BDO M&A Horizons, published quarterly, analyses recent M&A activity on a regional and sector basis and provides in depth analysis on potential activity in the next few months, as illustrated by our Heat Charts. In a global market of bewildering activity and endless choices, we provide some of the context necessary to navigate it.
HORIZONS
MERGERS & ACQUISITIONS
ISSUE 4 | 2021
IS ITTIMETOMAKECYBER RISK MORECENTRAL INDEALMAKING? THE PATHAHEAD...RECOVERY PICKSUP STEAM
VIEWS FROM AROUND THE GLOBE REGIONAL VIEW
REAL ESTATE, NATURAL RESOURCES ANDTMT SECTORVIEW
HORIZONS | BDO'S GLOBAL VIEWOF MIDMARKET DEAL ACTIVITY
CONTENTS
GLOBAL VIEW.................................................. 01 FEATURE 1: CYBER RISK ................................. 03 FEATURE 2: THE PATH AHEAD...RECOVERY PICKS UP STEAM ............................................ 05 GLOBAL MAP................................................... 09 REGIONAL VIEW ............................................. 11 SECTOR VIEW.................................................. 53 SOME OF OUR RECENTLY COMPLETED DEALS ........................................ 65
BDOGLOBAL CORPORATE FINANCE
DEAL VALUE OF 1,546 COMPLETED DEALS IN 2020 WITH A TOTAL $83.5bn *1st most active M&A Advisor Globally – Pitchbook league tables 2020 1st most active Advisor & Accountant Globally 2020 – Pitchbook league tables 2020 2nd leading Financial Due Diligence provider Globally – Mergermarket global accountant league tables 2020 PRIVATE EQUITY INVOLVEMENT DEAL OF OUR DEALS ARE BORDER CROSS 2,500
ONE OF THE MOST ACTIVE ADVISERS GLOBALLY *
ISSUE 4 | 2021
WELCOME WELCOME TOTHE FINAL EDITIONOF HORIZONS IN 2021, INWHICH BDO M&A PROFESSIONALS AROUNDTHEWORLD PRESENT THEIR INSIGHTS ON MIDMARKET DEAL ACTIVITY ANDTRENDS
we examine why data remains at the core of Industry 4.0 M&A. Manufacturing technology companies are increasing the pace of digitisation and M&A activity in this area is robust. In addition, M&A recovery is set to continue with renewables deals in the natural resources industry. Awareness of the environment and emphasis on ESG has directed attention to this sub-sector. Whilst the pandemic remains a major issue in many countries around the world, businesses and investors have continued to adapt and rethink their businesses. M&A has prospered and
Corporates are continuing to pursue non-core disposals to simplify their businesses or evolve their portfolio of activities and locations. Private equity are taking the opportunity to realise investments while trading, buyer appetite and prices are strong. We look at the trends above in more detail in our Global View article. In our leader articles we look at cyber risk and ask if it is time for it to be recognised in a more central role in deal making? We also look at the “Path Ahead” in terms of the trends in analyst earnings estimates, where we see a narrowing in most industries. We ask if there are potential explanations for the disconnect between forecasted fundamentals and equity prices? In our sector view, we look at Real Estate, TMT and Natural Resources. With Real Estate, we look at the main drivers in post-covid real estate investment, where the appetite remains strong. In the TMT,
The third quarter of 2021 saw a slight pause for breath in deal activity but still recorded a very respectable deal activity on a par with pre-pandemic levels. This pause was more noticeable with trade buyers, while private equity carried on investing at record levels. Private equity investors now represent over 25%of global mid-market deals and over 30%of aggregate deal value. Average deal value also continues to be at a record level and we believe this reflects the amount of cash chasing deals and the strong multiples being paid. We do not see any major reason for this picture to change as we head in the final quarter of the year. Sellers have come from all three categories of private owners, corporate and private equity. Many private owners are aiming to beat possible capital gains tax rises ahead of next year or to de-risk after managing through the pandemic.
seems set to continue to do so. We wish you well in closing the
transactions you are working on ahead of the end of the year and hope you stay safe and well.
SUSANA BOO INTERNATIONAL CORPORATE FINANCE COORDINATOR
JOHN STEPHAN HEAD OF GLOBAL M&A
john.stephan@bdo.co.uk
susana.boo@bdo.co.uk
HORIZONS | BDO'S GLOBAL VIEWOF MIDMARKET DEAL ACTIVITY 01
GLOBALVIEW
PRIVATE EQUITY CONTINUES TO BE A GROWING FORCE INTHE M&A MARKET IN 2021
After the strong recovery of global mid-market deal activity following the onset of the pandemic, the M&A market took a slight pause for breath in Q3. However, it still recorded a very respectable deal activity in excess of 2,100 deals that was on a par with pre-pandemic levels. That pause for breath was more evident with trade acquirers while private equity continued to invest at near record levels. It is noticeable how the mix has changed. In the two or three years before the pandemic, the split of trade vs private equity deals was typically 85:15. In the first three quarters of 2021, the split has been more like 75:25. Whilst trade acquirers have re-entered the M&A market in good numbers, private equity has been increasingly active in closing deals.
Looking around the world, there was a mixed pattern of gains and falls in the quarter. Greater China and Latin America saw an uptick in deal activity. The majority of regions were on a par with the previous quarter. The biggest falls were in North America, Southern Europe and the Nordics. North America was only 60% of the prior quarter but closer to historic levels. Africa and Israel also saw noticeable falls in activity. Between them, North America and Greater China represented nearly half of global deal activity.
