Excluding lapsed or pulled deals, a total of 444 transactions involving European targets were announced in 2019, down from 554 the previous year. Value-wise, the deals amounted to some EUR 40bn, down from nearly EUR 74bn in 2018. Domestic M&A was the dominant theme, with only 83 cross-border transactions amounting to under EUR 9bn. At a global level, Europe represented 13% of global financial services M&A in 2019, with North America leading the rankings.

“A lot of effort from the top-tier advisers last year went into corporate restructuring and demergers,” said Malik Karim, founder and chief executive of Fenchurch Advisory.

Examples include Investec’s [LON:INVP] planned demerger of its asset management business, which is poised to list as Ninety One, and Prudential’s [NYSE:PRU] UK spin-off, which made its stock market debut last year as M&G [LON:MNG], Karim noted, adding that these types of transactions generally revolve around corporate simplicity, capital efficiency, and geographic or business line focus.

“In terms of prospective activity, we expect boards under pressure from shareholders and activists to continue the relentless focus on unlocking value either through demergers or M&A, as well as taking advantage of opportunities to grow through acquisitions at a time when organic growth is a challenge,” he said.

Europe’s insurance companies are reviewing their business lines as they think about capital efficiency and the strategic direction of their business in a tough rating environment, said Ashley Prebble, Clifford Chance’s head of FIG in London. Also, the sector continues to see lots of activity around life and non-life closed books, he added.

Swiss Re’s [SWX:SREN] ongoing sale of its ReAssure unit to Phoenix Group [LON:PHNX] after a failed IPO attempt was the largest transaction announced in 2019, with a consideration of EUR 3.85bn, according to Mergermarket data. Meanwhile, Legal & General [LON:LGEN] and Liverpool Victoria fully sold their respective general insurance units to Germany’s Allianz [ETR:ALV].

“Insurers are also thinking about demergers as a way to help units that are not properly reflected in the group’s share price realise their full potential,” Prebble said.

Aviva [LON:AV], a life and general insurer, has been tipped as a potential break-up candidate, and has reportedly undergone pressure from institutional shareholders to improve its performance. Similarly, sector bankers and a large investor in RSA Insurance Group [LON:RSA] told this news service last year that the British P&C insurer could potentially drive its valuation if it floated its Nordics division.

Some of last year’s top headline-grabbing transactions came from the stock exchange sector, which could continue generating advisory fees in 2020 as consolidation pushes on. Hong Kong Exchanges and Clearing (HKEX) [HKG:0388] notably backed away from a short-lived attempt to take over London Stock Exchange Group (LSEG) [LON:LSE] after failing to persuade its UK peer.

The move came weeks after LSEG announced its own deal to acquire data giant Refinitiv for some EUR 24.2bn, which was widely backed by the bourse’s own shareholders but is still pending regulatory approvals.

Exchange operators have also laid eyes on smaller rivals. Paris-headquartered Euronext [EPA:ENX] beat Nasdaq [NASDAQ:NDAQ] in a bidding contest for Norway’s Oslo Bors VPS in 1H19. In November, Switzerland’s SIX announced a EUR 2.8bn offer for Bolsas y Mercados Españoles [BME:BME] as Euronext revealed it was in preliminary talks with the Spanish exchange. BME stock soared due to the prospect of a rival bid, but potential interlopers have not yet come forward.

“Regional bourses are increasingly being integrated into multinational exchange groups, and the few remaining independent exchanges in Europe could be subject to consolidation by larger peers,” said Francesco Ceccato, co-head of FIG EMEA at Barclays [LON:BARC], noting that Wiener Boerse and the Warsaw Stock Exchange [WSE:GPW] are among the remaining independent bourses.

“In terms of drivers, globalisation is playing a key role while combining technology and IT budgets are proven to deliver value through cost synergies,” he added.

In post-trade, central securities depository (CSD) operator Euroclear has yet to inform the market of how it intends to provide liquidity to its fragmented shareholder base. The company said in the summer that an IPO and private placements were being considered as exit options, and PE houses were reported in subsequent months to be eyeing minority stakes.

M&A activity in the asset management sector concentrated largely around domestic bolt-on deals, such as Liontrust’s acquisition of Neptune Investment Management and Premier’s acquisition of Miton, Fenchurch’s Karim said.

