Strongest quarter for European Private Equity buyouts since 2010
- Second highest quarter ever recorded in Germany with €9b
- Mega deals driving value up with five buy-outs over €1b in Q3
- Only two €1b plus deals in the UK so far this year
London, Moscow, 8 October 2013. As the deal pipeline starts to materialize, the European Private Equity (PE) buyout market saw a surge in deal values in the third quarter with 119 deals completed and €19.7b in value in Q3 2013, the highest value since Q4 2010 and up 129% compared with the €8.6b recorded the previous quarter. Deal volume was down by 8%, with 119 deals compared with 130 deals in Q2 2013, but as mega-deals took centre stage, the top five deals, with a combined value of €10b, accounted for over half the total deal value.
This quarter also marks a significant return for the German PE buyout market, with deal value reaching €9b, the second highest German quarter recorded, since Q1 2007 and €9.4b and almost double the UK’s €5.1b deal value. Germany is the first market to really threaten the UK’s longstanding leading position, according to the latest data published by the Center for Management Buyout Research (CMBOR), sponsored by EY and Equistone Partners Europe.
Sachin Date, Private Equity Leader for Europe, Middle East, India and Africa (EMEIA) at EY comments: “Germany is being viewed as a safe haven for investment and is ticking all the necessary quality boxes for investors. Its economy is sound and the recent elections passed without any real cause for concern.”
Q3 sees five buy-outs over €1b, while mid-market deals continues to slow down
Sachin continues: “Transactions in the €1b plus deal range held up well across Europe, but there was a slowdown in lower mid-market deals. This increase in mega-deals points to the fact that strategic, large, global and pan-European transactions will complete if the asset meets the buyers’ investment criteria.”
The top four deals originated from Germany – taking a 60% share of the largest top 10 deals. The Springer Science & Business Media (€3.3b) was the largest buyout of Q3 2013 and is likely to be the biggest buyout of the year, followed by Ista (€3.1b) and Douglas Holding (€1.5b).
In Q3 2013 we have seen a real slow down in lower mid-market deals (€25m to €100m). Only 26 deals equating to €1.4b completed, compared with 24 deals and €2.4b recorded the previous quarter.
UK market losing ground in deal values
Despite a 64% increase with €5.1b (47 deals), recorded in Q3 2013 from €3.1b (45 deals) in the previous quarter, the UK’s PE buyout market remained relatively slow. While deals in €500-1b range increased, it was surprising to see only two €1b plus deal so far this year (Vue Entertainment and B&M Retail). Although the UK continues to deliver a fairly consistent performance in terms of deal volume, its low levels of mega-deals has left it in danger of trailing behind in terms of deal value.
Says Sachin: “This low level of mega-deal activity in the UK is somewhat of a conundrum – the capital and debt markets are healthy and the UK has access to some of the best leveraged finance in Europe, which should result in more deal activity at this level.
“With strong competition for assets from corporate buyers, PE houses may be finding themselves unable to compete for these high-value assets. The recent Lucozade Ribena deal is a clear example where a strategic corporate buyer was successful despite strong interest from PE.”
PE houses return capital to investors
The combined value of exits and refinancings so far this year continues to outstrip the value of new deals in Europe. There have been 276 exits, with a combined value of more than €51b recorded so far in 2013 and over €31b worth of refinancing. This represents good news because private equity houses are divesting their portfolio companies and are able to return capital to their investors and banks ahead of making new investments and raising new funds. It has been clear for some time that the backlog of exits necessary to free up investment resources was weighing on the European buyout market. We are starting to see this overhang clear and continuing exit activity will help the buyout market return to growth.
There was a big increase in the debt to equity ratio in both UK and Europe. In €100 million plus deals, the contribution of debt is the highest since 2007; many larger deals are being done with 60% debt, bolstered by new, non-conventional players entering the market. Overall the market activity benefited from a combination of a freer debt market and more equity funding available.
Unbalanced picture in Europe
While Germany is currently the shining light in Europe, this activity is not representative of Europe as a whole, with the French buyout market, for example, being particularly weak when compared to the healthy levels of activity seen in 2011. Activity in France was driven by two main deals: SMCP/Sandro/Maje/Claudie (€650m) and Maisons du Monde (€650m).
Equally, Sweden experienced slow levels of activity and this is likely to be down to the cyclical nature of PE. From 2010 to 2012, there was lots of deal activity and PE will need to churn these assets in 2014 to 2016, as a result there has been a lull in activity.
Sectors buoyed by mega-deal activity
There has been little change across all sectors in terms of deal volumes but some stand-out deals have driven a significant pick-up in value – namely in the Telecommunications, Media and Technology (TMT) sector; Business & Support Services; and Manufacturing. Deal value in the TMT sector had picked up in the second quarter and rocketed in Q3 with €5.0b from 23 deals. Business & Support Services also saw a sharp increase from €1.2b (Q2 13) to €4.7b and 16 deals this quarter. Deal value in Manufacturing doubled from €2.0b to €4.0b.
Sachin concludes: “So far in 2013 European market conditions have meant that deal processes are both longer and more difficult and the low levels of deal completions have not always reflected market activity. As several key deals successfully completed this quarter, it feels like a more accurate reflection of what we are seeing in the market.
“It is also encouraging to see the deal pipeline still growing and a number of deals should complete this year, particularly in Germany. However, whether this upsurge in activity means the European PE industry is back in full recovery mode remains to be seen but the signs are certainly positive.”
Leonid Saveliev, EY Partner, said: “The Russian private equity sector hasn’t seen any significant market entry deals as of late. Since the end of June, individual market entry deals haven’t involved investments of over US$50 million and have rarely exceeded US$15 million on average.
Nevertheless, investors are still showing an interest in the service sector and the production of goods for private consumers, e.g., pharmaceuticals, fee-for-service medicine and fast-food restaurants. There is also still an interest in technology and Internet projects.”
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