Abundant Credit and Acquisition Ardor Drive Prospects for Lively European M&A

Europe’s rush to consolidate may have pushed the Continent and its offshore cousins ahead of the United States in deal volume for 2006. But regardless of which side of the Atlantic secured bragging rights, all indicators point to an even more robust European M&A market this year, say deal pros on the Continent. “We feel that the restructuring of European industries is not yet finished,” says Albertus Rigter, an analyst at Dexia Group in Luxembourg. Deal flow on the European side of the Atlantic has been characterized by fewer going-private transactions than the volume done in North America. Indeed, the largest European LBO last year, the buyout of Dutch media and information group VNU for $9.8 billion by a private equity consortium, was outpaced by a number of U.S. leveraged deals. To some experts, this indicates that there is more LBO activity to come in Europe. “The world is upside-down in that private equity buyers can afford to pay more than strategics,” says Ron St. Clair, President of connectors and fasteners maker Stalcop, which has been an active buyer in Europe. The glut of uninvested money means that PE firms will be active acquirers in Europe in 2007, he adds. In the strategic buyers’ camp, a number of big deals were completed or started in Europe last year. Action was particularly hot in utilities, steel, and banking. The $104 billion merger between France’s Suez SA and Gaz de France was poised to be the biggest utilities deal, but it hit an eleventh-hour snag in the form of a recent court decision that may delay privatization of the gas group. In the biggest utility deal that was completed, Germany’s E.ON paid $71.7 billion to acquire Spain’s Endesa. Among steelmakers, multinationals Arcelor and Mittal Steel merged to form the world’s largest producer. Meanwhile Anglo-Dutch steelmaker Corus Group was the object of a bidding war between Tata Steel of India and Brazilian steelmaker CSN. In banking, the key deal was the $37.7 billion acquisition by Banca Intesa of Sanpaolo IMI, both of which are based in Italy. While many of the deals in these sectors have been strategic, PE funds, hedge funds that concentrate on infrastructure assets, and financial institutions continue to eye the industries. Working against the consolidation of these sectors is the Continent’s lingering protectionist sentiment. Governments in France, Poland, Italy, and Spain all intervened in deal bids last year. Still, many analysts point to the wave of privatizations that occurred in the 1990s in industries like telecommunications, utilities, and energy as having untethered corporate assets that made them ripe for new combinations. For some players, like German utility companies, prohibitions against buying domestic assets have forced them to look for cross-border opportunities. Easing Up of E.U. Competition Rules On the antitrust front, buyers can expect relaxation of some European Union competition rules, notes Barry Hawk, a Partner at Skadden, Arps, Slate, Meagher & Flom in New York who focuses on antitrust and regulatory matters. Another influence on European M&A activity, according St. Clair, is the strength of the euro. “As the dollar has tumbled, more European would-be buyers are looking at U.S.-owned companies, either in Europe or the United States,” he says. As of December, these assets were effectively for sale at a 20% discount for Euro-denominated acquirers, he adds. An additional source of large-cap deals on the Continent this year, Rigter says, may grow from the desire of Russian energy giants to acquire Western European distribution platforms. Rigter notes that U.S. oil companies could fulfill some of the same strategic needs, but in light of the outcry caused by China National Offshore Oil’s aborted bid for Unocal, he thinks that Russian firms are more likely to take aim at European majors. Middle Market Will Be Hot Some of the same forces that are expected to drive consolidation at large companies will be in play in the middle market as well. “We’re seeing more competition in the mid market for deals,” says Hazel Mack, a Director in London-based risk management firm Willis Group’s M&A practice. She says that one trend she has seen in the last year is private equity buyers’ need to have all aspects of the deal locked down before lenders give the go-ahead. In a rare bright spot for strategic buyers last year, Mack says she witnessed deals in which corporate acquirers outmaneuvered financial buyers by tapping a strength that many private equity buyers lack: industry knowledge. “We worked on some deals that went to strategic buyers because they acted quickly, before news of the target’s availability became known,” she says. Another European mid-market buyer, Lincoln International, expects to break records for deal volume this year, says spokesperson Ute Raab. She says the company’s deals are coming from the consumer products, retail, and food industries, with private equity deals accounting for two-thirds of the deal flow. On the financing front, she points to development of more flexible mezzanine products by lenders as an impetus. Ashley Rountree, Founding Managing Director in Downer & Co.’s Paris office, says he has noticed increased receptivity from European family business owners to acquisition proposals. “Small business owners, whether family controlled or not, are much more willing to listen to a proposal for their business,” he notes. Much of the deal action he has observed in the European mid-market, he adds, has consisted of buyers picking up assets divested by large public companies. Promising deal-sourcing sectors this year include logistics, transportation, waste handling, and services businesses that are local in nature, he asserts. But Rountree describes the European mid-market as an arena in which strategic buyers must try harder to win the “hearts and minds” of potential targets. PE buyers often can afford to pay more, he notes, and many management-led buyouts include richer management salary and options packages than what strategic buyers are offering. However, this is a surmountable issue for corporate acquirers, and he suggests that they use tools such as earn-outs to win the allegiance of target management teams. “If you lose the good managers, you lose all,” he says. St. Clair expects to see opportunities in the European middle market for buyers that have the skills to evaluate and buy undervalued assets in Western Europe – particularly Germany – and move the manufacturing operations to countries such as the Czech Republic and Poland. “You can decide where you want to manufacture and take advantage of the currency differential by moving the plants,” he says. Good candidates for such an approach are companies under $50 million euros that have no real exit plan in place, he adds. Europe Is Bullish on Deals Overall, the outlook for European M&A in the year ahead is upbeat. The combination of fragmented business sectors, a deal financing market that shows no signs of tightening, and an anticipated upswing in private equity activity points to a robust year for both large and mid-market European dealmakers. “People in Europe are bullish. There’s confidence that even if the U.S. economy slows down, activity in Europe will breeze through previous records,” St. Clair states. (c) 2007 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com