European Mid-Market Arena: Barbarians at the Gate!

In 2004 American acquirers entered the Continental European mid-market arena, both from the corporate and the private equity side. In Holland alone, firms such as KKR have acquired the leading Dutch retail chain (Vendex KBB), APAX acquired the leading Dutch newspaper group (PCM) and Blackstone invested in satellites (New Skies Satellites). Deal values are ranging from a few hundred million to 2 billion euros. The same is true for recent deals in Germany, France and Italy. In all countries, a stunning silence from Works Councils, unions and politicians accompanied these deals, even though national icons were acquired by American private equity players. Governments and institutional investors in Continental Europe realize that things have to change in order to maintain the level of prosperity. The American private equity players are seen as agents of change, as enablers to shake up entrenched local management teams and to start growing these larger mid-market companies again. Growth will come from an active investment approach, initiating add-on acquisitions and partaking in the consolidation that will occur in most European sectors. Most Continental European markets have so far been dominated by local private equity players that took a passive approach to investing. In cases in which they obtained a majority position, they would syndicate out to fellow private equity players in their home market. This approach has typically led to minority positions for three to four private equity players in a company. In a rapidly changing environment this situation will lead to a stalemate if and when additional investments are required, when the company is faced with a crisis, or when an approach for an exit comes at an unfavorable moment for some of the investors. Approximately five years ago the first U.K. private equity players, with an active investment style and taking up to 100% single stakes in companies, set foot in Continental Europe. Bridgepoint and 3i are notable examples of this new investment style and introduced the concept of buy-and-build strategies in mainland Europe. Due to the success of U.K. mid-market players on the Continent, the local European private equity champions like Gilde, ABN AMRO Capital, Quadriga, and Iris Capital are now adopting this more involved U.K. investment style. In 2004 listed U.S. corporations like Blyth, Circor, and ITT Fluids have been active in acquiring midsize companies in Continental Europe to strengthen their European distribution power, to start cross-selling the existing and newly acquired product lines both in the USA and Europe, and to tap into one of the largest consumer markets in the world. The expansion of the European Union with its new member states since May 2004 will lead to a market of more than 350 million consumers. Despite a declining dollar, the prices paid for European acquisitions have gone up. Most deals have been financed locally in euros and are generating strong income growth from an appreciating euro. 2005 will see a further increase of Americans buying into the European mid market. The reasons are manifold: U.S. financial buyers: * Increase of money attracted by the American funds in lieu of established European mid-market players like 3i from the U.K., Industri Kapital from Sweden, and Gilde from Holland. * Lower IRRs being required by the Americans, thereby outbidding their embedded European counterparts in auctions. * Active U.S. management style that is welcomed by European management teams. * Move toward improved corporate governance rules across Europe. U.S. corporate buyers: * Level playing field, when bidding for a company, that has been created by the outgoing European Commissioner Frits Bolkestein. His M&A directives have finally been approved by the European Parliament. * Enlarged European consumer market as of May 2004 with 10 new member states. New entrants like Poland add 40 million consumers to the European Union. * Introduction of the euro as a common currency, which makes it easier for U.S. companies to see Europe as one market, instead of more than a dozen separate markets each with its own currency. * U.S. entrants not hindered by local rivalries due to decades of competition, but instead welcomed as new kids on the block with a can-do attitude torward both business and M&A. * Introduction of IFRS in Europe, moving toward international accounting standards and narrowing the gap with American standards. * Installation of a new form of public limited liability company in Europe called SE, which can be used across Europe. The SE has the potential to lead to administrative cost savings for companies active in different European countries. All in all, the U.S. players are entering Europe in a big way. Why? * Less competitive than their home market * Less consolidated in many sectors * Higher levels of debt financing available than at home U.S. players are following in the footsteps of both the U.K. corporate and financial players who broke into the Continental European market five to 10 years ago. U.S. players are offering a quicker decision process and higher valuations than their British and Continental European counterparts, enabling them to get the approval of local management teams and their shareholders. Hans van Ierland Managing Partner, Holland Corporate Finance www.hcfinance.nl founding member of ACG Holland and member firm of M&A International Inc. Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com