to grow by 4% due to the many economic aid packages introduced by the Parliament and as the pandemic is under control. Denmark's Social Democratic government closed the borders already on March 11, and a controlled step-by-step opening of the country began after Easter. As of 2 July, 12,815 people have tested positive and 606 have died in Denmark, according to official data.

“It’s difficult to predict what will happen in the short term, but at least we know about COVID-19 now and can take this into account. I feel confident that the market will rebound in the second half and even be slightly above average,” Kristensen said.

"The fear of a second wave of corona is not as pronounced anymore, because we know how to handle it,” Heinild agreed. “Large corporates that are fundamentally strong will focus on their long-term M&A strategy in a world that is now less uncertain”, he said.

Corporates recently active on the M&A front include Novo Nordisk [CPH:NOVO-B], which acquired Corividia Therapeutics from Sofinnova Partners for USD 2.1bn; and Novozymes [CPH:NZYM-B], which acquired PrecisionBiotics Group for DKK 600m (EUR 80m). 

Some of Denmark's leading industries such as pharma, renewables and technology are performing well and seem largely unaffected by COVID-19. A fairly new industry to look out for in Denmark is robotics. “Robotics is a super-hot sector in Denmark, and this will only be reinforced going forward,” Kristensen said. The potential to introduce automatizations in numerous industries and bring down wage costs are among the benefits, he added. Lifeline Robotics, for example, is looking to raise around EUR 11m in 2020 to launch a newly developed COVID-19 swab robot.

The Danish IPO market has been quiet for some years and is not expected to pick up in 2H20. There are no large cap listings on the agenda on the main Exchange, but the smaller First North bourse may see a few listings. Its most recent one was that of research equipment developer FOM Technologies [CPH:FOM] earlier this week. Many Danish companies still prefer the Swedish stock market as there are more active investors. CPTone BIOTECHParticle3D and Dancann Pharma have all expressed plans to list in Stockholm.

Finland: SME deals to dominate 2H20 M&A, corporate carve-outs a rising trend 

Finland saw the lowest 1H20 M&A numbers both in value and volume of all the Nordic countries, with just EUR 751m spread over 61 deals, compared to EUR 6.9bn across 121 deals in the corresponding period last year.

Failing to complete any big-ticket transactions in 1H20, the largest deal was industrial products and services company Valmet’s [HEL:VLMT] acquisition of a 14.9% stake in valve producer Neles from Metso [HEL:METSO] for EUR 179m.

Many expected sale processes were postponed, including South African pulp and paper group Sappi’s [JSE:SAP] sale of its Finnish unit Kirkniemi Mill, and family office Rettig’s planned sale of Purmo Group. However, Vaaka Partners succeeded in its exit of Kotikatu, selling the residential property company to Norvestor, while Procuritas recently relaunched the sale of building automation company Fidelix.

Despite the gloomy picture of the past six months, the mood in the market is cautiously optimistic with a relatively healthy pipeline going into 2H20, Kauko Storbacka, Partner, Territory Advisory Leader, PwC, said.  “As long as there is no second wave of coronavirus, it should be relatively busy from August-September onwards, with M&A activity in the last two quarters likely to be around -15% compared to the height of 2019. We are also receiving signals that PEs will be active in post-summer M&A, especially on buyside,” he said.

Most M&A activity in 2H20 is likely to be in the SME space, Mårten Knuts, Managing Partner at Krogerus, said. “There are some potential large transactions in the works, with corporate carve-outs a rising theme.  COVID-19 has highlighted the need to refocus strategies and carve out any non-core or underperforming assets,” he said.

Corporate carve-outs in the pipeline include Cargotec’s [Nasdaq Helsinki:CGCBV] expected disposal of cargo management software provider Navis, and Outokumpu’s [HEL:OUT1V] potential sale of its Long Products business.

“We are also expecting to see increased buyside opportunism with more public-to-private takeover situations likely," Knuts said. 

Assets in corona-resilient sectors such as energy and business services, or digital businesses are likely to be among the most attractive targets, Storbacka said. Technology and industrial targets will attract buyer interest, while infrastructure M&A could see a boost from government investment projects as politicians attempt to halt a recession, Knuts said. 

