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 1 | 2022
ESGCOMESOFAGE INM&A
VIEWS FROM AROUND THE GLOBE REGIONAL VIEW
INDUSTRIALS &CHEMICALS TMT LOGISTICS & SUPPLY CHAIN SECTORVIEW
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY
CONTENTS
GLOBAL VIEW.................................................. 01 FEATURE 1: ESG COMES OF AGE IN M&A . .. 03 GLOBAL MAP. .................................................. 07 REGIONAL VIEW.............................................. 09 SECTOR VIEW. ................................................. 53 SOME OF OUR RECENTLY COMPLETED DEALS......................................... 65
BDOGLOBAL CORPORATE FINANCE 2,020 COMPLETED DEALS IN 2021
OF OUR DEALS ARE
PRIVATE EQUITY INVOLVEMENT DEAL
ONE OF THE MOST ACTIVE ADVISERS GLOBALLY *
BORDER CROSS 2,500
DEAL VALUE OF WITH A TOTAL $128.6bn *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 2021
ISSUE 1 | 2022
WELCOME WELCOME TOTHE FIRST EDITIONOF HORIZONS IN 2022, INWHICH BDO M&A PROFESSIONALS AROUNDTHEWORLD PRESENT THEIR INSIGHTS ON MID-MARKET DEAL ACTIVITY ANDTRENDS
by over 30% from the previous year. Over 120 countries contributed to that record and we are grateful to the efforts of all of our 2,500 people that were involved in helping our clients succeed. We welcomed new teams in countries including Hungary and the Middle East and we hope that this is the year when we get the chance to meet some of our international colleagues in person again. With theWinter Olympics just around the corner our publication takes on an appropriate theme and we hope you enjoy the coverage if you tune in. Otherwise we hope you stay safe and well.
We look at the trends above in more detail in our Global View article. In our lead article we look at the hugely important theme of Environmental, social, and governance or ESG issues which are now front and centre in today’s business world and high on investors agenda. We examine the growing body of research that points to the positive correlation between a company’s ESG credentials and their financial performance and value creation. In our sector view, we look at Industrials &Chemicals, TMT and Logistics and supply chain. We look at why future looks bright for Industrials &Chemicals M&A. With TMT we explain why we believe strong deal momentum looks set to continue in 2022. In Logistics and supply chain we look at howM&A bounced back in record-breaking year. Along with the market, we at BDO, also experienced a record breaking year with 2,020 deals which was up
Well, 2021 will stand out as a vintage year for global mid-market deal activity and amount of capital deployed. Not even a slight dip in deal activity in the final quarter would detract from that picture which is truly remarkable against the backdrop of the pandemic. Private equity was the coming force in 2021 with a marked rise in the number of investments in new deals. 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. The Heat Charts suggest that 2022 will be another good year for M&A. The two dominant regions for deal activity were once again NorthAmerica and Greater China but NorthAmerica saw much bigger increase in deal activity of the two regions in the year. In terms of sectors, TMT saw the biggest gain in deal activity over the prior year. That said, all sectors enjoyed a growth in deals.
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 MID-MARKET DEAL ACTIVITY 01
GLOBALVIEW
DEAL ACTIVITY SLOWS IN FINAL QUARTER BUT 2021 REMAINS A STAND-OUT YEAR
After four continuous quarters of really strong deal activity, mid-market global deal-making took a dip in the final quarter of 2021. We do not see this as any great cause for concern as there is only so long that such high activity levels can persist before some respite. Looking at the aggregate amount of value, the dip is less pronounced in the final quarter, meaning that high amounts of capital are still being deployed. At a total value of over USD 220bn, the capital exchanging hands remains very high by historic levels. Taking 2021 as a whole, it really was a vintage year for deals with nearly 9,500 transactions. That represents a huge recovery on the COVID-impacted 2020 and is well up on the pre-pandemic year of 2019.
America saw nearly 45% increase in deal activity in 2021, compared to a less than 10% increase for Greater China. In the final quarter of the year, only Japan and Greater China saw an increase in deal activity with every other region experiencing a decline in deals.
In terms of sectors during 2021, TMT and Industrial & Chemicals remained the most prolific, representing around 20% and 30% respectively of total deal activity. Compared to the prior year, TMT deal activity nearly 60% higher, with financial services the next highest riser at over 45% up. Indeed, every sector experienced higher activity across the year. Looking around the world, every region saw an increase in deal activity during 2021. The two dominant regions remain as North America and Greater China but the proportions have changed. North
When we consider the mix of the deals, we can see that the final quarter tail-off was more influenced by lower private equity activity and value than trade. The chart on this page shows that clearly with dome- shaped PE aggregate value of deals across the year. That puts the split of deal activity of trade vs equity for 2021 at around 75:25 and the split of aggregate value at around 70:30. Compared to historic levels, this represents a rise in global PE investing and this has been a big driver of the resurgence in the M&A market post the onset of the pandemic.
