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Pent-up demand for deals in Germany, Austria & Switzerland to drive M&A rebound in 1H21 after rocky year

Mergermarket’s Germany, Austria & Switzerland (DACH) Trendspotter reveals activity down at EUR 120.37bn and 961 deals amid pandemic uncertainty in 2020.  

It’s been a year of zigs and zags for M&A, but dealmakers in the German-speaking region are confident that repressed demand for deals, combined with a better sense of how to navigate lockdowns, will fill up their pipelines at the start of the new year. 

After a first quarter dominated by large transactions, pessimism and caution around operating in a pandemic dented deal activity in the DACH region. Finally, a third-quarter uptick in transactions helped the region get through the year less harmed than European neighbours. 

I believe 1H21 will be a very strong period with pent-up demand and supply hitting the market,” Ralf Schremper, a partner at mid-market sponsor Oakley Capital, said. “It feels like there is some light at the end of the tunnel, and there is both readiness to sell and a readiness to invest.” 

With a total of 961 deals across Germany, Switzerland and Austria so far in 2020, M&A volume is down 26% compared to last year. This has taken the region back to levels last seen in the eurozone-crisis riddled years of 2011 and 2012, but still faring better than France (down 37%) and the UK (35%), Mergermarket data shows. 

Disclosed deal values meanwhile amounted to EUR 120.37bn in 2020, down 14.1%. Mega-deals such as ThyssenKrupp’s [ETA:TKA] EUR 17.2bn sale of its elevator unit, Siemens[ETA:SIE] EUR 15.99bn spin-off of Siemens Energy, and Liberty Global’s [NASDAQ: LBTYA] EUR 6.08bn acquisition of Sunrise Communications [SWX: SRCG] ensured values stayed far above the most recent low of EUR 73.17bn in 2015. 

“Since Germany managed the COVID-19 crisis comparably well, I think we were also on the brighter side regarding deal-making,” Gernot Eisinger, managing partner at Afinumsaid. “And the next six months should show higher M&A activity with an increasing pace compared to last year.” 

The region’s broader economic performance also appears to be holding up. German GDP posted an 8.5% rebound in 3Q following a 9.8% drop in 2Q, according to the Federal Statistics Office. Despite the pandemic’s autumn resurgence, industrial output was up 3.2% in October, suggesting a smooth 4Q start for the export-oriented economy. 

With COVID-19 vaccines on the horizon – and a loosening on travel restrictions and lockdowns to follow – dealmakers are optimistic that German-speaking countries are primed for a sizeable rebound in activity next year. 

“It’s all about assets with underlying resilient markets,” Ardian Germany Partner Alexander Friedrich said, adding that businesses with characteristics such as solid growth rates, a high visibility on revenue or add-on opportunities will continue to see very strong demand. 

Sectors such as software, IT services, healthcare and pharma, and food will likely continue to drive activity in the region, as will areas such as “innovative e-commerce” that had a bumper year due to the pandemic, he added. 

Upcoming transactions to watch in these sectors include the potential sale of Munich Leukaemia Laboratory (MLL); Insight Venture Partners’ dual-track exit process for its Austrian software testing business Tricentis; the sale of Quadriga’s laboratories businessGBA Group; and the pending exit of Ufenau-backed Swiss IT Security.

COVID-19 winners 

Technology deal values in the DACH region reached a new high of EUR 16.09bn this year, with the sector also steadily increasing its share of overall activity in the region in volume terms, with 188 transactions accounting for 19.5% of total deals. 

Notable deals in the space this year included TeamViewer’s [ETR:TMV] acquisition of German wearables developer Ubimaxfor EUR 136.5m; Hg’s sale of legal tech firm STP to BregalUnternehmerkapital; Austria-based GANTNER Electronic’ssale to SALTO Systems by Ardian; and Carlyle Group’s purchase of a majority stake in German identity and access management firm iC Consult Group. 

Still, industrials & chemicals remained the DACH region’s largest sector for M&A. At EUR 40.44bn, the sector’s deal volume accounted for a market share of 33.6%, while the sector’s 267 deals made up 27.7% of total activity for the year.  

Large-cap transactions such as Alstom’s [EPA:ALO] EUR 7.15bn purchase of Bombardier Transportation; the sale of Austrian chemicals company Borealis to OMV [VIE:OMV] for USD 4.68bn; and Air Liquide’s [EPA:AI] disposal of its hygienic products manufacturing unit Schuelke & Mayr to EQT for EUR 925m-EUR 1bn were among the sector's headline-grabbing deals. 

