Historically, the relatively modest size of the Belgian market has encouraged Belgian companies to export abroad early on in their lifetime, and this in most sectors. Indeed, many of our clients have been pursuing strategic M&As outside of Belgium, as an integral part of their strategic DNA.
However, market conditions have changed considerably in 2023. What does it mean for M&A?
In this interview, Gabriel Englebert, Head of Corporate Finance at BNP Paribas Fortis, gives us his views on the M&A market in 2023 and perspectives for 2024 and beyond, in a radically changing environment.
After a record-breaking 2021 ‘vintage’, the Merger and Acquisition (M&A) market in Europe was down -28% in 2022 vs. 2021, according to Dealogic. The same trend was observed worldwide. This slowdown, which began mid-2022, accelerated in Q4 2022 and Q1 2023 with a continued sharp decrease in M&A volumes.
The trends behind this decrease are well identified: firstly, central banks started to significantly raise interest rates to combat inflation. This is a negative factor in both deal sentiment and acquisition financing costs which started to rise as a result, including LBO financing costs topping 10% in Q1 2023 in Europe. Secondly, mega deals have become more scarce, while small & mid-market deals are still there they are taking more time to arrive at completion. There has also been more volatility in valuation and deal pricing, the gap between expectations based on 2021-2022 and 2023 buy-side valuations are sometimes hard to match. Lastly the geopolitical tensions have also contributed to more prudence from the investor community.
On the other hand, certain types of deals are making a comeback, such as P2Ps (“Public-to-Private”), including on the Belgian stock market, with the recent intentions to delist Telenet and Exmar, carve out operations (whereby non-core activities are sold to a better-suited new owner) and turnarounds, which are also more popular.
Yes, most of them are. We see that M&A remains core to the strategy of most companies. Generally, most markets and sectors have become mature, and the need for consolidation and scalability has never been higher. However, other criteria, specific to the Belgian market, explain why M&A is so important.
In a relatively small national market, with various regions and languages, our companies start exporting at a very early stage of their development. In fact with an open, decentralised culture that can be extremely favourable for M&A expansion, Belgian companies are natural exporters. In Belgium, we observe many of our clients operating under a model of “European federation of companies” geared around rather decentral but profitable growth.
Belgian companies often have robust shareholders and multilingual, highly educated management teams able to attract international profiles.
Our country, with strong universities throughout the country, is also an ideal territory for niche sectors such as life sciences and healthcare, agri-food, aerospace, industry, building materials, services, consumer goods and technology. Innovation has been very strong in the last decade in Belgium, and we can see that via he rise of big(ger) tech companies (‘unicorns’) such as Odoo and Collibra, which are still growing internationally.
These trends are favourable for M&A and we observe that incoming volumes of M&A transactions remain high within our platform.
We observe that all market participants are more prudent than in 2021-2022. This important evolution in risk-perception creates a relative lack of equity available for M&A projects.
Concretely, it means that in high(er)-risk M&A projects, investors are more cautious than before. The best example is that technology start-up or scale-up firms must demonstrate very robust and fast-growth, and shorter break-even points in their business plans. That is the most impacted segment so far, as equity investors are being very selective.
We also observe that M&A deals are taking a bit longer than before.
There is certainly more prudence in due diligence analyses and SPA conditions, but in the past we observed an exuberance from certain parties in the market to take uncontrolled risks, sometimes in expensive pre-emptive M&A deals. That trend is definitely over now.
There is selectivity in the market, with the best deals and companies still priced above 10x EBITDA. We see more prudence in terms of valuations in situations wherein not 100% of all beauty criteria are met, with impacts in the magnitude of 15-30%.
There is still a scarcity of opportunities in the market, and financing the deals has become more challenging.
We also observe a slow transition and stabilisation of valuation levels, rather than sharp decreases.
At the peak of the market M&A transactions used to take six months to complete – the time needed to negotiate the price and terms, conduct due diligence and clear regulatory approvals, taking into account all the cultural differences, that can be substantial in some cases.
But today, with an increasing share of one-on-one situations and limited auction processes (and somewhat much less broad auction processes), everything takes a bit longer, from 6 months up to 12 months on average. In a social media world, where indiscretion can get in the way, we also observe a recurring desire from clients for absolute discretion in their M&A processes. To this end, we never publicly communicate our M&A deals in the media or social media platforms. Secrecy is our business, and our business is secret!
Regarding the timing of M&A processes, some M&A deals take even longer than 12 months between initial discussions and signing. We then have to think about the current trading situation of companies. With high inflation numbers, many companies have had to release significantly higher, or sometimes lower, profits during the M&A process. Technically, analysing current trading numbers has become much more complex, starting also from the more complex COVID years, wherein numerous retreatments for exceptional items were already applied. This has also contributed to the volatility of valuations, both up and down.
Successful Belgian companies should continue to invest in foreign target companies to gain new market access or knowledge of a country, or to test an adjacent product or service. We know it for a long time now, one third of all M&A deals have a foreign target.
As a clear trend, we also observe the pursuit of innovation – in many cases a specific technology or know-how – and continued investments in the field of sustainability and ESG, which has been a major point of attention in all our M&A transactions over the last 2 to 3 years.
We are in a world of bespoke processes and tailor-made solutions, and I am still absolutely delighted about that. Our ‘made-to-measure’ approach is perfectly suited to market needs. Every day, every hour, our teams build know-how, think out-of-the-box and use their skills to develop in-depth solutions.
Being part of the leading European M&A advisory platform is a differentiating factor and a daily advantage. This gives us a full view and know-how of all market parameters, from equity to debt, in private and public markets, across full investing and financing, in all sizes and sectors. This is truly unique.
Our clients’ interests are our absolute priority. We’ll finalise the transaction in less than three months, if that’s what the parties want. Other elements are sometimes at stake too, such as business succession or the transfer of shareholdings. Consulting your investment banker about family governance can also bring some useful neutrality to the thinking process.
In conclusion, we see 2023 as a transition year, wherein market parameters are clearly more volatile, triggering certain types of deals (P2Ps, carve outs, turnarounds, etc.), and whereby deal completion is more complex.
We are waiting for signs of more reasonable inflation numbers and for this cycle of rate hikes to end, which will be necessary to stabilise and ease the cost of acquisition financing packages.
2024 and beyond should see a come-back in the volume of more strategic, larger M&A transactions, as consolidation and growth through M&A is central to most of our Belgian clients.
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