Europe's largest private equity deal in a decade was struck at the end of February as bidders Advent International Corp., Cinven Ltd. and RAG Foundation clinched the competitive auction for troubled thyssenkrupp AG's elevator business. Bought for €17.2 billion, the unit offered many of the characteristics buyout firms are searching for as they look to deploy record amounts of dry powder.
The sale is the latest of a number of large European buyouts announced over the past 12 months. It follows EQT Partners AB's €9.2 billion gross announced of Nestlé Skin Health, now called Galderma Holding SA, and the €6.3 billion gross acquisition by a consortium including The Blackstone Group Inc. of Merlin Entertainments PLC, according to S&P Global Market Intelligence data.
The Thyssenkrupp elevator auction wrapped up at an interesting time for M&A markets, closing as uncertainty around the spread of the coronavirus became more acute in Europe. Advisers that S&P Global Market Intelligence spoke with anticipate a pause while markets digest the reaction to the virus and its effects on businesses, and all hope it will be short-lived. Once global markets ease themselves through the uncertainty, they believe buyout houses will continue to flock to Europe in the hunt for deals.
On the plus side for private equity managers, there is currently more confidence in alternative than traditional strategies. A note sent out on March 9 by Credit Suisse Group AG analyst Craig Siegenthaler said the bank is more bullish on alternative asset managers versus the U.S. financial sector and views near-zero rates and volatility as an opportunity for new investment activity. "Unlike banks and traditional asset managers, the [alternative asset managers' assets under management] is locked-up and in some cases permanent so they are never forced sellers, which supports their defensive fee-related earnings streams that will grow into significant equity market corrections like their experience in 2008," the note said.
One adviser, who wished to remain anonymous, also predicts there may be more European M&A opportunities and consolidation for industries that will be deeply impacted by the virus, such as airlines.
Europe 'hotbed of opportunities'
With the North American market heavily saturated and highly-priced, many global buyout firms are searching more fervently for deals elsewhere. The European market is "significantly less invested" and has a long history of launching industrial and technology companies, which are increasingly attracting private equity interest, Clifford Chance LLP partner Simon Tinkler said.
"It's a real hotbed of possibilities, and it has the benefit of long-term stability and a well-structured legal system that is receptive to outward investment. If you compare that to, say, the Chinese market or India or Latin America, where there are undoubtedly opportunities, but the kind of risk that goes with it is significant," Tinkler added.
Recent currency effects have also created favorable value prospects for the region's businesses, Latham & Watkins LLP private equity partner Kem Ihenacho said. “With private equity’s dry powder at a record high, coupled with the availability of debt and willingness of sponsors to team up, I’m not surprised to see a deal of [thyssenkrupp's] size and would expect to see more large transactions during the year.” This is subject to prevailing market conditions, such as the outcome of the coronavirus spread, he added.
Complex transactions such as carve-outs and public-to-private deals are attractive to private equity buyers, particularly as larger outfits with cash-filled coffers look to deploy larger ticket sizes while wrestling with high asset prices that squeeze potential for favorable returns. There has been a steady flow of these deal types in Europe, attracting more buyout houses to the region.
"[Financial sponsors] are really looking for companies where you can work with management, streamline processes, cut out some bureaucratic processes and really bring together the business, and [carve-outs are] very promising," said Anselm Raddatz, Clifford Chance's head of private equity in Germany.
The growing presence of activist investors in Europe's public markets is helping private equity managers find these types of transactions. Thyssenkrupp was forced into selling its crown jewel asset and undertaking further restructuring after Cevian Capital AB and Elliott Management Corp. bought shares in the publicly listed business. Similarly, Nestlé Skin Health was sold to EQT in 2019 after activist investor Third Point LLC put pressure on the business's parent company.
The anonymous adviser said they were aware of a couple of other carve-out offerings that may come to market later this year. "We're seeing more and more activism, and that is definitely having an impact on decisions of some of these big conglomerates in terms of where they look to focus the businesses and create value for shareholders," the adviser added.
But while large buyouts are expected to continue in Europe, it is unlikely there will be a stream of record-breakers down the line. When asked whether we will see deals larger than Thyssenkrupp's elevator business, Tinkler said there is a natural size limit for private equity deals dependent on factors like the number of buyout houses that can bid together and the size of the debt market. "You're probably getting close to the limit," he said.