Average deal value remains above USD 100m, which is well above historic levels. We believe this reflects high current valuations and in turn a record supply of money to invest compared to the supply of suitable target companies. We do not see this picture changing in the immediate future. In terms of sectors, Industrial &Chemicals andTMT remained the most prolific, representing around 20% and 30% respectively of total deal activity. Most sectors were down a little on activity on the quarter with Energy, mining and utilities holding up best.
That trend is even more marked, when you look at aggregate deal value. In Q3, that was running at USD 216bn, which was only slightly down on the first half of 2021 and still well ahead of pre-pandemic amounts. Looking at the split of trade vs private equity aggregate deal value, it is currently under 70% trade and over 30% private equity. Pre-pandemic it was more like an 80:20 split. So, private equity now represents over 25% of deals and over 30% of value.
GLOBAL MIDMARKET M&A
3,000
300,000
2,500
250,000
2,000
200,000
150,000
1,500
100,000
1,000
500
50,000
0
0
2008
2009 2010
2011
2012
2013 2014
2015
2016
2017
2018
2019
2020
2021
Trade Volume
Total Value (USD M)
PE Value (USD M)
PE Volume
ISSUE 4 | 2021
02
THE OUTLOOK LOOKS SUPPORTS CONTINUES HEALTHY M&A MARKETS
For the fourth quarter in a row there are over 10,000 rumoured deals. That compares with a typical quarterly total of 8,000 or more and really is grounds for optimism for M&A markets despite the continued effect on many economies around the world of the pandemic.
We expect this picture to be supported by the availability of cash in private equity and capital markets coupled with relatively cheap debt. Inflationary pressures may lead to interest rate rises but interest rates would still continue to be at low historic levels. We believe there will continue to be non-core disposals by larger corporates and private sellers looking to beat possible future capital gains tax rises in certain jurisdictions. The other big factor is private equity realising existing investments that have seen good growth over the last 12 months and seeking to capture current high valuations. GLOBAL THEMES THAT ARE INFLUENCING M&A The availability of cash and strong trading by many companies with good cash generation should continue to fuel M&A activity. As we have noted above, the continued growth of private equity funds should continue to be a major factor. We also expect strategic buyers to continue to be active in the market as they seek to add to capability, especially technology and digital. Finally, and we keep saying this, but we do expect that there will be a rise in stressed and distressed M&A and special situations M&A as some of the government support measures around the world are withdrawn.
For the fifth quarter running our heat charts showed high levels of rumoured mid-market deals and add to the encouraging picture of bounce back and resilience in the M&A markets.
GLOBAL BDO HEAT CHART BY REGION AND SECTOR
TOTAL % *
North America
583 290 882 210 558 268 102 56 42
2991 29%
Greater China
295 602 118 177 162 232 158 65 113
1922 19%
CEE
150 156 42 93 38 56 53 16 8
612 6%
Southern Europe
117 174 47 170 46 89 77 31 18
769 8%
India
75 52 37
54 49 41 28 11
4
351 3%
Latin America
160 54 87
66 23 59 60 20 16
545 5%
Nordic
70 61
21
19 19 29 13 2 2
236 2%
UK/Ireland
112 57 82 65 41
45 47 25 12
486 5%
Australasia
77 60 43 75 45 58 58 35 8
459 5%
DACH
80 99 13 48 45 31
15
5 3
339 3%
Other Asia
69 72 25 36 22 19 14 13 3
262 3%
South East Asia
131
81 54 52 28 68 38 18 39
509 5%
Japan
29 23 6 14 10 27
2 12 5
128 1%
Middle East
33 18 11
6 5 17 11
2 3
106 1%
JOHN STEPHAN HEAD OF GLOBAL M&A
Africa
48 37 12
27 17 28 25
3 5
202 2%
Benelux
28 33 8 26 11
29 10 9 2
173 2%
Israel
27
9 20
8 8 14 7
3 1
85 1%
john.stephan@bdo.co.uk
TOTAL
2,084 1,878 1,508 1,146 1,127 1110 718 326 284 10,181 100%
* Percentage figures are rounded up to the nearest one throughout this publication. Note: The Intelligence Heat Charts are based on 'companies for sale' tracked by Mergermarket in the respective regions between 1 January 2021 and 30 June 2021. Opportunities are captured according to the dominant geography and sector of the potential target company. Mergermarket’s Heat Chart of predicted deal flow is based on the intelligence collected in our database relating to companies rumoured to be for sale, or officially up for sale in the respective regions. It is therefore indicative of areas that are likely to be active in the months to come. The intelligence comes from a range of sources, including press reports, company statements and our own team of journalists gathering proprietary intelligence from M&A across the regions. The data does not differentiate between small and large transactions, nor between deals that could happen in the short or long-term.
HORIZONS | BDO'S GLOBAL VIEWOF MIDMARKET DEAL ACTIVITY 03
CYBER RISK
OUT OF THE SHADOWS ¦ IS IT TIME TO MAKE CYBER RISK MORE CENTRAL IN DEAL MAKING?
Increased cyber threats across the world have meant that cyber due diligence has become an indispensable part of the M&A deal-making process.
