CMS_LawTax_Negativ_over100.eps Who dares wins: European M & A Outlook 2020 A study of European M & A activity In cooperation with: September 2020 Contents Foreword 3 Market commentary 4 CMS articles Latin America offers a trove of opportunities for foreign investors 6 The great divide in energy M&A as renewable sector enters boom period 8 The GP-led secondary: A new dawn or a flash in the pan? 10 COVID-19 reset: Need for high-quality upgrades clear as day 12 Market research M&A environment and expectations 14 Deal dynamics 30 Regional environment: The future of European M&A 36 Financing conditions 42 Conclusion 46 Methodology In the second and third quarters of 2020, Mergermarket surveyed senior executives from 170 corporates and 60 PE firms based in Europe about their expectations for the European M&A market in the year ahead. All respondents have been involved in an M&A transaction over the past two years. All responses are anonymous and results are presented in aggregate. 2 | European M&A Outlook Foreword Welcome to the eighth edition of the CMS European M&A Outlook, published in partnership with Mergermarket The last six months have been the most challenging for European dealmakers since the 2008 financial crisis. The COVID-19 pandemic and ensuing lockdowns have taken a heavy toll on the continent’s economies and sent M&A activity tumbling. The European Commission is forecasting an 8.3% contraction in EU GDP for 2020. Year-on-year, Stefan H1 M&A activity in Europe was down 31% by volume and 29% by value. Brunnschweiler, Partner, Global However, there are some reasons for optimism. European economic growth is expected to Head of the CMS rebound in 2021 and, at least for now, loosening lockdowns have allowed vendors, investors and Corporate/ advisers to meet and advance deals. M&A Group But the speed and sustainability of economic recovery will depend in great part on the development of a vaccine. Until one is distributed, uncertainty and volatility will weigh heavily on market sentiment. It is unsurprising, then, that respondents to this year’s survey are cautious and readying themselves for a difficult and challenging period ahead. Key findings from our research include: M&A appetite weakens Financing conditions Distressed M&A, 74% of respondents say to tighten restructuring and the pandemic has caused 79% of respondents expect corporate defaults to rise their dealmaking appetite to financing conditions to All respondents anticipate lessen. 65% of respondents become more trying in the an increase in distressed are not considering M&A, coming year. Leveraged loan M&A, 90% say there will be against 45% in last year’s issuance is down year-on-year an increase in restructuring survey. Uncertainty around and, although corporates have activity, and 82% expect an future company earnings has been able to tap high-yield increase in corporate defaults. widened pricing expectations bond markets, lenders are The pandemic has already between vendors and focused on nursing current forced companies in sectors buyers. Dealmakers are portfolios through COVID-19 impacted directly by lockdowns nervous about paying full disruption rather than funding – such as aviation, retail and multiples for assets at a new transactions. Debt leisure – into insolvency and time of high volatility, while for deals is expected to be restructuring. As government vendors are reluctant to more expensive and issued support mechanisms crystallise lower valuations on tighter terms than were unwind, more businesses at the bottom of the cycle. available pre-pandemic. will encounter distress. 3 Market commentary Intrepid M&A explorers will find rewards in the COVID-crisis tundra Scott Moeller, professor and director of deals in H1 2020, the percentage the M&A Research Centre of The Business represented by Europe has risen to 29% of the global total from School, City, University of London, analyses 19% in the same period last the key trends in European dealmaking year. The report shows that this increased percentage should remain steady over the next year or so. In the early 20th century, Vilhjalmur Stefansson, the legendary Icelandic Europe is well-positioned to American explorer of the Canadian maintain this rising percentage Arctic, said, “There are two kinds because it is strong in many of of Arctic problems, the imaginary the industries, where the experts and the real. Of the two, the surveyed found reason for imaginary are the most real.