GLOBAL MID-MARKET M&A
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ISSUE 1 | 2022
02
OUTLOOK SUPPORTS HEALTHY M&A MARKETS Despite the dip in deal activity in Q4 2021, the outlook remains strong. For the sixth quarter running our Heat Charts show high levels of rumoured mid-market deals. And for the fifth quarter in a row there are over 10,000 rumoured deals. That compares
to more recent historic numbers of 8,000 or more. All of this supports the positive outlook for M&A markets. 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 could 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 PE realising existing investments that have seen good growth over the last 12 months and seeking to capture current high valuations. GLOBAL THEMES 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 noted earlier, the continued growth of private equity funds should continue to be a major factor in deal- making activity. We also expect strategic buyers to continue to be active in the market as they seek to add to capability, especially technology and digital. The other big theme is the growth of ESG as companies and investors seek to acquire companies with activities that benefit the carbon footprint of the world.
GLOBAL BDO HEAT CHART BY REGION AND SECTOR
TOTAL % *
North America
502 299 303 488 179 352 178 66 39
2406 24%
Greater China
306 715 218 153 169 172 186 66 144
1922 19%
CEE
163 193 72
47 99 33 65 28 26
726 7%
Southern Europe
141 178 99
51 178 48 85 27 17
824 8%
India
93 77 46 43 53 56 27 13 2
410 4%
Latin America
127 39 63 112 48 14 50 22 14
489 5%
Nordic
53 52 25
17 26 19 14 1
4
211 2%
UK/Ireland
145 58 55 69 61
35 47 30 8
508 5%
Australasia
96 59 50 47 59 52 66 42 8
479 5%
DACH
80 94 54 19 49 50 16 5 8
375 4%
JOHN STEPHAN HEAD OF GLOBAL M&A
Other Asia
71
78 23 32 39 26 19 17
4
309 3%
South East Asia
125 78 87
64 46 20 42 13 37
512 5%
Japan
43 27 25
7 17
8 5
9 5
146 1%
john.stephan@bdo.co.uk
Middle East
26
6 15
14 2
3 7
1
3
77 1%
Africa
51
39 30 21 20 19 25
2 4
211 2%
Benelux
37 46 41
13 25 18 9 6 2
197 2%
Israel
31
24 22
16 21
15 11
7
7
154 1%
TOTAL
2,090 2,062 1,228 1,213 1,091 940 852 355 332 10,163 100%
* 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 MID-MARKET DEAL ACTIVITY 03
ESGCOMESOF AGE INM&A
Environmental, social, and governance (ESG) issues are now front and centre in today’s business world. Climate change, modern slavery, indigenous rights, employee health and wellbeing, and diversity and inclusion are but a few of a company’s ESG factors coming under increasing scrutiny by shareholders, investors, and the broader community.
The management and disclosure of ESG factors for public companies has long been considered a necessity from a regulatory and social licence to operate perspective. For private companies, the development and disclosure of ESG credentials presents a significant business opportunity. Early adoption of an ESG- aligned business strategy differentiates a private small-medium enterprise (SME) among competitors and positions them as an attractive option, both from a product/services standpoint and as a prospective investment. HIGHER BUSINESSVALUE A growing body of research points to the positive correlation between a company’s ESG credentials and their financial performance and value creation. A target’s ability to effectively understand and address their ESG risks, and transparently communicate their ESG credentials, provides them with greater certainty of their long-term value, minimising the risk of their valuation being reduced on discovery of ESG liabilities. Acknowledging the risk and impact of ESG factors on financial performance, the assessment of ESG in valuations has shifted from qualitative to quantitative with the attribution of financial values to ESG factors. For example, pricing of greenhouse gas emissions, increased insurance premiums from operations located in areas vulnerable to climate change, increased demand for environmentally and socially sustainable goods, and greater employee retention and productivity.
As communities call for greater transparency and accountability for ESG factors, increasing shareholder scrutiny of ESG performance and the continued rise of shareholder activism are presenting financially material risks and opportunities for companies. The mitigation of these risks and the maximisation of opportunities are key considerations for M&A practitioners. RISE OF ESG INVESTING The recent rise of sustainable investing and the exponential growth of green funds and ESG-linked funding options is invariably transforming acquirers’ investing strategies. To align with a new sustainable investing ethos, acquirers are increasingly looking for companies with strong ESG credentials. This transition to sustainable investing is not only being driven by community sentiment and corporate social responsibility (the ‘right thing to do’ position), but the considerable financial gains and market opportunities available to companies that understand and effectively manage their ESG risks. GREATER TRANSPARENCY AND ACCOUNTABILITY ESG metrics and sustainability reporting present an opportunity for both targets and acquirers in M&A transactions. ESG metrics are being used by targets to determine their business value, while acquirers are using ESG metrics and sustainability reports to identify sustainability-aligned targets and reduce reporting burden. ESG reports provide acquirers with insights into a target’s ESG opportunities, such as operational efficiencies, access to new markets and supply chain resilience.