The natural conclusion for companies then, especially those acquiring other companies, is to carry out effective cyber due diligence and ensure that they are not exposing their business to new threats. As an example, in 2017 Yahoo disclosed three data breaches during the negotiation process to sell its internet business to Verizon. As a result, during the negotiation process Verizon managed to reduce the purchasing price by USD 350m, with Yahoo assuming 50% of any future liability arising from those data breaches. The Yahoo example highlights perfectly how crucial cyber due diligence can be and the tremendous impact it can have on M&A business goals and outcomes. Leaving aside issues like how and whether Yahoo was capable of avoiding these data breaches in the first place, the acquiring party has to follow some guidelines in its cyber due diligence process to protect its interests and be able to identify and manage the risks as early in the process as possible to avoid the last minute pressures of signing the deal.
The rising number of cyber threats and major cyber incidents, many of which have severely impacted business operations, are leaving companies with no other choice but to integrate cyber into their due diligence processes. No one wants to buy or merge with a 'hot potato' which may cast a shadow over the deal and potentially affect stakeholder value. Business integrations that overlook cyber risks are the perfect incubators for malicious capabilities and intentions. The complex and gradual integration processes in M&A deal-making tend to leave blind spots for cyber threats, creating perfect opportunities for malicious actors to play their 'plot'. In some cases, we have witnessed compromised networks and systems from one side of a merger or acquisition propagating into the other side’s network. These type of threats, which are often very hard to identify, may lay dormant in a business for months and sometimes even years.
ISSUE 4 | 2021
04
CYBER DD PRINCIPLES Some of the key principles to follow in a cyber due diligence process are as follows: • Alignment to business goals and expectations: businesses usually look to identify significant vulnerabilities and threats that could lead to unexpected expenditures in the future, and we need to focus on risks that could have significant business impacts • Defining and prioritising scope: in most cases the cyber due diligence process includes an assessment of the technical control environment and often uses technical tools to reach some certainty that there are no dormant threats in the network. Without defined technical scopes and prioritising these tests can easily misalign with the business goals • Assigning the appropriate team: from a broader perspective, the cyber risk due diligence team should include people from the both the business and security, IT, and networking functions • Ensuring external professional support: in most cases identifying and 'flushing out' dormant threats inside a network requires non-routine professional IR (internal response) and forensic capabilities that most companies do not have so this means relying on dedicated external professionals • Prioritise Cyber DD: despite the increasing importance of cyber due diligence, it is often the last part of the process to be carried out. This puts it under pressure to deliver results quickly as the business is anxious to finalise the M&A deal. The cyber due diligence process needs to be given the necessary time to deliver quality and effective results • Having a high-level understanding of the security requirements in the integration process: due diligence processes usually create a remediation/work plan with tasks planned to be executed prior to signing the transaction and some planned for the integration process post-deal. It is essential to evaluate the complexity of these tasks against the cyber maturity of both companies and get a sense of the effort, cost and other consequences affecting the integration process. Following a cyber risk management methodology can simplify the M&A due diligence process and create valuable results. Approaching the due diligence process from a NIST cybersecurity framework perspective for example, will be both easy to execute and result in having a meaningful way to report back the results to the business for them to understand and evaluate. In addition, integrating the most common cyber threats into the evaluation process will improve the relevancy of the results and direct the business specifically to the areas that can have the biggest impacts on the business. Combining the NIST cybersecurity framework with current threat analysis will produce some of the key topics to concentrate on, including: prevention, detection & response, incident and crisis management and third-party risk management; and finally governance and compliance, which can have significant repercussions, especially where the regulatory landscape expands or because of the M&A activity.
OPHIR ZILBIGER BDO GLOBAL CYBERSECURITY LEADER
ophirz@bdo.co.il
HORIZONS | BDO'S GLOBAL VIEWOF MIDMARKET DEAL ACTIVITY 05
THE PATHAHEAD...RECOVERY PICKSUP STEAM ANALYSIS OF ESTIMATES FOR INSIGHTS ONTHE ECONOMIC RECOVERY
More than a year into the COVID-19 pandemic, industry recoveries are solidifying. Hindsight, along with the narrowing of analyst estimates and continued reductions in 'surprises,' have provided a clearer and more optimistic picture of the path ahead for many industries. What do those recovery curves look like now? Are there potential explanations for the disconnect between forecasted fundamentals and equity prices?
To bring visual clarity to these questions and more, BDO USA’s Valuation & Business Analytics practice released our latest Forecast Engine Industry Impact Study earlier this year. We utilized our proprietary Forecast Engine tool to help analyze over 20,000 estimates for 419 public companies spread across 24 industries This Forecast Engine takes thousands of market data points and transforms them into useful metrics and in sights with applications in various strategic, financial planning and analysis, and report ing and compliance functions. Analyzing the results by industry continues to show stark differences, both in terms of near-term impacts as well as the timing and extent of recovery. Although a decline in revenues and profits is to be expected for certain industries, the magnitude of the reductions and long-term impact conveyed by analyst estimates is still severe for more than a few industries.
Due to operating leverage differences between industries, the impacts to profitability are disparate.
ANTHONY ALFONSO GLOBAL VALUATION LEADER
aalfonso@bdo.com
(1) While this article highlights certain industry level data, for more detailed information for each industry please see the Study in its en tirety: https://www.bdo.com/insights/business-financial-advisory/valuation-business-analytics/vba-forecast-engine-impact-study-issue- 4).