Ongoing chemicals situations for dealmakers in 2021 include Lonza’s [SWX:LON] sale of its Speciality Ingredients (LSI) unit; Clariant’s [SWX:CLN] divestment of its Pigment’s unit; and BASF’s [ETR:BAS] potential disposal of its US chemical assets. 

Meanwhile M&A in sectors adversely impacted by the pandemic – such as retail, hospitality or automotive – is likely to come in the form of restructuring or insolvency-related deals, advisers say. 

While the much-anticipated onslaught of insolvency filings has not yet materialized thanks to generous government support programmes and suspensions to filing obligations, this is likely to change next year as such lifelines dry up. 

“I think there will be a clear uptick of insolvency-related M&A, certainly after the relaxations on insolvency application filings expire at the year’s end,” Christian Atzler, partner at Baker McKenzie, said. 

German credit agency Creditreform said earlier this month it anticipates corporate insolvencies in Germany will rise to 24,000 next year, up from between 16,000 and 17,000 in 2020, due to this shift. 

A phase-out of COVID-19-related subsidies could also trigger transactions among corporates, as the aftershocks of the pandemic compel them to re-evaluate core and non-core assets in their portfolios, advisers say. 

Conversely, well-managed corporates that built up a war chest at the outset of the crisis are now positioned to go on a shopping spree, dealmakers said.   

“Players that expected to be affected in a more dramatic manner by the crisis are now able to use this cushion to finance deals,” Atzler said. 

Private equity boost 

On the financial sponsors front, dealmakers expect to see robust activity across the board, in line with the flurry of sponsor-led transactions seen in 2H20, when 104 buyouts were announced. 

According to Ardian’s Friedrich, the sheer number of deals in the small to mid-cap segment has been particularly high this year. “Across both our direct funds active in the DACH region, we’ve seen quite a fruitful deal pipeline in 2H20 from the smaller to mid-cap, and up to large-cap deals of all sizes,” he said. 

200 private equity buyouts worth EUR 37.15bn took place in 2020, slightly less than last year’s bumper crop of EUR 39.85bn. 

And while the number of DACH sponsor exits fell to 97 from 126 last year, the value of these transactions rocketed to EUR 24.69bn, up from EUR 13.12bn in 2019, on account of sizeable deals like KKR’s sale of Deutsche Glasfaser to EQT and Omers for EUR 2.8bn; Carlyle’s purchase of Flenderfrom Siemens for EUR 2.03bn; and NEC Corporation’s acquisition of Avaloq from Warburg Pincus for EUR 1.9bn. 

Uncertainties around valuation caused by the pandemic and differences in price expectations may have accounted for sellers’ reluctance to step up to the plate – or to press pause on processes launched in the early months of the year. 

Among the 2020 sale processes that went quiet were Water Street Healthcare Partners’ sale of speciality diagnostics firm Orgentec; Ardian’ssale of audio equipment maker d&b audiotechnik; and Sun Capital’s planned disposal of Austrian packaging company Coveris. 

Valuations are bound to remain a sticking point for dealmakers in the new year. 

“In the first lockdown, valuations stayed high because people thought it’ll be over soon and based it on a 2019 valuation logic,” Schremper from Oakleysaid. “Now people are basing it on a 2021 run rate logic, so this shift in valuation levels we had expected is not happening.” 

The phenomenon is not limited to the world of private equity either. Many privately-held or family-owned businesses are likewise taking a wait-and-see approach to the current environment, said Christoph Petri, co-CEO of Ringmetall, a German industrial packaging company. 

“Corona has impacted valuations – they have come down,” Petri said. “But I’d say individual sellers do not accept this, and they are not willing to adjust their valuation targets.” 

Instead, businesses are opting to postpone talks for a year rather than accept a lower pay-out based on 2020 performance, Petri added.  

All these could be signals that the long-predicted shift from a seller’s to a buyer’s market could finally materialise. 

However, potential fresh competition for assets in the form of special purpose acquisition companies (SPACs) could frustrate such a forecast once more. 

The popularity of blank-check companies in the US could see some resonance in Europe, albeit on a more subdued level, Oliver Diehl, managing director at Jefferies, said.   

“We expect that there will be a handful of SPACs coming to market in Europe but nowhere close to the close to 150 SPACs that we will see in the US this year,” Diehl said.   

by Patrick Costello and Emma-Victoria Farr, with analytics by Marie-Laure Keyrouz 


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