ISSUE 1 | 2022
04
ESG DUE DILIGENCE NOW INTEGRAL PART OF M&A
ESG CREDENTIALS In today’s market, to remain competitive and maintain access to capital and service providers, companies need to develop and communicate a clear ESG strategy. The development of an ESG strategy requires a company to: 1. Understand their impacts (outside-in and inside-out) 2. Capture and collate data on material impacts 3. Create and implement effective strategic and tactical actions to avoid, reduce, manage, and offset their impacts 4. Routinely and transparently disclose progress to the market. A well-executed ESG strategy can generate value in a myriad of ways, including access to new avenues of capital, improved productivity and reduced operating costs, access to new markets, improved stakeholder engagement, and access to and retention of high-quality talent. “Developing and executing an ESG strategy is extremely valuable when it comes to M&A today. ESG credentials either increase transaction probability and/or increases price. It’s a win- win for the planet and for business.” TODD GROVER, PARTNER – Corporate Finance, Mergers & Acquisitions at BDO Perth
As acquirers become increasingly aware of the impact that underperformance on ESG factors can have on long-term business performance, ESG credentials have become a significant deal execution risk. Consequently, ESG due diligence is quickly becoming an integral part of the M&A due diligence process. Formulating a clear understanding of the material ESG risks for a target and evaluating the target’s ESG performance against its disclosure is key. ESG due diligence can identify potential technical issues (such as exceptionally high baseline greenhouse gas emissions), product health-related side effects, or operational errors with potentially long-lasting impacts (such as facilities constructed on inappropriately acquired land). This information can potentially impact the target valuation and deal structure. Sufficient due diligence on ESG-related opportunities is also needed to qualify current and future value projections. ESG due diligence is changing from a risk- focused ‘do’s’ and ‘don’ts’ tick-box exercise to a detailed benchmarking analysis of performance identifying areas of value growth potential. As ESG considerations continue to further embed in corporate decision making, the value of strong ESG credentials will continue to increase and so will the demand for acquisition targets leading in ESG performance.
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 05
IMPERATIVE FOR DEALS It’s clear that ESG issues are not ones which can be left to be considered post-transaction. A basic expectation of shareholders, ESG is an imperative consideration for M&A deals. Companies which develop, implement, and disclose ESG strategies early will position themselves as preferential suppliers, attractive investments, and more resilient, higher-value businesses. These companies are increasingly being identified as primary targets for acquirers looking for investment opportunities which will support the acceleration of their own ESG strategy and performance and drive up their own business value. Get in touch with BDO’s Sustainability team to understand what ESG means for your business and activate your Sustainability Journey today. CATHERINE BELL, Principal, Sustainability – catherine.bell@bdo.com.au KIRA SORENSEN, Senior Manager, Sustainability – kira.sorensen@bdo.com.au
Catherine Bell, Principal, Sustainability and Kira Sorensen, Senior Manager, Sustainability have established a rapidly growing Sustainability practice in Australia to address the increasing business imperative that ESG issues are having in the market today. They are focused on helping companies activate their sustainability programmes and reporting frameworks, assisting continuous improvement of sustainability programmes, and advising companies in the management and mitigation of their carbon and climate risk. The team in Australia are working hand-in-hand with other BDO sustainability professionals across our global network, leveraging our diverse expertise to support a growing number of cross-border opportunities.
CATHERINE BELL PRINCIPAL, SUSTAINABILITY
catherine.bell@bdo.com.au
KIRA SORENSEN SENIOR MANAGER, SUSTAINABILITY
kira.sorensen@bdo.com.au
ISSUE 1 | 2022
06
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 07
GLOBAL 10,163 RUMOURED TRANSACTIONS
P09 | NORTH AMERICA A RECORD YEAR FOR DEAL-MAKING
P13 | LATIN AMERICA M&A DEAL-MAKING HITS THE HEIGHTS IN 2021 BUT SLOWER GROWTH EXPECTED IN 2022
SECTORVIEW
e
e
INDUSTRIALS & CHEMICALS
LOGISTICS AND SUPPLY CHAIN
P55
P57
P61
TMT
ISSUE 1 | 2022
08
P17 | UNITED KINGDOM & IRELAND M&A STAGES STRONG RECOVERY IN 2021 DESPITE DECLINES IN FINAL QUARTER
P27 | DACH M&A AND PE ACTIVITY REMAIN STABLE IN FINAL QUARTER
P25 | BENELUX M&A ACTIVITY FALTERS AS DEAL VOLUME DROPS BY
P31 | NORDICS DEAL NUMBERS AND VALUE SOAR IN RECORD- BREAKING YEAR
P45 | CHINA M&A REMAINS VIBRANT IN STRONG FINAL QUARTER
P 41 | INDIA GROUND-BREAKINGYEAR FOR IPOS AND A BUOYANT YEAR PREDICTED FOR M&A IN 2022
P37 | AFRICA DEAL VOLUME FALLS BUT VALUE HOLDS FIRM IN QUIET FINAL QUARTER
P49 | SOUTH EAST ASIA DEAL FLOW SLOWS IN Q4 BUT OVERALL 2021 M&A DEAL-MAKING HOLDS UP WELL
P35 | MIDDLE EAST DEAL-MAKING STAGES STRONG COMEBACK IN 2021
P51 | AUSTRALASIA SLOW FINAL QUARTER CAPS A STRONG YEAR FOR M&A
P33 | ISRAEL DEAL VALUE AND VOLUME FALL BACK BUT PICTURE LOOKS BRIGHTER FOR 2022
P21 | SOUTHERN EUROPE BIGGER DEALS DRIVE REDUCED ACTIVITY TO CAP AN EXTRAORDINARY YEAR
-20% to -11% 1% to 10% 11% to 20% 21% to 30% 31-40% 41-50% 51-60% Key % movement -30% to -21% -10% to -1% 0
-20% to -11% 1% to 10% 11% to 20% 21% to 30% 31-40% 41-50% 51-60% Key % movement -30% to -21% -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 09