COVID-19 has made it very difficult for buyers to evaluate businesses, and, on the other hand, sellers tend to see 1H20 just as a temporary bump on the road, Storbacka said. “This could mean that many sellers will wait at least until the year-end to have visibility of full FY20 results,” he said.

“Public market valuations give a good view of valuation levels, and assets are now broadly traded at around 10% to 15% discount compared to before the pandemic. But if we see valuations drop further over the next two years, global discount sales are on their way,” Knuts said.

Despite some optimism in the market, the full impact of the pandemic is not yet clear, and the worst cases of company suffering are yet to emerge, Storbacka said. “We are likely to start seeing more distressed cases from around the beginning of 3Q20. There are likely to be more business restructurings, some leading to compulsory sales. On the other hand, this will provide more opportunities to those players with strong balance sheets,” he said.

Distressed cases so far include department store chain Stockmann [HEL:STCBV], which filed for restructuring proceedings in April, citing depleted cash resources due to the pandemic. Meanwhile, restaurant group Noho Partners secured EUR 34m bridge financing from existing funders to tie it over the coronavirus lockdown period.  

Norway: Healthcare and food to attract more interest, oilfield services put hopes on foreign buyers

Norway’s 1H20 deal value fell to the lowest numbers on Mergermarket’s records, with just EUR 1.4bn spent on 84 deals. During the corresponding period last year, Norway closed 161 deals to a value of EUR 13.3bn.

The largest deal was Norwegian Air Shuttle's 55.08% stake acquisition by its leaseholders for EUR 658.2m.

Due to the COVID-19 pandemic, many industrial and financial players have been forced to focus their attention on existing operations, relationships and agreements, and securing financing and liquidity, rather than exploring and executing new M&A transactions , Øystein Guvåg, Partner and Head of BAHR’s corporate M&A group, said.

Related uncertainty with respect to future earnings and profitability, but also practical difficulties such as travel restrictions, also meant many ongoing processes were delayed, Guvåg said.

Postponed processes include Valedo Partners’s expected sale of underground infrastructure maintenance firm Norva 24

Most deals that closed in 1H20 commenced negotiations ahead of the pandemic, including Axcel Management’s acquisition of Superoffice from Visma.

Since the end of April and beginning of May, activity has risen significantly, Jo Isaksen, Head of M&A and Private Equity Coverage at DNB Markets, said. Companies with resilient business models continue to be attractive acquisition targets, and these companies are also eager to do transactions, he said. Processes that have been put on hold will be relaunched after the summer, he added. Active acquirers include Norbit [OSL:NORBIT], which is in talks with targets as it looks to broaden its portfolio.

“We expect to see more bilateral M&A discussions and more targeted processes as it will be key in attracting buyers with clear acquisition rationale,” Isaksen said. It will be increasingly important to spend the time to make sure that you get the right attention before starting a process, he added.

The pandemic, combined with historically low oil prices, generally put ordinary investment activity in the oil and gas service and supply industry to an almost complete stop, Guvåg said. The low oil prices are extremely stressful for large parts of the oilfield services industry and will lead to distressed cases involving big losses for banks, Guvåg said. The alternative for many companies is either to file for bankruptcy or find new owners who are willing to finance their unprofitable operations for an unknown period, he added. Potential buyers could typically be international customers that benefit from having the services in-house, Guvåg said. We have some such processes ongoing at the moment, he added. 

On the other hand, companies operating in the TMT space have had limited COVID-19 impact. Video conferencing solutions provider Pexip, for instance, announced the successful completion of its IPO on the Oslo Stock Exchange in May. It is the largest IPO to date for a Nordic software company.

The transportation, construction and infrastructure sectors also got through the lockdown relatively well due to state funding, Guvåg said. The government support to Norwegian Air Shuttle was a positive signal also to other sectors, as was the decision to more than double the outtake from the oil fund, he said.

R&D-intensive sectors like healthcare and food are also well placed for M&A, Guvåg said. Land-based fish farming in particular will need capital from investors to build facilities and invest in new technology, he said, with Isaksen adding appetite from the public market for such assets has risen. Land-based fish farmer Salmon Evolution is interested in an IPO either this or next year, while Aker BioMarine is reportedly preparing for listing at Merkur Market. 

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