The move toward circularity and sustainability is already having a significant impact on M&A activity, driving a number of transactions across the automotive sector.
Sometimes these transactions are disposals where players decide that non-core business areas are no longer compliant with sustainability strategies. Alternatively, they may pursue acquisitions to support green strategies, using M&A to reposition portfolios around sustainable alternatives. Or they may buy shares in specific businesses, perhaps in order to gain access to specific raw materials.
Latest figures from 2021 saw record inflows to funds focused on ESG issues
As we have mentioned, the role of financial investors is becoming increasingly significant, with companies now expected to follow investors by integrating ESG into their M&A strategies.
Latest figures¹ from 2021 saw record inflows to funds focused on ESG issues, with ESG funds accounting for 10% of worldwide fund assets that year. Stocks of companies rated highly for their sustainability efforts also notched gains. For instance, the MSCI World ESG Leaders’ Index rose more than 20% in 2021.
A recent report from BCG² found that dealmakers were increasingly focusing on the opportunities for ESG-related value creation, such as investing in the clean energy transition, or gaining a competitive edge through sustainable sourcing.
It found that the volume of ESG-related deals, as a share of all deals, rose from 12% in 2001 to 22% in 2021, while the growth of green M&A has been fastest in industries at the forefront of the energy transition and in emerging markets.
As the chart above shows, green deals also command a significant price premium. According to BCG, the average acquisition prices for these deals have exceeded the overall market average by approximately 7% between 2019 and 2021, with premiums of 20% to 30% in some industries.
Between these dates it analysed the enterprise value to EBITDA ratios of green targets in majority acquisitions valued at more than $50m. The median ratio was 13.0 for green deals, versus 12.2 for overall multiples in the same sector. In energy & utilities, the premium is among the strongest and most persistent over time. Meanwhile, competition for green assets continues to increase, driving up prices.
It is clear that ESG will increasingly influence deal making. As a recent report from Harvard Law School Forum³ states, in the future ESG will not simply be a tool for identifying and mitigating risks, but also a lever for value creation with acquirers and targets increasingly expected to demonstrate their ESG credentials.
It says that many critical aspects of M&A will be affected by the integration of ESG into investor decision-making. For instance, the ESG premium will directly impact due diligence. In addition to assessing ESG risks – such as corrupt business practices, labour law violations, cybersecurity threats, and carbon emissions – acquirers will also need to examine related processes and procedures, including the degree of board oversight, and the scope and quality of internal and external ESG reporting.
Acquirers will also need to consider the ESG impact of a transaction, including reputation and culture, when assessing deal synergies. On the target side, boards and management will also need to be aware that ESG concerns may increasingly factor into shareholder decisions to support or reject a proposed transaction, particularly where the deal consideration includes shares of the acquirer.
|Deal value EUR(m)
|The french network specialising in vehicle dismantling, recycling, and second-hand trading
|American & Import Auto Parts (100% stake)
|US-based full-service automotive recycler company
|Fenix Parts, Inc.
|Reno Auto Parts Inc. (100% stake)
|US-based provider of automotive recycler servicing
|Fenix Parts, Inc.
|almaak (70% stake)
|Germany-based specialist in high quality recycled engineered polymer compounds
|Svenssons Bildemontering (100% stake); Svenssons Forvaltning I va AB (100% stake)
|Car assembly and seller of recycled car parts
|Germany-based operator of high-power charging station network for electric vehicles
|BMW AG; Volkswagen AG and others
|Polestar Performance AB
|Sweden-based electric car manufacturing company
|Gores Guggenheim, Inc.
|Columbus Recycling Corporation
|US-based company engaged in recycling and supplying of scrap metals of different grades
|Schnitzer Steel Industries, Inc.
|Redwood Materials Inc.
|US-based company engaged in technology and process development for materials recycling, remanufacturing, and reuse
|Amazon.com, Inc.; Ford Motor Company and others
|Sweden-based company engaged in the production of lithium-ion battery cells and systems
|Volkswagen AG; Scania AB and others
1 Reuters, Dec 2021: How 2021 became the year of ESG investing https://www.reuters.com/markets/us/how-2021-became-year-esg-investing-2021-12-23/
2 BCG, Oct 2022: Green Deals Gain Steam, The 2022 M&A Report https://www.bcg.com/publications/2022/green-deals-on-the-rise-according-to-the-latest-mergers-and-acquisitions-report
3 ESG and M&A in 2022: From risk mitigation to value creation. Harvard Law School Forum on Corporate Governance, Jan 2022 https://corpgov.law.harvard.edu/2022/01/24/esg-and-ma-in-2022-from-risk-mitigation-to-value-creation/
raised bank club financing to support its acquisition ofcomplementing its existing portfolio companyAcquisition financeUndisclosed