France: stiff competition for deals

Despite reaching a post-crisis high in 2018, the buy-out market in France is not without its headwinds and 2019 is likely to remain highly competitive, with robust multiples still in evidence. Thomas Gaucher, Managing Partner and a founder of Clearwater International France speaks to Unquote about the prevailing conditions in the market.

Multiples across Europe are at a well-documented high point, especially for larger assets. How is pricing trending in the French market and what are the key drivers behind this?

Multiples are certainly high by historical standards –especially for the ‘premium’ assets. As it is in some other markets, the main drivers behind this trend are the very substantial reserves of dry powder available, both in terms of equity and debt. This has been amplified by the interest many of the larger pan-European and US investors have shown in the market, as well as the emergence of the private debt funds.

It is often difficult for sponsors to win auctions for best-in-class assets that some investors will inevitably table very high offers early-on in the process. From their point of view it can be preferable to overpay a little, but at least secure deals. Also, one could argue that overpaying for prime assets presents less of a problem than not investing at all, or paying true market value for questionable targets. At the end of the day, for many it’s about deploying capital safely, and in a highly competitive market this creates entry price inflation.

To what extent has local and international political risk affected the French market? Has an element of nervousness crept in?

I do not believe that the French buy-out market has experienced any specific tensions due to international political risks and specifically the on-going situation with Brexit. In fact, we have been more concerned with developments on the domestic front, with the whole situation surrounding the “gilets jaunes” protests has been the primary worry. These have had a material impact on Q4 GDP growth, especially for consumer-related businesses. However, I think that the LBO market is unlikely to be damaged in any detrimental way because financial liquidity has not been affected and remains strong.

Where we perhaps see more of an issue looking ahead is in the pipeline of high-quality assets coming to market. 2018 was such a strong year and it is quite possible that many trade and financial sellers were encouraged to sell their most attractive assets to take advantage of the high multiples they were commanding. This is especially true of the sponsors that were looking to boost returns ahead of major new fundraising efforts. As a result, we may find that the flow of buy-out opportunities feeding into the pipeline in the first few months of 2019 may be less strong than in it was in the first half of 2018.

2018 was such a strong year and it is quite possible that many trade and financial sellers were encouraged to sell their most attractive assets to take advantage of the high multiples they were commanding.

From a sector point of view, financial services and healthcare commanded robust multiples in Q4. Does this match your experiences on the ground? Are there any other industrial ‘hotspots’ in terms of assets changing hands?

There is no doubt that the financial services and healthcare sectors have produced some deals completed at very high multiples in recent times, but they are not alone. The French market has seen significant activity in a number of other key sectors including leisure (particularly the travel sub sector) and industrials. Companies which are employing disruptive business models, such as online real estate brokers, are also attractive. As mentioned earlier, the best-in-class businesses will command strong multiples almost irrespective of the sector in which they operate.

On the other side of the equation, where are financial sponsors looking for more reasonably priced assets and what sort of strategies are they employing?

Picking up assets at lower multiples is less about the sector and more about the approach of the investor. Those prepared to accept a higher level of transaction complexity and business risk are more likely to source deals off-market or pick up assets at lower multiples. Similarly, strategies that seek out elements of distress –ranging from ‘light turnaround’ to full receivership –are relatively common. Meanwhile, other investors might target companies that have a complex future or past equity story, management problems, or that have questionable regulatory issues, etc.

What is certain is that high quality assets being sold at reasonable prices vanished from the French market last year.

Are financial sponsors out-gunning trade buyers more than one would expect? If so, what are the key factors behind this?

Yes, we have seen sponsors pricing more aggressively than trade buyers, despite lacking the sort of industrial synergies that trade entities often bring. Again, this is to do with the need to deploy some of the dry powder that is available.

What’s more, we would tend to think that this will continue at least in the short term, as listed trade buyers in particular have suffered from the falling stock markets in Q4 2018 -lower market cap valuation multiples make it all the more difficult to match aggressive sponsor valuations.

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