ISSUE 4 | 2021
06
PERCENT CHANGE IN 2020 EBIT ESTIMATED IN FEBRUARY 2020 TO ACTUAL RESULTS
Construction - Commercial: -44.3% Oil & Gas: -98.2% Gaming, Hospitality, Leisure: -168.9% Airlines: -278.3%
Restaurants: -41.5%
Telecommunications: -39.0%
Manufacturing: -35.6%
Banks: -34.3%
Distribution: -33.0%
Healthcare - Medical Devices: -14.6% Media & Entertainment: -11.3% Retail - Discretionary & Luxury: -27.0%
Asset Management: -9.8%
Healthcare - Life Sciences: -3.4% Insurance: -1.3%
Technology - Hardware & Equipment: -0.1%
Healthcare - Payer: 0.4%
Technology - Software & Services: 1.8%
Retail - Consumer Staples: 4.0%
Technology - Semiconductors & Products: 5.4%
Construction - Multi-Family: 9.3%
Healthcare - Provider: 13.8%
Construction - Single-Family: 18.7%
Retail - Online: 29.4%
*For the Banks industry set we have utilized earnings before taxes (EBT) instead of EBIT.
HORIZONS | BDO'S GLOBAL VIEWOF MIDMARKET DEAL ACTIVITY 07
In our inaugural issue, we analyzed how fundamental estimates and equity prices moved in opposite directions during April and May of 2020. Many of the graphs in the latest report show that analyst estimates did begin to rebound from the lows at the end of May 2020. However, equity prices have continued to outpace estimates and exacerbated the overall disconnect.
PERCENT CHANGE IN TEV AND EBIT FROM FEBRUARY 2020 TO MAY 2021
Oil & Gas
Insurance
Airlines*
Gaming, Hospitality, Leisure*
Telecommunications
Despite increases in TEV for all but one industry, relatively few observed an increase in both actual EBIT and projected long- term EBIT.
Banks
Healthcare - Provider
Healthcare - Life Sciences
Restaurants
Distribution
TEV
2020 EBIT
Long-term EBIT
Retail - Consumer Staples
*Full range not shown
Construction - Multi-Family
Healthcare - Medical Devices
Healthcare - Payer
Asset Management
Construction - Commercial
Construction - Single-Family
Manufacturing
Tech. - Software & Services
Retail - Discretionary & Luxury
Media & Entertainment
Tech. - Semiconductors & Products Tech. - Hardware & Equipment
Retail - Online
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
ISSUE 4 | 2021
08
As a new addition to this latest study, we analyzed the potential impact of ESG ratings on financial performance to understand if it helps explain the financial resiliency and outperformance of certain companies and industries. Full details on our insights and methodology can be found in the study, but while ESG factors are undoubtedly critical to the assessment of an enterprise’s long-term financial resiliency and performance, our analysis casts doubt on the ability of ESG ratings themselves to consistently convey this critical information to investors. As such, a viable path forward will need to focus on fundamental analysis of ESG value drivers and reconciliation of rating methodologies. Regarding recovery curves, with some hindsight now available, combined with the narrowing of analyst estimate dispersion in most industries, we’ve seen a further coalescence around a handful of specific recovery patterns. Our analysis classifies each industry’s recovery pattern as either L-Shaped, U-Shaped, V-Shaped, No Impact or Hockey Stick. While a V-Shaped recovery was expected, or hoped, for much of the global economy in the early days of the pandemic, we now finally see a significant number of industries experiencing this decisive recovery. Two industries that experienced the expected pause but then picked back up where they left off are Healthcare - Medical Devices and Healthcare - Provider. Interestingly, despite the pause, Healthcare - Provider 2020 actually surpassed pre-COVID-19 expectations. To see where the other industries landed, read the full report.
HEALTHCARE - MEDICAL DEVICES Long-Term EBIT Trend Analysis
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
2019
2020
2021
2022
2023
HEALTHCARE - PROVIDER Long-Term EBIT Trend Analysis
120%
110%
100%
90%
80%
70%
2019
2020
2021
2022
Feb. 2020
Jul. 2020
May 2021
Source for report graphs: Data analyzed from S&P Global’s Capital IQ database.
HORIZONS | BDO'S GLOBAL VIEWOF MIDMARKET DEAL ACTIVITY 09
GLOBAL 10,181 RUMOURED TRANSACTIONS
P11 | NORTH AMERICA FRENETIC PACE OF ACTIVITY SLOWS
P13 | LATIN AMERICA M&A ACTIVITY MAINTAINS UPWARD TRAJECTORY
SECTORVIEW
e
e
P55
P57
P61
REAL ESTATE
TMT
NATURAL RESOURCES
ISSUE 4 | 2021
10
P17 | UNITED KINGDOM & IRELAND PE DRIVES M&A ACTIVITY IN ANOTHER BUSY QUARTER
P27 | DACH RECOVERING MIDMARKET M&A ACTIVITY IN DACH COMPARED TO 12 MONTHS AGO
P25 | BENELUX M&A ACTIVITY SLOWS DOWN IN SUBDUED QUARTER
P31 | NORDICS TRANSACTION ACTIVITY FALLS SHARPLY BUT REMAINS STRONG FROM A HISTORICAL PERSPECTIVE
P43 | CHINA M&A DEALMAKING CONTINUES TO SOAR
P 39 | INDIA INDIA RACES TOWARDS USD FIVE TRILLION ECONOMY
P35 | AFRICA M&A ACTIVITY EXPECTED TO PICK UP IN 12 MONTHS
P47 | SOUTH EAST ASIA M&A ACTIVITY CONTINUES TO IMPROVE
P49 | AUSTRALASIA STRONG RUN CONTINUES FOR AUSSIE DEALMAKERS
P33 | ISRAEL SUBDUED DEAL ACTIVITY SEES VOLUME FALL BUT VALUE REMAINS STABLE
P21 | SOUTHERN EUROPE PE LEADS THE WAY WITH SURGE IN M&A ACTIVITY | ACTIVITY REACHES PREPANDEMIC LEVELS
-20% to -11% 1% to 10% 11% to 20% 21% to 30% 31-40% 41-50% Key % movement -10% to -1% 0
-20% to -11% 1% to 10% 11% to 20% 21% to 30% 31-40% 41-50% Key % movement -10% to -1% 0
Note: The colouring illustrates the movement of expected transactions compared to the expected transactions in the previous quarter.
