BDO’s global quarterly mid-market M&A review, Horizons, reports that mid-market mergers and acquisitions by Chinese companies in Europe have risen 4% in value over the third quarter of 2018. The increase is especially significant when contrasted with a 92% drop in Chinese M&As in the US, year over year.
BDO points to the US-China trade standoff as driver of cross-border deals in Europe where lower regulatory hurdles, stable political relations, emerging technologies and high-tech assets create a favourable deal climate. China’s increasing appetite for European technologies, specifically in areas such as 5G, artificial intelligence and blockchain will drive mid-market deal activity further, BDO predicts.
Reporting on the state of global mid-market deal making, BDO reveals that global M&A volume figures in the mid-market continued an 11-month long downward trend that started in January of this year. The faltering volume is common spread says BDO - In Q3 2018, activity declined in North America, Europe, China and the Rest of the World, with only China experiencing a more modest fall. BDO’s Global mid-market M&A Heat Charts which predicts deal activity, does not give great cause for concern. The number of rumoured deals around the world is almost identical to deals completed in the last 12 months, which stands at over 8,000, BDO reassures.
BDO concludes that the current mid-market M&A climate is inspired by dealmakers’ increasingly strategic mergers and acquisitions, with over 85% of global M&As being led by strategic buyers who nevertheless remain selective vis-à-vis the mid-market ’s high M&A prices. BDO further points to booming economies, abundant cash, high public equity valuations and relatively low interest rates as drivers of global mid-market M&A value.
BDO concludes by pointing out that globally, political and economic factors slowing deal making include Brexit, strained relationships with Saudi Arabia, the EU-Italian budget row and US and China trade relationships. Economic factors include US interest rates and US industrial bellwethers and slowing Chinese growth. The combined effect of former and latter having a ‘driving with the brakes on’ effect on global mid-market M&As, BDO finds.
BDO’S GLOBAL MID-MARKET M&A INSIGHTS PER REGION
In North America mid-market trade and PE deal activity has continued to lag, with only the United States-Mexico-Canada Agreement slightly improving M&As between quarters. A factor that has not had the expected impact on M&A in the mid-market and as a whole is the repatriation of US profits, repatriated cash being directed to shareholders. BDO predicts that pending 5G network rollouts in the region will drive M&A in technology, media and telecommunications, as will the emergence of Canada’s cannabis industry.
In Latin America mid-market deal making volumes fell 39.7% and 35% in value over Q3, a year-on-year drop of 3.8% in volume and 7.1% in value. TMT returns to its first place in BDO’s heat chart, led by consumer transactions in Q1. The region suffers from the impact of a strong dollar, increased interest rates and low growth. In Q3 2018, two deals worth USD 500m were PE transactions, representing 4% of the quarter’s deal count and 9.8% of the value.
UNITED KINGDOM & IRELAND
This third quarter of 2018 was the quietest since 2012, reflecting markets’ lack of confidence due to Brexit. Only 121 deals were completed, representing a 22% decrease in overall volume. Nevertheless and with increased funding available, valuations continue to rise and this is reflected in the fact that the total value of PE deals for 2018 remained the same as 2017, despite a 25% decline in number of transactions. Companies in the UK and Ireland remain attractive to international buyers. Although inbound activity declined in the UK, five of the top 10 transactions were US and Japanese buyers. A number of Irish buyers are currently looking to acquire UK companies as they see opportunities to secure and consolidate their market position while other companies look to protect their supply chain.
Southern Europe saw a sharp decline in both transactions and value by 22.2% and 18.6% respectively compared to Q2 2018, but average deal size kept increasing, reaching USD 93m. The Consumer sector is predicted to lead on volume, accounting for 22.8% of the region’s transactions. PE activity experienced a particularly negative quarter with only 28 transactions. Looking ahead however, BDO’s Heat Chart predicts the cumulative volume of PE in Southern Europe to reach 582 deals, which is forecasted to represent 7.2% of total global transactions.
NORTHERN AND CENTRAL EUROPE
- The Benelux over Q3 2018 saw a fall in deal volumes but a remarkable 20% jump in value. Top 10 deals were split across six different sectors. In relation to total deal value, 64% of the buyers were located in Western Europe and 36% in Asia. Private equity deal volume fell 55% year-on-year.
- Reversing European trends, the DACH region’s mid-market deal activity increased by 6% in Q3. The aggregated value of transactions increased sharply (+39%), a year on year jump of 68%.
- The CEES / CIS states achieved the weakest Q3 results in the last 10 years in terms of both transaction volume and value. The total value of the deals was USD 2,685m, down more than 50% compared to the Q3 2017’s figure of USD 5,392m and also down 41% in volume numbers.
- In the Nordics M&A performance in Q3 2018 fell significantly compared to Q3 2017 and had its weakest quarter in terms of volume since Q3 2015. Five out of the 10 largest deals took place in the TMT sector. PE activity more than doubled in value compared to Q3 2017, while the number of deals stayed the same. Even though activity in the Nordic M&A market has slowed down, it is expected to remain at fairly good levels.
