Shifting environment presents the chance to unearth value and should pave the way to boost the number of mid-market deals.
By Manuel Deó
The Spanish M&A market in 2018 has been characterised by a series of large-cap transactions, helped by an abundance of cheap financing for the right deals. The total deal value on large-cap transactions in 2018, including ACS and Atlantia’s €32.1 billion takeover of Abertis, has already surpassed 2017 totals.
In the year to October, 772 transactions closed in Spain, compared to 791 in the same period last year. Yet, deal values totalled US$98.6 billion this year to October, dwarfing the US$36.7 billion total in the same period last year. IFM’s €2.16 billion acquisition of OHL Group’s concession business, which closed in April, was just one of several significant buyouts in a country known for mid-market M&A.
Buyers scouring the market for consolidation opportunities in 2018 have been particularly active in real estate, energy, healthcare, and infrastructure sectors. While Spain has enjoyed a host of deals above the €1 billion mark, the mid-cap market remains healthy with abundant opportunities likely to appear over the next 12 months. Sellers want to transact quickly, and there is strong competition for each asset.
Like most of Europe, Spain is in the middle of a sellers’ market driven by strong financing markets and competition. Companies seeking strategic M&A opportunities will need to be more creative as they search for deals.
A shifting corporate landscape will likely intensify the number of restructuring deals and carve-out opportunities in the year ahead. A trend toward more focused public companies, a potential slowdown in mega deals, and ongoing pressure to sell non-core assets and bolster balance sheets ahead of a potential economic downturn in 2020 are all affecting the deal climate. Consequently, opportunities will include extensive reorganisation work for deals that require substantial pre- and post-deal integration and divestment of non-core assets. These deals will present buyers with the chance to unearth value and should pave the way to boost the number of mid-market deals over the next few months.
The trend towards more focused public companies could play into the hands of agile deal teams able to capitalise on carve-out or restructuring opportunities. Carve-out deals can provide corporates and PE houses with the flexibility to pursue separate and optimal capital allocation strategies and to create different debt profiles based on unique business needs and priorities. Moreover, these deals offer the potential for more favourable cost of capital and greater access to capital markets, unlocking shareholder value by disposing of lower valuation business segments and de-risking companies that have become overly complex.
M&A teams need to ensure they have conducted appropriate pre-deal due diligence on carve-out targets, which is more important now than ever before. Sellers are less willing to give protection, but they want greater certainty and faster deal processes. This places buyers under pressure to conduct thorough and appropriate due diligence in record time, therefore buyers must be equipped to undertake the right pre-deal work on the right areas and with the right depth of analysis and expertise.
Despite many political challenges, Spanish political institutions and macroeconomic fundamentals remain very strong. The country’s GDP has grown twice as fast as the Euro zone average since 2015 and the economy is forecast to remain the best-performing major economy in the Euro zone in 2018 and 2019. These factors, alongside the availability of cheap financing, should sustain the strong M&A market in the year to come. We expect record prices and fierce competition to continue well into the new year.