At the large-cap level, Deutsche Bank [ETR:DBK] reportedly explored a merger of its fund management arm DWS [ETR:DWS] with that of UBS [SWX:UBSG], but talks were said to have stalled due to ownership disputes. Lyxor, Societe Generale’s [EPA:GLE] fund management unit, has also been subject to speculation. SocGen’s CEO was quoted in the Financial Times earlier this month as saying the business is under review but not currently on the block.

“I thought we were going to see more asset management M&A last year than we did, but I think in 2020 we’ll see relatively significant activity in the sector,” said Andrew Hutchings, co-head of FIG at Freshfields, pointing to scale, cost pressures and technology development as drivers.

“Banks and insurers tend to like their fund management businesses, as they often provide steady returns, but there’s the possibility of smaller independent fund managers being acquired,” Hutchings said. “Meanwhile, we foresee potential inbound interest from Asian and North American players looking into Europe.” This news service explored Europe’s 2020 wealth manager deal pipeline last week.

Though large European bank mergers have been anticipated for some time, absent some new financial or economic trigger event, it is hard to envision those sorts of transactions taking place for the time being due to a lack of regulatory and political appetite, said Richard Crosby, FIG partner at Clifford Chance.

“Instead, we will probably continue to see banks dispose of their non-core businesses to release capital as investors demand higher ROEs from the sector,” Crosby said. “Big banks continue to review their lower-return businesses, which may be specific business lines or regions where firms lack sufficient scale.”

ING [AMS:INGA] and UniCredit [BIT:UCG] were speculated as potential takers for smaller Commerzbank [ETR:CBK] after talks between the German lender and Deutsche Bank fell apart. However, both Deutsche and Commerzbank have embarked on respective restructuring programmes, with the latter hoping to sell its Polish subsidiary mBank [WSE:MBK] this year.

Domestic banking consolidation remains an important European theme versus cross-border M&A, noted Barclays’ Ceccato. However, there could also be some activity among multi-local groups that have overlapping operations despite their headquarters being in different jurisdictions, he noted.

European governments have also yet to exit investments in large banking assets such as Bankia [BME:BKIA], RBS [LON:RBS], ABN Amro [AMS:ABN] and Volksbank, and the circumstances for those privatisations could occur.

“Potential exits routes could be a sale or market placement, but current public valuations in the banking sector are not high,” Ceccato said. “It is also hard to see companies like RBS or ABN Amro go on a trade sale given their size.”

Challenger banks, however, could potentially see some activity as they lack profitability in the current economic environment, Clifford’s Crosby said. Should they look at public markets, digital bank and payment start-ups would have to decisively prove their business models in order to convince investors, Ceccato said.

The payments space continues to see M&A, particularly in the area of merchant acquiring, which remains fairly fragmented in Europe relative to the US, Ceccato said, pointing to Nexi’s [BIT:NEXI] purchase of the merchant acquiring business of Intesa Sanpaolo [BIT:ISP] as an example.

For its part, financial sponsors’ interest in FIG has increased year on year, and there is no sign of it abating, Freshfield’s Hutchings said.

“Though historically PEs have been more interested in capital-light businesses, they are now open to all FIG subsectors,” he said, noting that the large PE houses not only have a wealth of capital to put to work but also a sophisticated understanding of target markets.

CVC has notably acquired French insurance services group April Group. PEs have reportedly mulled bids for UK challenger lender Metro Bank [LON:MTRO]. Moreover, private equity investors will have to eventually exit FIG investments such as WiZink, owned by Varde Partners, and NewDay, held by CVC and Cinven.

In the UK, increased certainty around Brexit could facilitate deals, according to advisers. For example, overseas buyers and PE firms could target UK listed companies that may be undervalued by public markets, Fenchurch’s Karim said.

However, Britain’s withdrawal from the EU will ultimately take time to complete, with the focus for 2020 expected to be on the trade agreement, dealmakers conceded.

“There don’t appear to be significant new drivers for European FIG M&A in 2020, but the pipeline for the coming year looks reasonably positive,” concluded Hutchings, from Freshfields.

by Pablo Mayo Cerqueiro in London, with analytics by Sabzina Oshikova

Pablo Mayo Cerqueiro Financial Services Correspondent Acuris

Pablo joined  Dealreporter/Mergermarket in January 2019. He covers financial services M&A  and capital markets activity across Europe, including public and privately held companies. Previously, he worked at Euromoney’s Global Investor Group in  London, covering fund services and custodial banking. Pablo holds a master’s degree from Syracuse University and a bachelor’s degree from the University of  Santiago de Compostela.