Market Insight: Uncertainty in Europe

This article was written by Henry Wells, and first published in Mergermarket Group's The Growth Agenda: M&A Europe, the Middle East and Africa 2016 on October 27, 2016.

The European M&A climate is performing well, yet inconsistently. There are certainly deals being done, especially in the mid-market, but not as steadily as we have seen in previous years, both in terms of both volume and quality. That said, there is still considerable appetite to carry out transactions and we see significant pools of capital that need to be invested. Strategic buyers are keen to invest and the debt market, especially the alternative debt market, remains strong.

This available pool of capital is the main driver of deals in Europe right now. However, the interest rate environment across Europe is forcing investors to look for alternative asset classes and smart places to invest their capital. The private equity and alternate debt communities have raised significant funds, which maintains this pressure to keep investing, which helps with deal flow. 

The industrial sector is leading the way for M&A activity right now and we are seeing that especially in the UK and Germany – as measured by the wider market statistics, but also our own mandate and pitch activity.  In addition to financial investors, corporates are looking more closely at their cost of capital, and how efficiently they are utilizing it. We are seeing an increase in the number of corporates that are looking to engineer carve-outs and disposals of subsidiaries.

Brexit – Pros and Cons

Brexit, while having some negative impacts on the European deal market, is also encouraging cross-border activity. Due to the currency movements seen in the last few months, we are seeing an increase in US and Asian corporates looking to invest in Europe – it is now 15% better value for them to do so, and with our international network, this is proving to be a popular area of focus for our clients.

Brexit in itself is not holding back M&A activity, but it does serve as a ‘reason’ not to do something.  Uncertainty, around a number of sectors, for example consumer facing sectors, is causing investors and strategic buyers to think very hard about how and when they invest. This uncertainty, fed by the ambiguity of what a post-Brexit Britain might look like, is delaying investment decisions and we think this is going to continue for some time.  The M&A related issues thrown up by Brexit are not going to be solved any time soon, so I think we’re going to have to learn to live with it - but it makes doing deals harder.

We have seen this uncertainty have a knock-on effect onto the IPO market, which feels shaky at the moment. In the UK, there have been a considerable number of IPOs pulled or significantly re-priced, largely because seller’s expectations are not being matched.

In addition, in the post-Brexit environment, we are also seeing deals not happening as sellers have unrealistic price expectations. One theme is where sellers who own good businesses are pointing to values achieved by the best-in-class businesses, and determining that they want that same multiple.

Over the next six to twelve months, it will be interesting to see how the Brexit impact continues to play out, but one thing is for sure, Brexit will continue to have an impact, on M&A activities that involve UK businesses, in 2017 and beyond.

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