M&A focus: A sign of things to come? Europe’s deal market ends 2018 with a whimper after a forceful start

The ghost of political turmoil did little to hinder deal-doing in Europe in the first half of 2018 but its presence appears to have made itself increasingly felt as the year wore on. With plcs wary of major investments ahead of the threat of mounting Brexit-related convulsions, not to mention a mainland European economy that lost some pace through 2018, it was an uneven run for corporate takeovers.

Globally, the latest figures from Mergermarket show the volume of deals completed in 2018 fell for the first time since 2010 to 19,232, after a decade of steadily rising. However, if overall activity was subdued, there was more cause for cheer with marquee deals; average deal value rose to $384.8m, the second-highest value on record, falling just short of the $400.3m notched up in 2015.

In Europe, the disparity between a strong beginning and faltering end of 2018 was particularly stark, with the $146.2bn worth of deals completed in Q4 being the lowest value since Q1 2013. Of the 11 deals worth more than $10bn in Europe in 2018, all were announced in the first half. Nevertheless, Europe was an active region globally receiving a 39% share of global deal count.

The concern among many deal professionals is that the series of bids and disposals that marked the start of 2018 were an anomaly driven by boards using a pre-Brexit window to push through strategic deals. And that window now looks to have firmly closed. Notes Paul Hastings M&A veteran Roger Barron: ‘There was uncertainty towards the end of last year, but 2018 started with an unusual flourish of deals. Those coming together was as much coincidence as anything else.’

For context, Europe’s deal market has in the last five years proved able to live with considerable uncertainty, sustaining credible levels of activity despite Eurozone worries, subdued economies and the Brexit bandwagon.

However, Mergermarket data shows overall deal count fell in Europe for the first time since 2014, albeit only with a modest decline. Deal count fell to 7,437 from 2017’s 7,826, while the run of big-ticket deals drove combined M&A value in Europe to $989.2bn, up 17% from 2017.

‘To stay alive you need to consolidate. 2018 was very difficult for retail and 2019 will probably be the same.ʼ
Victoria MacDuff, Slaughter and May

‘The fundamentals are still there,’ reflects Barron. ‘Corporates have cash to spend, there are low interest rates and a few assets for them to buy. What you might be seeing is, if you are doing something significant, Brexit uncertainty means you might be waiting for the second week of April to push on with it.’

More positively for City counsel, private equity houses have continued to assert themselves in Europe, with take-privates soaring after 64 such deals were completed since the start of 2016. In 2018, take-private buyouts reached their highest level of volume and value since the financial crisis, with $26bn spent across 22 deals. The wider figures for sponsor-related bids are even more emphatic: European private equity-related buyouts hit $195.5bn in 2018, across 1,458 deals, its highest value since the financial crash.

Other active sectors through the year include energy, mining and utilities (EMU) and the pharmaceutical sectors. EMU was Europe’s highest-valued sector, with a total value of $152.5bn across 402 deals, with takeovers of innogy and EDP and interest in North Sea assets and renewable energy pushing the sector to its highest value since 2012.

Pharma, medical and biotech more than doubled in value against 2017 and continued to provide a steady stream of work. Japanese pharma giant Takeda’s $79.7bn takeover of Shire was the undisputed standout, which provided work for Magic Circle duo Slaughter and May and Linklaters. The deal was completed after multiple bids from Takeda, a theme for the year that drove up deal value, also seen in Comcast’s long-awaited takeover of Sky, with the bidding war resulting in a $51.1bn valuation of the broadcaster.

For Slaughters, such bumper deals saw the firm rise up Mergermarket’s legal rankings in deal value in Europe, up from 20th in 2017 to 5th for 2018. Linklaters retained its second-placed position, while Freshfields Bruckhaus Deringer kept the top spot for 2018. DLA Piper retained top position for overall European deal count, acting on 411 deals, with the most noticeable change at PwC where the Big Four firm shot up 12 places to 10th, acting on 152 ranked deals.

Such figures provided relief for City advisers who were generally expecting a difficult year, according to Slaughters’ M&A partner Sally Wokes: ‘It’s been a strong year for us, which was a welcome surprise, given the strong headwinds politically and otherwise. The number of high-value transactions in the first part of the year contributed significantly to the overall statistics for 2018.’

Unsurprisingly, the turbulent political and business dynamics have had dramatic impacts in certain sectors. Sustained trade tensions between the US and China saw bid activity between the two countries fall a striking 94.6% from a record high inbound value of $55.3bn in 2016 to just under $3bn in 2018. In stark contrast, China’s bids in Europe rose 81.7% to $60.4bn from $33.2bn last year on Mergermarket figures, underlining the Asian giant’s shifting investment priorities.

The series of bids and disposals that marked the start of 2018 were an anomaly driven by boards using a pre-Brexit window to push through strategic deals. That window now looks to have firmly closed.

In the UK, many businesses looked to mitigate an unpredictable outlook through further consolidation. The retail sector was certainly pushed through a challenging 12 months of firesales, defensive deals and distressed M&A in a trend most expect to continue throughout 2019.

The most high-profile instance was the £3bn merger between supermarket giants Asda and Sainsbury’s, a deal which saw Slaughters partners Wokes and Victoria MacDuff (pictured) take lead roles.

‘The Sainsbury’s-Asda merger is an example of that domestic consolidation,’ says MacDuff. ‘To stay alive you need to consolidate. 2018 was a very difficult year for retail in particular and 2019 will probably be the same, which may mean more consolidation in the sector.’

Looking ahead, many M&A counsel are predicting a bruising environment for deals defined by the US-led protectionism and the rise of more interventionist investors (see Deal View).

In the US, The Committee on Foreign Investment in the United States (CFIUS) has looked to aggressively protect its interests in areas such as defence and energy. Paul Hastings’ Barron feels this trend will edge further into the mainstream in the UK during 2019. ‘There are increasing critical infrastructure concerns from the UK government. Typically, it’s been a US thing but it’s something UK M&A practitioners will have to be cognisant of as the country becomes more protectionist.’

For now, uncertainty has become the new normal in M&A, with many signs pointing to companies avoiding significant deals until the terms of the UK’s exit from the European Union become at least broadly apparent. With the UK Government’s own Brexit package being rejected by Parliament by an unprecedented 202-vote margin on 15 January, as Legal Business went to press there was no sign of that clarity emerging.

While Europe’s M&A market has persistently held up better than many City advisers feared in recent years, the awkward consensus is that 2019 will be a year to endure and quickly forget.

thomas.alan@legalease.co.uk