NORTHAMERICA A RECORD YEAR FOR DEAL-MAKING
As expected, M&A activity continued to forge ahead in 2021. A market with an abundance of cash held by both PE funds and strategic buyers, lifted restrictions driving pent-up deal demand and improved business conditions all contributing to a surge in M&A. With all deal-making participants now familiar with operating in a pandemic- influenced M&A environment, 2021 started positively and remained so during the year, setting new records in M&A activity. Underlying pent-up demand left over from 2020, along with low interest rates, continued government stimulus and strong debt and equity markets all contributed to an unprecedented increase in deal volume and value. The total value of North American deals in both the USA and Canada were the highest recorded in history, both individually and combined. North American mid-market M&A volume maintained a furious pace throughout 2021 with 2,636 deals compared to 1,825 in 2020 and 2,213 in a pre-pandemic 2019. There
was a corresponding increase in aggregate deal dollar value in 2021 with USD 352bn in deal value versus USD 207bn in 2020. Q4 2021 was the slowest quarter of the year, with 441 deals and USD 75bn in total deal value. Certain 2020 deal trends continued into 2021 including strong valuations, virtual due diligence and more focus than ever on earnings sustainability. Industry participants deployed the tools used to navigate an early pandemic deal environment to drive another very active year. The factors driving M&A deal volume and value, whether it’s in the mid or up-market are no secret and have been prevalent and pervasive for years. In both Canada and the USA these include a record amount of dry powder, partially fueled by low interest rates, strong equity markets, pressure in some cases to deploy capital and strategic buyers continuing to explore inorganic growth strategies. A seller’s market remains, with the amount of underlying market liquidity driving competition and valuations along with many business owners turning their focus back to growth
BIG PICTURE
• Deal volume up 44% in 2021 compared to 2020 and up 19% compared to pre- COVID 2019 • Deal value up 70% in 2021 from 2020 and 63% compared to 2019 • PE buyers were still active with 143 deals, representing 32.4% of volume and 29.1% of value.
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ISSUE 1 | 2022
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to provide a runway for funds to continue seeking platform and add-on opportunities, while also dealing with increasing competition and valuations. 2021 also marked the year of a rise in Environmental, Social and Governance (ESG) considerations for many investors and funds. Strengthened by the pandemic and regulatory changes, ESG has made an impact on investing decisions, due diligence and ultimately deal activity, regardless of the size of the deal. While its impact to M&A is less direct, it has certainly made a contribution to the way deals have been sourced, evaluated and executed in recent quarters and it will be prevalent moving forward. KEY SECTORS In 2021, M&A activity increased across eight of the nine tracked sectors compared to 2020, with the exception of Real Estate, which had only 16 deals tracked in 2021. Financial Services experienced the biggest rise, with 236 deals in 2021, increasing from 117 in 2020. Next were TMT and Industrial & Chemicals, which increased 80% and 48% respectively with 993 and 399 deals. The remaining sectors all increased by at least 10% in terms of year-over-year volume.
Another enduring factor contributing to increased activity in 2021 is accelerated retirement plans for business owners. While the aging demographics of the population have been well known to be a positive contributor to divestiture activity, a recent survey of 150 North American business owners found that 66% planned to sell or retire sooner due to the COVID- 19 pandemic. The reasons for this are diverse, including the monetization of recent successful years, a fear of new increased taxes on capital gains (both in Canada and the USA) and a lack of desire to take the necessary steps for the next phase of growth or maintenance after an exhausting past couple of years. Regardless of the reason, this accelerated transition has been one of the biggest factors driving mid-market M&A in 2021 and this will continue to be the case. Private equity maintained its status as a large factor in M&A activity, contributing 36% and 35% of total deal value and volume in 2021 respectively. North American dry powder estimates are in the trillions and 2021 was another successful year in fundraising, which should continue
after withstanding a year with significant challenges. The resilience of mid-market business owners and management teams are another contributing factor that should not be overlooked. In another year marred by supply chain issues, lockdowns and varying other headwinds outside the capital markets, businesses have endured and shareholders have found opportunities across all industries to acquire or divest. From chip shortages to multi-year high shipping rates, global supply chain issues had some influence on virtually every industry throughout 2021 and have driven many strategic buyers to employ vertically integrated focused M&A strategies to try to increase some control over their purchasing and/or material procurement. Regionally, several areas experienced additional disruptions due to natural disasters such as the wildfires and floods in parts of the US andWestern Canada presenting additional challenges for companies trying to move goods across country or for businesses with coast-to-coast operations. However they arose, industry participants were able to navigate varying, more localized issues and continue to get deals done.
