European buyouts down to 2004 levels

Data released last month illustrate the diminished size of Continental Europe’s buyout market in H1 2008 compared with H1 2006 and 2007.

In the first half of this year, €22.7bn worth of buyouts were recorded, the lowest level since 2004, said the Centre for Management Buy-Out Research (CMBOR). The figure for 2008 was about a third of the total value in H1 2007 and H1 2006, when there were buyouts to the value of €63.4bn and €65.1bn respectively.

According to Daniel Flaig, from Swiss private equity firm Capvis, H2 2008’s figures could be even worse. “Deal flow in Q3 has felt even slower than in the previous two quarters,” he said. “People are realising that you can only bring top quality companies that are well known to the banking community to market.”

In Germany, at least, the deal flow is being thwarted by a reluctance to sell at a lower price.

“We hear about a lot of processes starting and then stopping as vendors test the market to see what price they might get and then decide to hold the asset instead. This is true of family, private equity and corporate vendors,” said Flaig.

While some buyout firms in the UK are hoping deal flow will pick up as big corporates increasingly look to spin-off divisions, Germany does not look like it will benefit from this for the time being.

“We are not really seeing corporates selling off non-core assets – most corporates seem to be in pretty good shape, although some, perhaps in the textiles machinery sector, may start doing this,” said Flaig.

In terms of volume, the CMBOR data showed the number of buyouts also fell. There were 325 buyouts in H1 2008 – 19% lower than the 401 deals completed in the first half of 2007.

Germany and France remained by far the most active markets in Continental Europe, completing 67 and 66 buyouts respectively in the first half of the year, although for France it looks like 2008 will show a huge drop on the total of 228 buyouts completed during the whole of 2007.

In terms of value, Germany continued to lead the way with a market value of €6.5bn, followed by Italy at €4.2bn and France at €3.1bn.

The findings showed that average deal size also fell, from €113m in 2007 to €70m. Are large buyout players gravitating down the value chain to ensure they are still investing LPs money?

“We actually haven’t seen much evidence of bigger players doing mid-market deals,” said Flaig. “We see them looking at smaller opportunities but they don’t seem to pursue them.”

“The prospect of a dramatic recovery in the European buyout market seems unlikely in the short-term. While deals at the lower end of the market will rumble on, the buyout market peaks of 2007 and 2006 have been driven by the mega-deals, and these transactions are still proving elusive,” said Christiian Marriott, a director at Barclays Private Equity.

M&A activity in the Nordic and Benelux countries has suffered so far this year. This decline has generally been accentuated by the dramatic slowdown in private equity investment seen in both regions.

In the first half of the year, Nordic M&A fell by only 5% to US$70bn compared with the same period in 2007, its second best start to the year after last year’s US$73bn record.

However, Nordic buyouts were down 44% to US$5.7bn, their worst start to the year since 2004 (US$3.4bn). In comparison, mid-market buyouts (below US$500m) were down just 17.7% to US$1.7bn and accounted for a four-year high of 31% of overall buyouts.

Nordic buyouts accounted for only 8.2% of total M&A activity in the region, a level not seen since 2002.

In aggregate, Nordic countries were the fifth most targeted in Europe and accounted for 7.6% of total European buyouts. Other countries topping the buyout rankings comprised the UK, France, Germany and Italy. However, for most of them the year-on-year fall in buyouts activity was even greater than for the Nordic region.

Meanwhile, M&A targeting the Benelux countries was down 78% to US$48bn compared with the all-time record set in 2007. Benelux buyouts were down 78% to US$4.2bn and accounted for an eight-year low of 8.8% of total M&A activity targeting the region.

Mid-market buyouts were less affected in 2008 but dropped 24.5% to US$1.5bn. Buyouts below US$500m accounted for 36.6% of overall buyouts in Benelux, a four-year-high.