7 minute read 10 Nov 2020
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How Swiss valuation parameters and European M&A volume developed in recovering economic environment observed in Q3 2020

By Hannes Schobinger

Leader Valuation, Modeling & Economics | Switzerland

Passionate about corporate finance.

7 minute read 10 Nov 2020

Calm before the storm? While three quarters of a year fundamentally affected by the global pandemic have passed, what interim conclusion on market reaction can be made?

Q3 2020 in Switzerland was associated with a relatively stable and low number of new infected cases, which was also reflected in a recovering economic and business environment. However, while a second wave is coming with an unprecedented speed and scale, the extent of future market detraction also depending on government’s decisions about strict measures and lockdowns remains volatile and is almost impossible to predict.

In times of economic turbulences, we deem a monitoring of the developments of the most recent market data to be crucial to understand their impact on the key parameters used in corporate valuations. In our quarterly publication Valuation – Market Essentials Switzerland Q3 2020, we shed light on the most actual developments of market multiples and cost of capital components per industry for the SMI companies.

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Chapter 1

Trading Multiples Switzerland

Trading EBITDA multiples witnessed upward movement in Q3 2020

While in Q1 2020, a strong decline in trading EBITDA multiples was observed driven by the crash in the stock market, followed by a moderate increase in Q2 2020 for some of the industries, a sharp upward turn in trading EBITDA multiples can be observed for four out of six industries in Q3 2020, even boosting multiples to the record levels.

Although the LTM financials as of June 2020 considering first impacts from COVID-19 are now available and negative performance might lead to investors correcting their expectations downwards, this seems not to be the case. Instead, share prices of most of the companies have improved since Q2 2020, which can be explained by investors’ optimistic expectations of improving market conditions and financial performance after recovery. These growing expectations of companies’ improving future performance result in a higher proportion of future growth value as part of the enterprise value of a company, while the current operations value, which is mainly impacted by the pandemic, seems to be a less valued component of a company’s total value.

  • Chemicals, construction and materials

    Driven by the decline in LTM EBITDA figures as of June 2020 and increased market capitalizations as of September 2020, the median EBITDA multiple of this industry has increased from 9.1x in Q2 2020 to 13.4x in Q3 2020, reaching the highest median multiple observed since Q1 2018 for this industry. Although the sharp increase in median multiple in Q3 2020 looks extraordinary as compared to Q2 2020, it cannot be directly compared given that in the previous quarter, multiples were based on financials as of December 2019, which did not consider any impacts from the pandemic. The multiples of prior quarters are usually presented based on the most recent financials, which were publicly available as of that respective valuation date and are not recalculated when updated figures become available.

    In light of COVID-19, chemical manufacturing companies are facing slower global economic growth, supply chain disruptions and deteriorating end market demand in key industries such as automotive and construction. The general fall in demand coupled with oversupply in commodity chemicals has resulted in weaker pricing which has negatively impacted the profitability of the chemicals companies.

  • Industrial goods and services

    Driven by the overall trend of reduced earnings and increased share prices for 65% of the companies, the median EBITDA multiple of the industry increased from 9.6x in Q2 2020 to 12.9x in Q3 2020, reaching a record level observed since Q1 2018. The negative impact of the pandemic has been profound for the industry given that not only the OEM’s faced manufacturing disruptions and breakdowns, but also their suppliers and customers faced similar issues even after lockdowns were lifted, which resulted in interruptions for the entire supply chain. 

    As the “new normal” is dominated by restricted site access, limitations on employee collaboration due to social distancing and other safety regulations, which clearly burdens operating performance, a lot of companies are now looking to focus on divesting non-core or under-performing business units to strengthen their balance sheets.

  • Retail and consumer products

    Also, for the retail and consumer products, the median EBITDA multiple increased from 7.8x in Q2 2020 to 10.4x in Q3 2020 following the same trend and reaching the pre-COVID level as of Q4 2019. Although, at-home consumption of retail and consumer products has seen an uptick, discretionary spending and out-of-home consumption, which is usually associated with higher margins, has witnessed large scale downturn, resulting in lower earnings. Similarly, consumer spending at traditional stores nosedived which was partially offset by increase in online sales. The overhang of this momentous change has led to lower industry wide EBITDA margins. 