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 11
NORTH AMERICA HEAT CHART BY SECTOR
TMT
502 21%
Financial Services 488 20% Pharma, Medical & Biotech 352 15% Business Services 303 13% Industrials & Chemicals 299 12% Consumer 179 7% Energy, Mining & Utilities 178 7% Leisure 66 3% Real Estate 39 2% TOTAL 2406
LOOKING AHEAD
The first half of 2022 does not show any imminent signs of slowing down, but the question remains whether the M&A market can continue for another full year at the same frenetic pace. With increasing inflation and a strengthening economy, the US Fed indicated that they are likely to begin raising interest rates earlier than anticipated, with three or four rate hikes expected in the year. The same is likely to happen in Canada and while this should not immediately curtail M&A activity, it will likely slow it down in the medium to long-term. Conversely, with strong market fundamentals, robust amounts of PE dry powder and strong strategic balance sheets, deal activity will not fall off a cliff. While the market remains hot in terms of deal dynamics, every sector is poised to remain strong in deal activity and capitalize on the current M&A environment.
RYAN FARKAS MANAGING DIRECTOR
rfarkas@bdo.ca
NORTH AMERICA MID-MARKET VOLUMES BY SECTOR
2020
2021
ALEX ARDIZZI DIRECTOR
aardizzi@bdo.ca
549 52
758 993
20
6 16
299 301
306 58
41
39 49
267 9
313 99
117
159 236
196 7
173 217
142
114 58
186
166 210
Technology & Media
Financial Services
Energy, Mining & Utilities
Pharma, Medical & Biotech Real Estate
Consumer
Business Services
Leisure
Industrials & Chemicals
ISSUE 1 | 2022
12
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 13
LATINAMERICA
M&A DEAL-MAKING HITS THE HEIGHTS IN 2021 BUT SLOWER GROWTH EXPECTED IN 2022
Latin America’s mid-market segment registered 85 deals worth USD 8,625m in Q4 2021, which represented a sharp fall in both volume and value compared to the previous two quarters. In terms of deal volume and value, Q4 was the third best quarter of the year. Average deal value was 14.7% lower than in Q3 2021, overall deal volume fell by 41.8% and overall deal value by 50.3% compared to the previous quarter. Compared to Q4 2020, overall deal volume declined by 8.6%, however overall deal value increased by 26.4%. There were 27 PE deals completed and overall value declined by 67.2% compared to the previous quarter. Overall PE deal value was USD 1,858m, a decline from the previous two quarters. The 27 PE transactions accounted for 21.5% of the quarter’s overall deal value. Looking at the quarter’s top 20 deals, the total value of USD 5,509m represented
63.9% of overall deal value but only 23.5% of overall deal volume. Over the last 12 months, deal volume rose from 280 in 2020 to 429 in 2021, an increase of 53.2%. Overall value climbed by 97.8%, due not only to the higher volume of deals but also the higher average deal value. KEY SECTORS AND DEALS TMT and Energy, Mining & Utilities led Q4 2021 sector activity with 32 and 14 deals respectively, accounting for approximately 54.1% of all deals closed in the period. The top two sectors were followed by Pharma, Medical & Biotech, Financial Services and Industrial & Chemicals, with eight deals each, Business Services (seven), Consumer (six) and Leisure (two). No transactions took place in the Real Estate sector. The quarter’s top 20 deals represented approximately 63.9% of all Latin America M&A activity with a total value of USD 5,509m. Brazil was the most targeted country and featured in 19 out of the top 20, representing 93.9% of the top 20’s deal value.
BIG PICTURE
• Looking at the last 12 months, deal volume increased from 280 in 2020 to 429 in 2021, a growth of 53.2%. Overall value was up 97.8%, due not only to a higher volume of deals but also a higher average value per deal • In Q4 2021, with 85 deals worth USD 8,625m, M&A volume fell compared to bothQ3 2021 andQ4 2020 • Sector activity was led by TMT (32 deals) and Energy, Mining &Utilities (14 deals) • Brazil accounted for 19 of the top 20 deals, representing 93.9%of total deal value • The Latin American economy remains one of the most impacted by COVID-19 and is struggling to recover.
PE/TRADE VOLUME &VALUE 160
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ISSUE 1 | 2022
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and it is likely to take a few more quarters for a full recovery. Additionally, due to a likely rise in interest rates to contain inflation and an increased exchange rate, the domestic market is expected to retract. However, it’s worth noting that this particular scenario can present opportunities for foreign investors looking for cheaper assets due to the devaluation of local currencies, as well as encouraging strategic acquisitions involving local companies with purchasing power. With this in mind, Brazilian investment brokers are expecting higher levels of foreign investment in 2022, due to the attractive pricing of assets, as well as rising government revenues which can help to minimize recent fiscal concerns.
