Spotlight on: Southern Europe
Dealmaking in Europe’s Southern region – comprising Spain, Italy and Portugal – slowed somewhat in Q1 2022. Despite this, there were some notable hotspots, including in the healthcare, food and beverage, and TMT sectors, as Clearwater International’s Bruno Pinho, partner in Portugal, and Josemaría Torrens, director in Spain, discuss.
Persistent demand for assets continues to support high valuations, with the LTM multiple for the sector in Q1
The record-breaking M&A activity recorded in 2021 gave way to a notably slower tempo of dealmaking in Q1 2022, with both volume (41) and aggregate value (€8.5bn) in Europe’s Southern region dropping by around a fifth from Q4 2021 (52 deals worth €10.6bn). Against this backdrop, the region’s LTM deal multiple continued to rise, albeit less rapidly than in the previous two quarters.
Healthcare shone through as the Southern region’s most valuable sector in Q1 (€2.3bn). Persistent demand for assets continues to support high valuations, with the LTM multiple for the sector in Q1 well ahead of the European average.
More than half of the aggregate deal value accrued in Q1 came from a single PE-backed transaction involving two targets: Italy-based blood plasma business Kedrion Biopharma, and British rival Bio Products Laboratory. Q1 also saw PE-backed deals in the dental, electro medical, in vitro diagnostics and pharmaceuticals manufacturing subsectors.
Dealmaking in the region’s healthcare sector is underpinned by fundamental shifts in consumer behaviour – notably, growing dissatisfaction with public healthcare provision. “People feel that they are not getting what they need from state healthcare providers, and they are going to the private sector to get it instead,” says Bruno Pinho, Lisbon-based partner at Clearwater International. “The emergence of private healthcare providers is accelerating, and this is attracting PE capital.”
The operation of healthcare services attracts specialised players
The expansion of private healthcare – which includes everything from dentistry to hospitals and care homes – is also stimulating dealmaking in adjacent sectors, Pinho says: “The operation of healthcare services attracts specialised players. But all of this requires real estate investments, and we are seeing a trend where the ownership of these assets goes to different players.”
Another outstanding performer in Q1 was the food and beverage sector. Deal volume saw a slight rise quarter-on-quarter from six to seven, but deal value rose sharply from €915m to €1.5bn. The LTM multiple for this sector in the Southern region is slightly below the European average, suggesting there is still value to be found.
One factor driving growth in the sector is the rise of new eating habits post-pandemic, including the growing appetite for ‘nutraceuticals’, functional foods with health benefits. This point is underlined by the food and beverage sector’s largest Q1 deal in the region, namely the acquisition of Italy-based dietary supplement specialist Biofarma Group by French PE firm Ardian. “Dealmakers are focusing on healthy food, including meat substitutes and organic produce,” notes Pinho. “It’s not a push – consumers are going into stores and looking for this.”
dealmaking in the Southern region put in a solid performance in Q1
Turning to TMT, dealmaking in the Southern region put in a solid performance in Q1, with volume marginally higher quarter-on-quarter, rising from five to six. Moreover, there is still value to be had: the region’s LTM TMT deal multiple was more than two points of EBITDA lower than the European average.
The largest TMT deal seen in Q1 was CVC Capital Partners’ acquisition of Italy-based insurance software provider RGI Group. Also of note was the acquisition by Linzor Capital Partners of a majority stake in inConcert, a Spain-based digital marketing specialist.
“Digital marketing is a major trend within TMT,” says Josemaría Torrens, Barcelona-based director at Clearwater International. “B2C businesses are investing a lot in building their campaigns around social networks, rather than television and newspapers. We are finding many companies in the market that have been approached by both PE groups and strategic buyers.”
Increased competition from strategics – particularly over the past year – is causing sleepless nights for PE bidders across all sectors. It could also account for the dwindling proportion of secondary buyouts, which fell sharply in Q1. “What’s different now is that strategic investors are beating financial investors in competitions,” Torrens says. “Our experience in Spain is that they have more need and put in more resources to get the asset.”
New funds are telling investors they want to make allocations outside their domestic markets. That didn’t happen five years ago
Another trend is the rise of short-range cross-border PE deals involving European neighbours. This phenomenon is most pronounced in the mid-market, Pinho says: “We’re seeing more PE firms in Spain looking at deals in Portugal. And we see processes in Portugal where PE firms are starting to look at Spain and even France. New funds are telling investors they want to make allocations outside their domestic markets. That didn’t happen five years ago.”
One reason for this is that it is now easier than ever to manage deal processes remotely. “Thanks to digital technology, you can see everything without leaving your office. It’s a cultural shift as much as anything,” says Torrens. “It also means processes are much faster – deals that used to take us nine months are now completed in five.”
With valuations elevated, what impact might a eurozone rate hike have on deal multiples? “There is a lot of money still to be deployed and there are a lot of investors looking to do deals,” says Pinho. “What you might see is some rationality coming into transaction multiples. If anything, you will see impacts on prices rather than volumes.”