  • Media, technology and telecommunication

    The median EBITDA multiple of the industry increased from 8.5x in Q2 2020 to 9.8x in Q3 2020, also driven by lower financials. The profitability of the media industry was negatively impacted as high margin advertising revenues started to dry-up due to cancellation of sports and live events which have high footfalls. On the other hand, some technology and telecom companies were positively impacted by higher demand due to remote working and reliance on technology to conduct business and operations.

  • Healthcare

    Opposed to trends witnessed across other industries, healthcare industry’s median EBITDA multiple has declined from 17.2x in Q2 2020 to 15.1x in Q3 2020, which was not driven economically but rather by 3 companies, whose increased multiples were considered outliers.

  • Energy and utilities

    The median EBITDA multiple for the energy and utilities industry remained stable during the current quarter, while the LTM EBITDA figures as of June 2020 increased for 2 and decreased for the remaining companies.  While demand for energy and utilities decreased on commercial, industrial and manufacturing side, however, this was largely offset by expanded demand across residential formats, comparably resulting in a certain robustness of the industry to the current crisis.

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Chapter 2

Transactions Europe

European M&A activity regained buoyancy in Q3 2020

Following months of subdued transaction activity, the European M&A market witnessed widespread recovery in Q3 2020, although the activity in four out of six industries was still below pre-COVID levels in Q3 and Q4 of 2019. The total number of transactions (M&A transactions, which were announced or announced & closed in the same quarter and have published at least one multiple) across the six industries increased to 182 during Q3 2020. As compared to 124 deals in Q2 2020, this is an increase of 47%. The activity improved also as compared to 173 transactions recorded in Q1 2020, however, it is still below 234 transactions in Q4 2019.

While the number of transactions increased for all industries except for Energy & Utilities in Q3, the highest increase was observed in the industries chemicals, construction and materials, which also leads the chart with total 60 deals, followed by healthcare as well as media, technology and telecommunication showing growth rates of 90% and 50%.

According to the recent Mergermarket report on deal drivers, the large uptick in the M&A activity was mainly due to the pent-up demand for M&A ever since the lockdowns started. As soon as lockdowns were lifted across Europe, the M&A activity regained buoyancy. However, while a second wave of pandemic is coming with an accelerating speed and further business restricting measures and lockdowns are not excluded, the M&A market reaction is very uncertain to predict.

The top countries in terms of target company location were UK (17%), followed by France, Germany, Italy (8-10% each).

  • Chemicals, construction and materials

    In Q3 2020, the M&A deal volume significantly increased to 18 transactions as compared to only 5 during Q2 2020. However, the Q3 M&A activity still trails the numbers reported in Q3 a year ago. Given that chemicals industry has been hit hard by plummeting demand and disruptions in the industry value chains caused by COVID-19, M&A and consolidation may prove to be a positive catalyst for recovery of the industry.

    Top deals include a tender offer to acquire Ahlstrom-Munksjö Oyj, a Finnish manufacturer of fiber-based materials for customers around various industries, made by Ahlström Capital Oy, Viknum AB with a total transaction size of USD 3.8 billion. The deal is yet to be closed.

  • Media, technology and telecommunication

    In Q3 2020, the M&A deal volume increased to 60 transactions, which is a 50% change as compared to 40 deals in the previous quarter. According to the recent Mergermarket report on deal drivers, demand for technology products and services has significantly grown during the COVID-19 pandemic given that a lot of physical business infrastructural moved to a virtual setting. This has shown an increasing importance of embedding technology across different businesses and consumer interactions, making this industry a front runner for M&A activity during Q3 2020.

    Top deals include Liberty Global plc’s offer to acquire Sunrise Communications Group, one of the largest Swiss integrated telecommunications services players, from Freenet AG and with a total transaction size of USD 7.6 billion. The transaction is yet to be closed and after a full acquisition of Sunrise, the combined business is expected to achieve significant market shares in each of its business segments.

  • Healthcare

    In Q3 2020, the deal volume increased to 23 transactions as compared to 12 in Q2 2020. According to the recent Mergermarket report on deal drivers, the healthcare industry has continued to attract investment during the COVID-19 pandemic as the outbreak has reconfirmed the importance of healthcare services and facilities. This is also reflected in the subsector split, where 65% deals were made in healthcare equipment, facilities, supplies and technology subsectors. Although there were no deals above USD 1 billion in Q3 2020, this might change in near future, as the research for COVID-19 vaccine and digital healthcare technology are considered as the driving factors for companies to continue attracting financial support and investments.