The biggest deal was the acquisition of 30% stake in Comerc Energia Ltda. by Vibra Energia for USD 363m and in second place was the acquisition of 100% in Celg GT by Energias do Brasil S.A. for USD 359m. Both companies operate in the Energy, Mining & Utilities sector. The Energy, Mining & Utilities sector is currently enjoying a boost due to high demand for renewable energy worldwide and Brazil is especially attractive to investors in this regard due to its natural resources and regulatory stability. The lower costs and large market in Brazil are also factors that make the country an interesting alternative to the US and Europe for investments in the renewable energy sector.
reforms to address structural challenges in Latin America. The OECD also suggests that governments should introduce fiscal, social and transformational policies. The governments across the region, which historically suffers from low productivity, inequalities, social vulnerability, institutional weaknesses and threats to environmental sustainability can, according to the OECD, use the current economic context to adopt multi-dimensional strategies to implement the many reforms needed to drive recovery. Taking all this into consideration, Latin America is expected to see growth in 2022, but at a slower pace than observed in 2021. Additionally, in the near term, according to the Economic Commission for Latin America and the Caribbean, most countries in the region will not have recovered to pre-pandemic levels of GDP by the end of 2022, some three years after the start of the pandemic. As examples, according to Moody’s, some countries, such as Chile, Peru and Colombia, are already operating above pre-pandemic production levels, while Brazil and Argentina are close to pre-pandemic levels. However, in the majority of Central America and the rest of Latin America, production levels are still below what they were pre-pandemic
POLITICAL AND ECONOMIC CONTEXT
Finally, the upcoming presidential elections in Brazil, Colombia, and
Costa Rica may temporarily impact the economic recovery of these countries and affect the attractiveness of investment in those countries.
Latin American economies have been some of the most heavily impacted by the crisis brought on by the COVID-19 pandemic, which has resulted in deep recessions across the region. According to the Organization for Economic Co-Operation and Development (OECD), this moment could be seen as an opportunity to implement the necessary
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 15
LATIN AMERICA HEAT CHART BY SECTOR
TMT
127 26% 112 23% 63 13% 50 10% 48 10% 39 8%
Financial Services Business Services
Energy, Mining & Utilities
LOOKING AHEAD
Consumer
Industrials & Chemicals
Latin America represents approximately 5% of the global market with 489 deals announced or in progress, as shown in the BDO Heat Chart. TMT is expected to top the Heat Chart with 127 deals, followed by Financial Services (112), Business Services (63), Energy, Mining & Utilities (50) and Consumer (48). In 2022, considering all the previously mentioned factors, slower growth is expected for Latin America as a whole. In Brazil, although the privatization of companies has not progressed as expected in 2021, the outlook remains positive. The expectation is that the government’s share of companies will be reduced and that it will no longer be the majority shareholder. This situation will likely attract investors, from individuals to corporations. Additionally, the country’s currency devaluation is expected to attract more foreign investors eyeing cheaper assets.
Finally, it is worth highlighting that Latin American economic growth in recent months has been linked to the reopening of cities and businesses after the peak of the pandemic passed. With the region facing a new wave of COVID-19, this might yet push back recovery for some time.
Leisure
22
4%
Real Estate
14 3% 14 3%
Pharma, Medical & Biotech
TOTAL
489
LATIN AMERICA MID-MARKET VOLUMES BY SECTOR
2020
2021
ROMINA LIMA CORPORATE FINANCE AND ADVISORY PARTNER
55
125
romina.lima@bdo.com.br
5
29
4
ADRIANO CORREA CORPORATE FINANCE AND ADVISORY PARTNER
5
50
29
9
adriano.correa@bdo.com.br
24
36
43
59
77
25
27
49
58
Technology & Media
Financial Services
Energy, Mining & Utilities
Pharma, Medical & Biotech Real Estate
Consumer
Business Services
Leisure
Industrials & Chemicals
ISSUE 1 | 2022
16
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 17
UNITED KINGDOM& IRELAND M&A STAGES STRONG RECOVERY IN 2021 DESPITE DECLINES IN FINAL QUARTER
The momentum created by the easing of lockdown measures and excess liquidity in the market in H1 2021 slowed in H2 2021, with lower M&A mid-market deal activity. Deal volumes in H2 2021 decreased to 243 from 346 reported transactions in H1 2021 (30% down), while deal value also dropped by 19% from USD 35.2bn to USD 28.4bn in the same period. In Q4 2021, deal volume fell from 156 to 87 closed transactions and deal value from USD 15.7bn to USD 12.7bn in comparison to Q3 2021, equating to drops of 44% and 19% respectively. As the PE/Trade volume and value graph shows, the mix between Trade and PE-funded deals shifted slightly towards Trade from Q3 2021 to Q4 2021. In Q4 2021, there were 66 trade deals compared to 21 PE-funded deals. Trade parties
were involved in 76% (69% In Q3 2021) of all deals by volume with those deals contributed 75% of total deal value in Q4 2021 (71% in Q3 2021). Looking at the total deal count, PE-funded deals declined from 31% to 24% by volume and 29% to 25% by value fromQ3 2021 to Q4 2021, with a reported 21 transactions with a deal value of USD 3.2bn in Q4 2021, down from 48 and USD 4.5bn. Despite the decline in total value, average PE deal value increased fromUSD 93m in Q3 2021 to USD 152m in Q4 2021, a 63% increase quarter-on-quarter. In addition, total PE spend in 2021 was USD 494m, up fromUSD 377m in 2020. This not only indicates a general confidence in the UK economy but also highlights that the availability of capital and a low interest rate environment has seen competition for deals increase and a result this has helped increase valuations.