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 11
NORTHAMERICA FRENETIC PACE OF ACTIVITY SLOWS
The M&A markets in North America slowed somewhat from the frenetic pace of Q2 but conditions for deal-making remained resoundingly positive throughout Q3. Despite the respite, 2021 is on track to set records both in terms of number of deals as well as dollar volume of transactions. The unprecedented deal-making environment is linked to the overall liquidity-driven economic recovery which reached a pace not seen in decades but did show signs of slowing in Q3, as GDP estimates were reduced slightly with supply chain and inflationary pressures taking hold. Valuations remained buoyant as earnings expectations continue to grow and the competition for deals has never been more apparent. Domestic corporates, multinationals, financial sponsors and family offices are all actively seeking to deploy capital given low interest rates and a strong underlying economy.
Corporates are now focused more than ever on deploying abundant, low-cost capital to accelerate growth and expand market share. The capital markets are highly supportive with sustained low interest rates, a healthy banking sector and highly receptive equity markets. Such conditions combined with renewed CEO confidence to deploy capital is fueling increased deal flow. Corporates were slow to join the M&A fray coming out of the pandemic but have since ratcheted up their interest in deal-making, and more recently, used their considerable purchasing power to win a larger percentage of competitive deal auctions. Technology continues to be the top sector both in terms of dollar volume and number of deals. Given the impact of the pandemic, new entrants and tech disruptions are redefining business models and changing the way of life. As a result, emerging industries such as TeleHealth, FinTech, and CleanTech are becoming areas of focus for M&A. In addition to seeing industry boundaries converge, we are also seeing the convergence of multiple technologies.
BIG PICTURE
• Overall dollar volume and number of deals slows from record-setting Q2 • Full-year 2021 on track to be most active year ever recorded • TMT and Industrials deal-making lead other sectors by a wide margin • Private equity activity robust representing one-third of all M&A activity.
PE/TRADE VOLUME &VALUE
900
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0 500 400 300 200 100 600 700 800
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Trade Volume
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ISSUE 4 | 2021
12
NORTH AMERICA HEAT CHART BY SECTOR
Financial Services
882 29%
TMT 583 19% Pharma, Medical & Biotech 558 19% Industrials & Chemicals 290 10% Business Services 268 9% Consumer 210 7% Energy, Mining & Utilities 102 3% Leisure 56 2% Real Estate 42 1% TOTAL 2991
tapering and rate increases could present significant challenges to the M&A markets for 2022. As for the balance of 2021, North American M&A activity should remain strong based on the sheer backlog of deals in market as well as the underlying fundamentals of resilient debt and equity markets, abundant cash and a strong economy. Given current activity levels, most market participants expect 2021 to go down in history as the best year for deal-making in the history of deal-making.
Corporates are looking to M&A to update their own business models and stay current with the latest trends while boosting competitiveness. Private equity firms continued to contribute significantly to Q3 M&A volume. Financial buyers accounted for nearly 33% of overall middle-market M&A activity in Q3. By the end of the quarter, private equity firms were sitting on over $3 trillion of investment capital. The sheer amount of private-equity dry powder combined with a booming economy and a liquid debt market has resulted in the first three quarters of 2021 being a record period for sponsor-backed deal-making. Earlier in 2021, the potential for tax policy changes, aka significant increases in capital gains rates, undoubtedly motivated many sellers to pursue a transaction before higher rates were enacted. The number of tax-driven, motivated sellers clearly subsided in Q3 as U.S. Congressional leaders announced spending packages with far more modest adjustments to capital gains rates. This combined with rising inflation, supply/ demand imbalances for goods and services and a shift in Fed policy to
NORTH AMERICA MIDMARKET VOLUMES BY SECTOR
2020
2021
549
BOB SNAPE PRESIDENT
758
bsnape@bdocap.com
20
6
299
306
41
39
267
313
117
159
196
173
142
114
186
166
Technology & Media
Financial Services
Energy, Mining & Utilities
Pharma, Medical & Biotech Real Estate
Consumer
Business Services
Leisure
Industrials & Chemicals
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 13
LATINAMERICA
M&A ACTIVITY MAINTAINS UPWARD TRAJECTORY
M&A mid-market activity in Latin America in Q3 2021 saw 116 deals completed, worth USD 13,586m, representing increases of 7.4% in deal numbers and 32.2% in deal value compared to Q2 2021. Looking at performance relative to Q3 2020, deal numbers were up 46.8% and deal volume rose by 68.2%. The accumulated deal numbers for the last 12 months were 395 deals with a value of USD 37,566m, which compares with 295 deals and USD 26,156m for the same period in the previous year, an increase of 33.9% in volume and 43.6% in value. Private equity was involved in 32 deals worth USD 5,477m in Q3 2021, representing 27.6% of the total deal count and 40.3% of the quarter’s value. The average PE deal value was USD 171.17m, considerably higher than the USD 96.53m average for non-PE transactions. Average PE deal value was up 23.1% compared to the previous quarter.