  • Industrial goods and services

    In Q3 2020, the deal volume increased significantly by around 25% to 38 transactions, which is however far below the 58 deals recorded in Q3 a year ago. The top countries in terms of target company location were UK and Italy accounting for 20% of deals each.

    In addition to the trend of divesting non-core business to overcome challenging supply chain disruptions, further consolidation and integration may happen across the industry as businesses look to gain access across unserved markets and to gain economic efficiencies.

    Top deals include Garda World Security Corporation offering to acquire the remaining 98.40% stake in G4S plc, a UK based security and alarm services company, from Harris Associates, Sachem Head Capital and others. The deal is expected with a total transaction size of USD 7.5 billion and is yet to be closed.

  • Retail and consumer products

    Although the deal volume in the retail and consumer sector went up only slightly by 6 deals to 36 in Q3 2020, this is still  significantly below the 69 transactions recorded in Q3 a year ago, showing  a profound impact of the pandemic on retail and consumer M&A market.

    The evolution of the industry from traditional stores to online/virtual set-up has only been accelerated during the last couple of quarters and businesses are looking to invest and commit larger amounts in order to build more robust technology driven business models and technology enhanced resilient supply chains. M&A, therefore, is expected to play a greater role in this industry soon.

    Top deals include EP Global Commerce offering to acquire the remaining stake in Metro AG, a Germany based hypermarkets and super centres player. The deal is expected with a total transaction size of USD 10.2 billion and is yet to be closed.

Businessman standing in front of a computer server room window writing information.
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Chapter 3

Selected cost of capital and terminal value parameters

Development of certain cost of capital and terminal value parameters amidst recovering economic and business environment

Unlevered beta

Since beginning of the year, the median unlevered betas across all industries are following an upward trend given an increased volatility in the stock market. As a component of cost of capital, increased betas lead to increased cost of capital providing an indication of higher levels of systematic risk and therefore lowering valuations (all else held equal).

Debt to total capital ratio

In Q3 2020, the median debt to total capital ratio continued the declining trend for 4 of the 6 industries, mainly driven by a positive development of market capitalizations for the majority of SMI companies. However, the underlying debt level is still based on pre-COVID 2019 financials and does not yet consider any new debt resulting from government survival packages.

Credit Spread

The European credit spreads (Barclays Europe Aggregate) continued their downward trajectory during Q3 2020 after breaching record highs in March 2020, which can be attributed to expected recovery across Continental Europe as economies lifted lockdowns and economic freeze-outs and business activity picked up again reducing risks of default.

GDP growth

Driven by industrial activity that picked-up during the past three months, GDP growth expectations were slightly corrected upwards in Q3 2020 as compared to projections in the previous quarter. However, the GDP projections for 2020 remain as before negative for Switzerland, Germany, USA, emerging markets and globally in average. For Switzerland the short-term projected GDP growth for 2020 was slightly adjusted upwards from -6.4% as of Q2 to -4.6% as of Q3 2020, while the 10-year average (geometric mean) remained almost unchanged at 2.2% due to a recovery expected in the following years.

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Chapter 4

Banking and Insurance Sector

COVID-19 continues to leave its effects on the banking sector

Banking and Insurance industry witnessed contrary valuation trends during Q3 2020. While the median P/TB multiple for insurance companies increased from 0.9x in Q2 2020 to 1.0x during Q3 2020, the median P/TB multiple for the global and private banks on the other hand, decreased from 1.1x to 0.9x during the same period. The decrease in banking sector multiples was mainly due to shrinking of their market capitalization values as the sector continues to suffer from the overhang of the COVID-19 crisis.

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While Q3 2020 shows some signs of recovery, the uncertainty about the direction and speed, in which the markets will develop especially considering a second wave of the pandemic, remains of the biggest challenge. Corporate finance practices must be prepared for the diverse (recovery) scenarios, multiple valuation methods or more advanced statistical modeling that may arise out of the volatile waters we are sailing through.


We thank Elizaveta Leontyeva for her valuable contribution to this article. 

About this article

By Hannes Schobinger

Leader Valuation, Modeling & Economics | Switzerland

Passionate about corporate finance.