BIG PICTURE
• Q4 2021 saw declines in both deal volume and value in mid-market M&A transactions in comparison to the previous quarter • H2 2021 also saw declines in both value and volume compared to H1 2021 • H2 2021 still saw high levels of M&A activity, with deal value significantly higher than H2 2020 despite deal volume being lower • Overall, 2021 saw deal values at record levels and significantly higher than pre-pandemic levels.
PE/TRADE VOLUME &VALUE
300
25,000
250
20,000
200
15,000
150
10,000
100
5,000
50
0
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 1 | 2022
18
• US-based Altaris Capital LLC acquired a 70% stake in UK-listed science and chemicals company Johnson Matthey Plc for a consideration of USD 434m • Terra Firma Capital Partners acquired private housebuilder Hopkins Homes Limited for a consideration of USD 400m • France-based Criteo S.A. acquired UK-based AI, data and engineering company IPONWEB Limited for a consideration of USD 380m • 3i Infrastructure plc acquired traffic light equipment company SRL Traffic Systems for a consideration of USD 253m.
(14%), Industrials & Chemicals (15%) and Financial Services (9%). These four sectors also contributed the highest amounts to total deal volume across 2021. Year-on-year all sectors recorded increased deal volume bar Energy, Mining & Utilities, which saw a 30% drop in deal volume. Real Estate and Financial Services showed the biggest increases at 180% and 48% respectively, which can partly be explained by the COVID-19 pandemic and restrictions affecting these sectors harder than others and consequently the bounce back was delayed. Q4 2021 saw strong cross-border M&A activity again, with 11 out of the top 20 mid-market transactions involving an overseas buyer. A selection of the biggest mid-market transactions were as follows: • Constellation Automotive Group Limited, the group behind We Buy Any Car, acquired car dealership operator Marshall Motor Holdings plc for a consideration of USD 465m • NYSE-listed student media learning platform Chegg Incorporated acquired online learning language provider Busuu Limited for a consideration of USD 436m
Despite the decline in volumes and value between H1 2021 and H2 2021, 2021 as a whole saw an increase in both deal volumes and values in comparison to 2020. Deal volumes increased by 20% (492 completed deals in 2020 compared to 589 in 2021) and deal values by a strong 65% (USD 39bn in 2020 compared to USD 64bn in 2021). Significantly, the overall deal value of USD 64bn in 2021 was much higher than pre-pandemic levels, indicating a strong recovery in mid-market M&A. KEY DEALS AND SECTORS With the backdrop of a decrease in deal volume fromQ3 2021 to Q4 2021, all sectors bar Energy, Mining & Utilities and Real Estate experienced a drop in deal volume quarter-on-quarter. TMT deals fell from 61 to 29 transactions fromQ3 2021 to Q4 2021, a 52% drop, Leisure from seven to two deals in the same period, a 71% drop, Consumer from 17 to six, a 65% drop and Business Services from 20 to 12 transactions, a 40% drop. Of the 87 completed deals in in Q4 2021, TMT accounted for 33% of total deal volume, followed by Business Services
ISH ALG DIRECTOR
ish.alg@bdo.co.uk
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 19
UNITED KINGDOM & IRELAND HEAT CHART BY SECTOR
TMT
145 29%
Financial Services
69 14%
Consumer
61
12%
Industrials & Chemicals
58 11% 55 11%
Business Services
LOOKING AHEAD
Energy, Mining & Utilities
47 35
9% 7%
M&A across UK & Ireland hit near-record highs in 2021, and although there was a slowdown in the second half of the year, all the signs are that mid-market M&A activity in 2022 will continue to be at high levels. The roll out of vaccination programmes and the lifting of restrictions will help grow the UK economy and this positive economic outlook, coupled with PE firms having near record levels of dry powder, will help drive M&A activity in 2022. 2022 will also likely see a rise in distressed opportunities as the effects of the withdrawal of Government support schemes and the repayment of pandemic loans start to take effect. The BDO Heat Chart predicts an active market in the UK & Ireland with 508 rumoured deals. TMT is expected to be extremely active with 145 deals, followed by Financial Services (69) and Consumer (61). Pharma, Medical & Biotech, Leisure and Real Estate are the sectors expected to have the least amount of activity.