The quarter’s top 20 deals totalled USD 7,360m, with Brazil leading the way in terms of target countries with nine deals worth USD 3,389m, followed by Chile and Mexico with three deals each, worth USD 1,121m and USD 972m respectively. Argentina was involved in one top 20 deal worth USD 350m in the TMT sector, which involved the purchase of financial management mobile app Ualá. Looking at bidder countries, 24% of investments come from inside the region, with Brazil leading the ranking with deals worth USD 1,764m. All Brazilian investments were in their own country apart from one in Chile. The remainder of investment came mainly from the USA, which led the way with purchases worth USD 2,963m, followed by China (USD 850m), Russia (USD 435m) and Switzerland (USD 410m). The leading sectors in Latin America in Q3 2021 were Energy, Mining & Utilities and TMT.
BIG PICTURE
• Deal numbers rose by 46.8% and value by 68.2% versus Q3 2020 • Private equity represented 27.6% of deal volume and 40.3% of deal value • The top 20 deals had a combined value of USD 7,360m: Brazil was the target country for nine deals (46% of the value); Chile for three (15% by value); Mexico for three (13% by value) and Argentina for one deal (5% of value).
PE/TRADE VOLUME &VALUE 140
14,000
120
12,000
100
10,000
80
8,000
60
6,000
40
4,000
20
2,000
0
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
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Trade Volume
PE Volume
Total Value (USD M)
PE Value (USD M)
ISSUE 4 | 2021
14
UNCERTAINTY IN ARGENTINA Argentina is currently experiencing a period of high volatility linked to macroeconomic conditions and political uncertainty. The legislative Simultaneous and Compulsory Open Primary Elections (PASO) that took place in September saw surprising results with the opposition party (Juntos por el Cambio) winning in most of the country's provinces. Juntos por el Cambio received about 8.8 million votes, representing 40.02% of the total, while ruling party Frente de Todos received 6.9 million votes, 31.03% of the total. These results caused great surprise in the national government, which had expected to do better. Undoubtedly, the most striking result was in the province of Buenos Aires, historically a stronghold of the ruling party, where the opposition won by almost 5% (38.23% vs. 33.49%). This brings fresh hope that there will be changes to macroeconomic policies after the general legislative election in November, which will likely result in a Congress more prone to introducing market-friendly policies.
The Energy, Mining & Utilities and TMT sectors are both active in Argentina’s M&A deal-making market. The current appetite for lithium, driven by the green economy and the need to reduce carbon dioxide emissions, make Argentina an attractive country for investment due to the deposits of this mineral in the northwest of the country. Argentina is the fourth largest lithium producer in the world and is part of the so-called LithiumTriangle, along with Chile and Bolivia. Lithium is a key element in the manufacture of the rechargeable lithium ion battery that powers electric vehicles. More than 20 countries across the world have adopted the zero emissions by 2050 policy and experts estimate that demand for lithium could multiply by as much as 40 times by 2040, with supplies of the mineral limited. New technologies are enabling the extraction of lithium with greater efficiency than the traditional method of extraction of brines.
Prices in this market have reached an all-time high in the last three years, driven by the demand for lithium for electric car batteries and the gradual depletion of lithium in Chinese deposits and demand is being underpinned by the recovery of global activity after the pandemic during 2020. Regarding regulation in lithium production, it is worth noting that there are tax benefits available for this type of investment and that mining legislation is specific to each province in Argentina.
FERNANDO GARABATO PARTNER
fgarabato@bdoargentina.com
PAULA KRITZ MANAGER
pkritz@bdoargentina.com
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 15
LATIN AMERICA HEAT CHART BY SECTOR
TMT
160 29% 87 16% 66 12% 60 11% 59 11% 54 10% 23 4% 20 4% 16 3%
Financial Services
Consumer
Energy, Mining & Utilities
OUTLOOK The BDO Heat Chart indicates that a total of 545 deals are announced or in progress for the region, which represents 5.4% of the Global Heat Chart. Opportunities are concentrated in TMT, Financial Services, Consumer, Energy, Mining & Utilities and Business Services with a total of 160, 87, 66, 60 and 59 predicted deals respectively.
The TMT sector also saw activity, with deal-making taking place at a local level, where transactions are focused on the acquisition of innovative software companies – especially start-ups – that can be developed globally. In relation to the Ualá transaction mentioned earlier, which is believed to be the largest private raise ever by an Argentinian company, the fintech industry has been growing steadily since the onset of the pandemic. Energy, Mining & Utilities and TMT are hot sectors where Argentina’s country risk is mitigated by the attractiveness of the sectors, where international drivers are key (such as the prices and demand for lithium) and growth is exponential with businesses operating in a fast-growing fintech sector based in technology. As long as the PASO results are confirmed in November’s elections, the expectations are that more sectors will become attractive to investors as Argentina begins implementing more market-friendly policies.