Q3 2018 saw total transaction value decrease by 48% in Q2 2018, representing the lowest mid-market M&A deal value and volume for the last 10 years. PE buy-outs remained the same as Q3 2017 but transaction value rose by 16%. The quarter’s largest deal was Tokyo Marine Holdings’ purchase of 22.5% stake in Hollard Insurance. The BDO Heat Chart for Africa’s mid‑market M&A activity forecasts 168 deals for the rest of 2018, indicating a positive outlook.
A strong economic outlook and rising investor confidence from both local and Chinese investors boosts deals in India. Chinese investors have participated in 16 deals this year. In Q3 2018, fundraising totalled approx USD 300m and the top 10 rounds accounted for 66.4% of the total funds raised. Six companies raised rounds of more than USD 100m each. The majority of funds went B2C with consumer internet or internet-enabled businesses dominating dealmaking.
Due to shrunk liquidity, China-US trade disputes and the increased scrutiny of Chinese deals, Both deal volume and deal value decreased by around 2% in Q3 2018 compared to Q2 2018 and deal value dropped by 6%. Chinese M&A transaction value in the US for the first nine months of 2018 decreased by 90% compared to the same period in 2016, when Chinese deal making peaked. China’s private equity market has cooled down with fundraising at one tenth of August 2017 levels. The latest BDO Heat Chart for Greater China indicates that there are a total of 1,260 deals planned or in progress. Key sectors include Business Services, Consumer and Financial Services.
Deal volume has now declined for three quarters in a row but deal value increased by an impressive 28%. Both volume and value decreased by around 2% compared to Q2 2018. PE deal activity has declined for three quarters in a row, volume falling 37% since Q1, the first big decline since the slowdown from Q1 2015 to Q3 2015. Deal volume and value in industrials and chemicals has increased over three consecutive quarters, and together with construction will be positively impacted by the 2020 Olympic Games. An increase in M&A to resolve SME business succession issues is expected in the future.
Middle-market deal making in South East Asia is on the rise, with an increase of 6.2% in deal numbers and value jumping an impressive 66% over the course of the third quarter. PE deals formed a small proportion of total M&A activity for the quarter, representing 5.8% of the number of deals and 4.0% of value. Weakened South East Asia currencies make that US dollar investors may find assets in the region attractive.
BDO reports a year-on-year deal value increase of 59% in Australian and New Zealand deal making, a 27% volume increase on Q2 2018. Energy, mining and utilities recorded the highest number of deals. Australasian mid-market PE transactions more than doubled in Q3 2018, with value at its highest point since Q3 2015. Competition and excess levels of debt and equity capital have PE firms pay higher prices.
SPECIAL FOCUS: FACILITIES MANAGEMENT IN THE UK
In the first half year of 2018 facilities management deals were up 40% compared to H1 2017, 24% of those deals being cross-border transactions with deal targets geographically complementary to one another. UK facilities management improves strategic alignment with clients’ workspace strategy, deploying new technologies to address employment costs, in face of regulatory scrutiny over flexible labour and Brexit. The sector seeks synergies between specialist services and innovative knowledge sharing. Trade buyers secure targets by acquiring related activities, such as landscaping and integrated services. BDO notes that all of the Facilities Management M&As that it is involved with have an international angle.
SPECIAL FOCUS: LIFE SCIENCES
Life Sciences M&A stalled last year, deal volumes fell by some 20% in value. But while big pharma fell heavily in value, generics and medical devices grew, the latter by some 50%. 2018 Has performed strongly in the first three quarters with deal count and values at heights not seen since 2014 – even seeing the return of Big Pharma mega-deals. PE houses are using low interest rates to double the amount of cash available to invest in the UK over the last year. Challenges ahead include the turning to outcomes-based payment, blockbuster scarcity, time-to-market costs and in the UK the uncertainty around Brexit and a potential impact on drug availability – which could just as well mean an increase of M&A activity into 2019.
SPECIAL FOCUS: NATURAL RESOURCES
Commodity price increases in 2018, fueled by excess demand versus supply, prompting market expansion which in turn spurred M&As. Offsetting this were the trade conflicts in North America, Asia and Europe which caused a 13% drop in transactions in Q2 compared to Q1 2018. In Q3 2018, the number of natural resources sector transactions declined, but transaction values rebounded significantly between Q2 and Q3. The highest sub-sectors by value were Oil & Gas with Q3 Transaction values in Oil & Gas more than doubling Q2 results. Transaction values in diversified metals and mining have increased each quarter this year despite global trade disputes, a growth explained by big tech’s dependence on commodities. Technology companies will continue to acquire meaningful ownership stakes in mining companies — or even buy the mines themselves.
Published quarterly, BDO Horizons articles are authored by more than 20 BDO M&A specialists, showcasing global deal activity and providing invaluable insights into where investment is flowing. With topics ranging across regions and industry sectors, Horizons provides a satellite view, integrating impacts to the global economy and scoping out trends.