Pharma, Medical & Biotech
Leisure
30 6%
Real Estate
8 2%
TOTAL
508
UNITED KINGDOM & IRELAND MID-MARKET VOLUMES BY SECTOR
2020
2021
152
195
5
14
49
56
19
26
59
68
46
68
44
31
38
49
79
82
Technology & Media
Financial Services
Energy, Mining & Utilities
Pharma, Medical & Biotech Real Estate
Consumer
Business Services
Leisure
Industrials & Chemicals
ISSUE 1 | 2022
20
HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 21
SOUTHERN EUROPE
BIGGER DEALS DRIVE REDUCED ACTIVITY TO CAP AN EXTRAORDINARY YEAR
In Q4 2021, there were 103 mid- market transactions in Southern Europe. In terms of numbers, although this represented a recovery, the deal volume was still a long way from the corresponding final quarters in the last four years. In fact, in Q4 2021 the overall number of deals actually fell by more than Q4 2020 (down 39%) and Q4 2019 (down 38%). Generally speaking, Q4 2021 showed a very different trend compared to the first part of 2021, when M&A activity was at its most active. Focusing on Q4 2021 deal value, aggregate deal value only dropped by 4% compared to both the corresponding quarters in 2020 and 2019. However, when comparing Q4 2021 with Q3 2021, we can see noticeably sharper declines of 23% in value and 38% in volume. Looking at average deal size, Q4 2021 recorded a great result, with the average value including PE activity at around USD 130m, the highest in 13 years and up 24% compared to the previous quarter when
the average deal value was also very high. Compared to the corresponding quarter in 2020, the average value in 2021 was 57% higher, suggesting that bigger deals largely drove the quarter’s activity. Looking at Southern Europe’s PE activity, Q4 2021 was a good quarter overall. Although the number of PE deals fell compared to the other quarters in 2021, that seemed to be in line with pre-COVID results over the last 10 years. PE deals accounted for 32% of all deals transacted in Q4 2021 and 41% in Q3 2021, which was the fourth highest proportion and the highest in the last 13 years respectively. In addition, when comparing Q4 2021 with the corresponding quarters in the previous two years, PE’s share of overall transactions was 32%, higher than both previous years, which finished at 29% and 25% respectively. Focusing on PE activity in terms of value in Q4 2021, the total value was USD 4.0bn, some 45% lower than overall value in Q3 2021. By comparing PE’s proportion of value with overall deal value, it is possible to conclude that in Q4 2021 PE had a
BIG PICTURE
• 2021 was an extraordinary year for M&A activity in Southern Europe with value reaching USD 68.2bn • Deal volumes and aggregate values fell in Q4 2021 compared to Q4 2020 but average deal values rose • TMT was the most active sector with 29 deals • BDO Heat Chart suggests that Industrial & Chemicals and Consumer will be the most active sectors moving forward.
PE/TRADE VOLUME &VALUE
250
25,000
200
20,000
150
15,000
10,000
100
5,000
50
0
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 1 | 2022
22
of investors led by the American Fund KKR & Co. Following on, the third biggest transaction was the acquisition of Palex Medical S.A., a Spanish company in the Consumer sector, by Fremman Capital, who purchased the stake for USD 466m. Additional deals worthy of a mention were the acquisition of Italian Business Services company Irideos S.p.A by the US private investment firm Grain Management LLC for USD 465m and the acquisition of the French Industrials & Chemicals company Orolia S.A.S by French company Safran S.A. for USD 451m. Looking at the quarter’s top 20 deals, Spanish companies were the most targeted with nine deals and accounted for a total deal value of USD 3.1bn. Following this were six French companies with a total deal value of USD 2.3bn and four Italian companies with a total value of USD 1.4bn. Finally, within Southern Europe’s top 20 mid-market deals, no one sector was dominant as transactions spanned multiple sectors, the most common being Energy, Mining & Utilities, followed by Industrials & Chemicals, Consumer and Pharma, Medical & Biotech.
sectors accounted for around 61% of all deals and were followed by Consumer, Business Services and Leisure with a total of 24 deals, a big drop compared to the previous quarter when the three sectors totalled 49 deals. This was mainly due to Business Services, which saw its deal flow fall from 26 to just seven deals in the quarter (down 73%). Consumer deal numbers fell by 38% between the two quarters, while Leisure remained at the same level. Finally, Financial Services, Pharma, Medical & Biotech and Real Estate represented 5.8%, 5.8% and 4% of total deal numbers respectively. The top 10 mid-market deals in Southern Europe totalled USD 4.4bn, which represented 32% of the quarter’s overall transactions. The biggest deal in value terms was the acquisition of a 21.28% stake in a Spanish company operating in the Business Services sector, Jobs and Talent, S.L., by a group of investors from a Swedish company and a British Fund, for USD 500m. The second biggest deal took place in the Consumer sector and saw the acquisition of the French company Groupe Soufflet S.A. for USD 498m by a group
much lower impact than in the preceding 2021 quarters (PE buyouts accounted for only 30% of the total deal value in Q4 2021 against an average of 39% for the previous three quarters in 2021). Finally, the average PE deal size for the quarter was very high at USD 121m, even higher than the very high average deal size of the preceding two quarters. In fact, the average PE deal size was one of the highest recorded in the last 13 years, confirming the trend that M&A deal-making generally slowed down in the final quarter of the year, with only the big deals keeping pace at the end of an extraordinary year. KEY SECTORS AND DEALS TMT confirmed its position as the most active sector in Southern Europe in 2021, accounting for 29 deals during Q4 2021 (151 in 2021 overall), which represented 28% of total mid-market deals, increasing from 26% of the previous quarter. In absolute terms, TMT deal numbers fell by a third compared to Q3 2021, when 43 deals were completed. TMT was followed by Industrials & Chemicals with 22 deals while Energy, Mining & Utilities, with 12 deals, accounted for 12% and was the only sector which an improved deal count from the preceding quarter. These top three
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