“ optimism. This includes both the technology, media & telecoms Scott Moeller, The same might be said about the (TMT) and pharma, medical & Professor and outlook for European M&A in late biotech (PMB) sectors. Indeed, very Director, M&A 2020. When we look at the first large deals, admittedly announced Research Centre half of the year, the future looks before the height of the pandemic of The Business dismal and we imagine worse but that remained on track to School, City, is yet to come. Yet the in-depth close despite those headwinds, University of analysis in this report – which drove much of that value. London surveyed more than 230 senior executives from corporates and It will be an upward climb, private equity firms in Europe – however, as almost two-thirds goes beyond the commonly-heard (65%) of the dealmakers contacted superficial negative assumptions for this report said they were not to reveal pockets of strength and considering M&A at this time, 20 reasons for considered optimism. percentage points worse than last year. Obviously, uncertainty Part of that optimism comes from due to COVID-19 is the principal the relative strength of Europe reason given (by almost three- vis-à-vis the rest of the world. quarters of those contacted), but Mergermarket data shows that, there are other drivers as well. The although Europe’s share of global most important were the fear of a M&A deal volume has dropped global recession and a reduction commensurate with the rest of in cross-border activity due in the world, in terms of value of part to the increased antitrust 4 | European M&A Outlook regulatory scrutiny (including deal driver, with much of this will be worse than last year. Within restrictions on cross-border happening through their corporate this context, private equity, credit acquisitions originating from venture capital investment arms. funds and non-bank lenders certain countries, notably China). were identified as the sources of This has been partially offset by As noted above with the slowdown funding that would be most readily the increase in the percentage of of cross-border activity, only 5% of available, though these too were intraregional deals done in Europe corporates surveyed would target expected to be both more expensive and thus not subject to the same new geographies. And the report and with tighter covenants and regulatory reviews, representing provides advice for struggling terms. The areas of opportunity more than 75% of all European companies, who shouldn’t look to are expected to be distressed debt deals in H1. And if they did want the corporate sector to bail them and special situations, and survey to venture outside of Europe, out: only 14% of corporates said respondents predict that the most those European acquirers said they would consider acquiring activity will come via deals related overwhelmingly that North America distressed targets at this time. to distressed M&A, restructurings would be their first choice. The report offers some interesting and corporate defaults. Those guidance for others who are on who are willing to be bold are In addition to an expectation the sell side, as buyers, whether clearly hoping to be rewarded. of continuing strength in the private equity or corporate, who TMT and PMB sectors, another were principally looking for targets The Arctic Ocean is not a frozen sector expected to see growth that provided a lower cost base wasteland – Stefansson and was consumer/retail. This would and/or access to new technologies subsequent explorers discovered seem to be one industry where and other intellectual property. a plethora of wildlife and sea life, distress and even insolvency will and even vast amounts of minerals drive activity – one company’s There are interesting trends as and oil below the seemingly pain can be another firm’s gain. well for the debt and financing impenetrable ice. Similarly, markets. As corporates shored underneath a veneer of negativity, The experts surveyed identified up their balance sheets earlier deal activity in Europe does have a divestments and carve-outs as this year, deal financing ground strong foundation going into the strong deal drivers, with almost to a halt. For the first half of closing months of 2020, according three-quarters of the cash- the year, M&A loan activity was to the experts active today in the rich private equity firms noting down 39% from H1 2019. As had M&A market and surveyed for this their interest in distressed and been widely reported, Europe’s report. But, as with those early turnaround opportunities, linked IPO market more than halved. Arctic pioneers, dealmakers not only with the more favourable valuations need to know where to explore but, currently available. In contrast to The outlook for these financing perhaps even more importantly, the private equity acquirers, 83% markets is, unsurprisingly, negative. where to avoid adventuring. of corporates saw acquisition of Among survey respondents, 79% new technologies as their principal believe financing market conditions 5 Latin America offers a trove of opportunities for foreign investors Senior CMS representatives from across Latin America report on the region’s response to the COVID-19 pandemic and opportunities for investors from Europe Latin America has been hit in the construction and hard by the pandemic.