Southern Europe: Highest performing region
Despite multiples rising in the region, Southern Europe remained good value, affected by lacklustre macro-economic indicators and political uncertainty in the key markets of Italy and Spain. This lower pricing environment, coupled with an abundance of excellent assets, has attracted an increasing amount of capital from international funds.
According to Unquote data, in Q3 the region recorded 44 deals worth an aggregate value of €5.1bn and Italy alone saw 25 buyouts for a total €3.3bn, the same volume and almost the same value reported in the previous quarter, despite the summer break.
“The Italian M&A landscape has shown intense activity in spite of concerns about the country’s instability and a possible downturn of the economic climate,” says Andrea Pagliara, Partner at Clearwater International. “Furthermore, we have seen several large private equity firms based in the UK, France and the US open their offices in Italy and deploy local teams to harvest the opportunities offered by this buoyant market.”
These international players are mainly tackling the large-cap space, where suitable assets have become less scarce, but competition is still tough resulting in higher valuations. “Despite the mid-market representing the backbone of the Italian economy, the country has recently seen some interesting mega-deals and has been able to produce very profitable assets in the large-cap segment, thus attracting the interest of international private equity funds. This is a sign of the market maturing and becoming more sophisticated,” says Pagliara.
The Italian M&A landscape has shown intense activity in spite of concerns about the country’s instability
Meanwhile, the mid-market, which has been dominated by smaller local funds, has recorded lower valuations and has been experiencing strong consolidation. “This buy-and-build trend is fuelled by private equity firms eager to benefit from the opportunities offered by highly fragmented sectors, which provide a rich array of potential targets for multiple add-ons,” says Pagliara. “The consumer sector has been the most active arsenal for successful aggregation platforms, able to spread out across the entire value chain. We have recently seen this happening with Mandarin and Margot in the fashion accessories segment and Consilium and GMI in the shoe designer industry. Once they have spread throughout the value chain and reached a critical mass, these sponsor-led platforms often attract industrial buyers and reap higher multiples in an exit scenario”.
In addition to the consumer goods sector, other segments that have experienced sustained growth and strong activity in the quarter were primarily specialty chemicals and business services. In particular education, “The education sector has seen a surge in large deals, primarily targeting business schools and online universities providing distance learning. These assets are particularly attractive because of their non-cyclical nature, which makes them resilient and able to deliver profitability even if the economic climate deteriorates. This is why we have seen valuations reaching 17x EBITDA in the segment.”
The Italian private equity landscape has recently become more diversified, where a wide variety of strategies have been flourishing, including co-investments and minority transactions. Pagliara says: “Tikehau, which specialises in minority investments, has recently opened an office in Italy; Fondo Agroalimentare Italiano launched with a dedicated approach to minority stakes in companies operating across the agri-food value chain; and an increasing number of more traditional Italian players have embraced a minority approach alongside their majority buyout strategy.”
Taking a glance at the coming months, market sentiment indicates that the Italian market will continue to see a frenzy of deals and a rise in fundraising. “The upcoming pipeline offers investors an attractive array of opportunities for the last quarter of the year, especially across the technology services sector, where some transactions are already on the horizon,” says Pagliara. “Valuations in the region will probably continue to slowly increase and get closer to the pricing of the rest of Europe. Nevertheless, we expect Italy to remain a more affordable and appealing market where a mild risk linked to political and economic uncertainty is largely outweighed by the ample set of solid and profitable assets available.”