Business Services
Industrials & Chemicals
Pharma, Medical & Biotech
Leisure
Real Estate
TOTAL
545
LATIN AMERICA MID-MARKET VOLUMES BY SECTOR
2020
2021
10
53 54
83
0
5
5
7
28 9
1
1
5
5
4 34
29 29
3
7
25
23 24
32
20
57 59
58
22 5
6 19
48 9
8 43
Technology & Media
Financial Services
Energy, Mining & Utilities
Pharma, Medical & Biotech Real Estate
Consumer
Business Services
Leisure
Industrials & Chemicals
ISSUE 4 | 2021
16
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 17
UNITED KINGDOM& IRELAND PE DRIVES M&A ACTIVITY IN ANOTHER BUSY QUARTER
Another busy quarter for mid- market M&A in UK & Ireland, with 128 transactions reported at an aggregate value of USD 13.4bn. This is lower than the preceding quarters as the market starts to return to pre-COVID-19 levels. It is worth noting that 470 deals completed in the first nine months of 2021, with aggregate value of USD 48.5bn, which is equivalent in volume for the full year 2020 and UDS 10bn higher in value. However, the year-to-date activity is similar to the first nine months of 2018 and 2019, so the commentary about 2021 being a record-breaking year for M&A activity will very much depend on the final quarter.
As we look back over the last 20 months we are impressed by the resilience of the mid-market. Nearly all companies have had to rethink their strategy and quickly adapt to the new environment. The pandemic has brought a lot of suffering but through the chaos we have witnessed the strength and innovation of management teams as they have repositioned their businesses. It has often been commented that economic confidence underpins M&A activity, which even further highlights the exceptional bounce back in M&A activity as businesses demonstrated renewed confidence in their revised strategies and investment in their future growth. PRIVATE EQUITY: A KEY DRIVER OF M&A During Q3 2021 there were 37 private equity transactions, representing 29% of the total activity as an increasing number of PE funds sought out opportunities in UK & Ireland. Over USD 580 in new PE/VC
BIG PICTURE
• 128 transactions completed with an aggregate value of USD 13.4bn • With 29% of deal volume, private equity was a key driver in quarterly M&A activity • TMT leads the way in sector activity with 37% of all deals.
PE/TRADE VOLUME &VALUE
300
0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 18,000 20,000 20,000
250
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Trade Volume
PE Volume
Total Value (USD M)
PE Value (USD M)
ISSUE 4 | 2021
18
Business Services was the second most active sector with 20 transactions, followed by Consumer and Financial Services. These sectors have shown strong resilience throughout COVID with a particular flurry of activity in Consumer as businesses look to capitalise on the boost of online retail for key consumer brands. Some notable transactions included the sale of lifestyle brand Sweaty Betty to Wolverine for USD 410m and the e-commerce firm The Hut Group’s acquisition of Cult Beauty for USD 379m. M&A activity in Energy, Mining & Utilities continued to be supressed as the sector transitions to more sustainable opportunities. We expect to see an upturn as larger trade buyers look to transform their operating models through acquisition and investment in renewable companies in order to achieve their ESG strategic objectives. The Leisure sector was also quiet in Q3 2021 with only five reported transactions, but again we expect this to increase as businesses look to rebuild in the aftermath of COVID-19 and seek out opportunistic buys. Similarly, with no reported transactions in Real Estate during the last quarter, and only 10 deals in the last 18 months, it is only a matter of time before the post-COVID-19 valuations stabilise and we see the return of M&A within Real Estate.
funds was raised last year, which in addition to the existing dry powder, will continue to drive M&A activity in the mid-market as companies look at succession planning post-COVID. The activity amongst trade buyers remained steady at 91 transactions with an aggregate value of USD 10bn, which is 10% ahead of last quarter. This is predominantly due to several larger trade transactions including Mediaocean’s acquisition of Simplicity for a reported USD 500m and Telefonica’s acquisition of Cancom UK for USD 462m. KEY DEALS AND SECTORS Unsurprisingly, TMT remains the most active sector, with 47 deals representing a record high of 37% of all transactions. This trend will continue as the significant majority of all start-ups are in the tech sector, which underpins the disruption across all other sectors. It is interesting to note that seven of the region’s top 20 largest transactions were in TMT, with a focus on media, including Flutter’s sale of Oddschecker Global Media for USD 214m to Bruin Sports Capital and the sale of Dennis Publishing by Exponent for USD 413m, representing value of 2.8x reported revenue multiple.
KATHARINE BYRNE M&A PARTNER
kbyrne@bdo.ie
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 19
UNITED KINGDOM & IRELAND HEAT CHART BY SECTOR
TMT
112 23% 82 17% 65 13% 57 12% 47 10%
Financial Services
Consumer
Industrials & Chemicals
Energy, Mining & Utilities
LOOKING AHEAD
Business Services
45 41 25
9% 8% 5% 2%
Looking ahead, we expect to see an increasing number of transactions inTMT, Business Services and Financial Services. Consumer will also be of interest for PE buyers as they consolidate global brands and tap into the increasing consumer spend in a post-COVIDworld. Valuations will remain high as the influx of capital chase returns. However, the due diligence process is taking longer as buyers look to gain a better understanding of the target operations, so it’s imperative that vendors are fully prepared when going to market, and utilising vendor due diligence can help accelerate the process. The BDO Heat Chart also highlights a return for M&A activity in Energy, Mining &Utilities as trade and financial buyers look to acquire renewable energy companies. But sustainability is not just confined to the energy sector. ESG is now impacting M&A in all sectors as sustainability criteria are becoming an increasingly important factor for institutional and private investors in choosing which companies to invest in.
