In a new report, Pitchbook looks at the mergers and acquisitions trends in Europe. In 2019 through September, the value of European M&A is lower than it has been since 2014, and the volume is lower than it has been since 2010. Only two sectors did not see year-on-year declines vis-a-vis 2018: healthcare and energy.
In the healthcare space, EQT, a Swedish private equity firm acquired Nestle Skin Health, which was part of the Nestle SA empire. The value of this purchase was $10 billion. That is considered pricy, but it gives EQT an opportunity to test the thesis that the skin health operation had been effectively neglected within the Nestle family and that its new setting will allow it to prosper.
Although the Nestle Skin deal was an outlier, Pitchbook’s analysts say that the shifting nature of the health care world “will create opportunities for future sizeable deals.” Further, that dynamic is not merely continental, it is global. “International consolidation appears to be rampant among many US, European, and Asian healthcare market leaders as they exchange assets for sizeable sums,” says the report.
In the energy space, E.ON acquired Innogy through a complex assets swap with Innogy’s former parent, RWE. Both sides of the swap are German entities. As part of the broader deal, E.ON assumes RWE’s 76.8% equity stake in Innogy for €22 billion (more than $25 billion).
Resilience and Regulatory Review
In more general terms, the Pitchbook report says that Europe’s dealmakers “are opting for fewer but larger transactions, paying substantial premiums for businesses with built-in cycle resilience.”
The report is the work of Dominick Mondesir and Nalin Patel, both EMEA private capital analysts. They observe that it takes longer to complete a deal than it used to, as deal teams get cautious, focusing on the down-cycle modeling to insulate their institutions “from the fluid regulatory, political and economic risks the region poses.”
Cobham, a UK-based aerospace and defense supplier that specializes in air-to-air refueling, recently was taken private by a US-based private equity firm, Advent International. Both parties agreed to the deal in July 2019, but (by way of illustration of regulatory risk in this area and the length of time involved as a consequence) the matter went immediately into regulatory review. Only in late October did Advent announce that it had won approval from US and EU regulators. The UK’s own regulators still have not weighed in.
Likewise, the UK’s competition authority has stepped in to review another big recent M&A deal: Apax Partners and a consortium it leads and their efforts to buy Inmarsat, a satellite operator.
More on the Healthcare Sector
As noted above, healthcare is one of only two sectors in which European merger activity has not declined year-to-year since 2018. Mondesir and Patel have other related observations to make about this sector. They observe that pharma and biotech lead the way here and that low returns on research and development in this sector is part of what has pressed forward the cause of consolidation with its attendant deal-making. Sluggishness in the revenue growth of mature products has had the same effect.
Indeed, Boston Scientific recently concluded its biggest transaction since 2005 when it bought BTG, the marketer of interventional oncology therapies. Boston Scientific said that the acquisition of BTG and its product portfolio “reinforces our category leadership strategy.”
West-of-Channel M&A Activity
Looking at the numbers by region, Mondesir and Patel found that the United Kingdom and Ireland dominate Europe’s M&A activity. Within those two countries 1,754 transactions have closed year to date, which is more than one-third of the overall count. The UK and Ireland has seen the smallest decline in M&A activity on the continent in the years since the pre-Brexit year of 2015.
“This points,” the report tells us, “to continued faith in UK-based companies, many of which have strong management teams, proprietary products and room for organic and inorganic growth.”
From 1Q through 3Q, the median UK and Ireland M&A EV/EBITDA multiple has decreased from 2018’s 11.2X peak to 8.7X in 3Q 2019. But that remains an “elevated” figure, and the Pitchbook authors believe the market is taking the long view, beyond the short-term geopolitics.