Pharma, Medical & Biotech
Leisure
Real Estate
12
TOTAL
486
UNITED KINGDOM & IRELAND MID-MARKET VOLUMES BY SECTOR
2020
2021
151
151
5
7
49
48
19
21
58
50
45
57
44
24
39
39
79
73
Technology & Media
Financial Services
Energy, Mining & Utilities
Pharma, Medical & Biotech Real Estate
Consumer
Business Services
Leisure
Industrials & Chemicals
ISSUE 4 | 2021
20
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 21
SOUTHERN EUROPE
PE LEADS THEWAYWITH SURGE IN M&A ACTIVITY | ACTIVITY REACHES PRE-PANDEMIC LEVELS
Southern Europe’s mid-market M&A activity in Q3 2021 saw declines in both the volume and value of completed transactions, even though it reached pre-pandemic levels. The transactions totalled USD 14.1bn, a fall in both the number of deals (37%) and in volume (18%) compared to the previous quarter, which is usually the most active quarter of the year for deal volume. Despite the decrease in transaction volumes, the average value per deal increased from USD 97m to USD 126m. Q3 2021 saw a surge of private equity-led M&A activity, with PE accounting for a record proportion of deals (40%). PE deal- making also accounted for 43% of overall deal value, boosting average deal value to USD 133m.
KEY SECTORS Every sector bar Leisure, which maintained its deal count from the previous, experienced declines in Q3 2021, and collectively this resulted in a 37% decline in deal numbers compared to Q2 2021. However, it’s worth noting that the second quarter of the year had, until the onset of the COVID-19 pandemic, been the busiest quarter in the previous five years. The sectors most impacted by the fall in M&A activity were TMT (17 deals vs 28 in 2021 Q2), Consumer Services (12 deals vs 25) and Pharma, Medical & Biotech (5 deals vs 17). Industrials & Chemicals was the top performing sector in terms of mid-market M&A deals, regaining top spot fromTMT. The quarter’s mid-market deals were heavily concentrated in the three most active sectors, with Business Services, Industrials & Chemicals and TMT accounting for 67% of all deals closed.
BIG PICTURE
• M&A reached pre-pandemic levels in Q3 2021, even with an overall decline in quarterly deal volume and value • Private equity activity surged ahead with a record-breaking 40% of all deals • Industrials & Chemicals led the way in sector activity and, together with Business Services and TMT, accounted for 67% of all deals • Strong levels of cross-border M&A activity were recorded across sectors • Outlook for the next quarter indicates the continuing recovery in deal activity.
PE/TRADE VOLUME &VALUE
250
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 18,000 16,000 20,000
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Trade Volume
PE Volume
Total Value (USD M)
PE Value (USD M)
ISSUE 4 | 2021
22
KEY DEALS The region’s top 10 mid-market deals totalled USD 4.03bn, representing 28.5% of the volume of all quarterly transactions. The biggest deal took place in the TMT sector and saw the acquisition of Coriolis Telecom S.A.S., a virtual mobile network operator, by French TMT company, Altice France SA, for USD 486m. The second biggest was the acquisition of the assets of Iberian shipping company Compania Trasmediterranea S.A by Italian shipping company Grimaldi Group SpA, for USD 443m. In third spot was an Industrials & Chemicals deal that involved the PE acquisition of a 66.74% stake in Reno De Medici S.p.A., a forest products company and the second largest European producer of coated recycled cardboard, by American asset manager Apollo Global Management LLC, for USD 433m.
Finally, another notable deal saw the acquisition of a 60% stake in Etro SpA, one of the last big family-owned luxury clothing brands, by French PE group L Catterton Europe, for USD 354m. The top 10 deals were spread across several sectors, with Industrials & Chemicals and TMT leading the way with three deals each. The targets in the top 10 were distributed across three countries, with four Italian targets and three targets for both Spain and France. Cross-border transactions comprised the majority of the quarter’s top 10 deals, with European companies involved in eight of the top 10. While the acquiring nations were varied, US and French companies led the list of acquirers with two deals each.
CRISTINA DIAS PARTNER
cristina.dias@bdo.pt
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 23
SOUTHERN EUROPE HEAT CHART BY SECTOR
Industrials & Chemicals
174 23% 170 22% 117 15% 89 12%
Consumer
TMT
Business Services
LOOKING AHEAD
Energy, Mining & Utilities
77 10%
Financial Services
47
6%
The outlook for the next quarter suggests a continuation of the recovery in deal activity, with the overall number of rumoured deals close to the previous quarter’s figure (769 vs 770 in 2021 Q2). According to the market intelligence in the BDO Heat Chart, 769 deals are expected to take place in Southern Europe, which represents 8% of the rumoured mid-market deals worldwide. These figures represent an 18% year-on-year increase over the 651 rumoured deals for the corresponding quarter in 2020. Industrials & Chemicals is predicted to retain its top spot for deal volume in the region, replacing Consumer as the usual leading sector, by accounting for an estimated 23% of deals (174 deals), followed closely by Consumer with 170 deals (22%). Looking at other sectors, TMT is in third place and is expected to account for 117 deals (15%) in the final quarter. Combined, these three sectors are likely to dominate future deal activity in Southern Europe and are predicted to account for 60% of future quarterly transactions (63% in 2020 Q3).
Pharma, Medical & Biotech
46 6%
Leisure
31
4%
Real Estate
18 2%
TOTAL
769
SOUTHERN EUROPE MID-MARKET VOLUMES BY SECTOR
2020
2021
118
102
8
9
47
39
22
18
124
97
38
28
59
32
65
53
66
50
Technology & Media
Financial Services
Energy, Mining & Utilities
Pharma, Medical & Biotech Real Estate
Consumer
Business Services
Leisure
Industrials & Chemicals
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