Dealmaking in Italy is expected to drop next year, before a slow recovery in 2021, on the back of a more favourable global economic outlook and stronger equity market trends, said Giovanni Castaldo, head of M&A Italy at Citi.

Italian M&A activity in 2019 fell by 45% to EUR 30.2bn, compared to 2018, with 517 deals closed against 634 in 2018. The top three deals in 2019 matched the top deal in 2018 by value, according to Mergermarket data.

Macro instability due to geopolitical factors has had a ripple effect on the Italian market and has been one of the main causes of a sharp decline in deal value. For instance the US-China trade war on import tariffs as well as Brexit, contributed to a general economic slowdown in Italy but also in other economies such as Germany, said Andrea Petruzzello, head of corporate finance advisory Italy at UniCredit.

This propelled the market to be more selective thereby increasing bid-ask spreads, he said. Should these conditions continue in the coming months, M&A activity is likely to be negatively impacted in 2020, Petruzzello said.

Only four transactions made it past the EUR 1bn threshold this year, he explained, namely the combination between Inwit [BIT:INW] and Vodafone’s [LON:VOD] Italian towers; Eni’s [BIT:ENI] acquisition of a stake in an Abu Dhabi refinery; the merger between motorway infrastructure companies Sias and ASTM; and Ferrero’s acquisition of Kellogg’s snack and biscuits businesses.

In spite of this, an increasing number of Italian small and medium firms have been using M&A as growth leverage, with bolt-on acquisitions on the rise, Max Fiani, partner at KPMG, said in a recent analysis by the advisory firm. Italian SMEs are realising that size and scale are key in hedging against competitive forces from multinational groups, according to Fiani.

SMEs in the consumer and industrial sectors that generate a significant share of their revenue abroad, continue to be attractive targets for foreign investors, Petruzzello said. This is particularly the case for private equity players whose appetite for mid cap remains strong and is partly fuelled by succession issues, he added.

The most active sectors this year included energy & infrastructure, TMT (including IT) and consumer goods (food and cosmetics, in particular), which are all earmarked to remain active in 2020, Petruzzello said. However, cyclical sectors, such as fashion and automotive are expected to face headwinds, he said.

Welfare services was another sector that saw significant dealmaking, Luca Picone, a partner at Hogan Lovells in Milan said pointing to Edenred’s acquisition of Easy Welfare, a corporate welfare services operator.

The consumer and machinery sectors were particularly strong in the mid-cap segment, said Andrea Falchetti, head of SMEs investment banking origination at Banca Imi.

Deal prices increased in the last months, but will continue to be viewed as competitive compared to other European foreign markets, as prices will remain conservative thereby discounting country risk, according to Bruno Gattai, partner at Gattai, Minoli, Agostinelli & Partners.

Next year, cross border activity is expected to be a key driver for dealmaking, while global macro trends, the Brexit outcome and political volatility in Italy will represent key risk factors for this cross-border M&A and national M&A, said Castaldo.

Traditionally – and this year has not been an exception – the most active inbound foreign investors have been from the United States, France and the United Kingdom, Petruzzello said. Meanwhile, inbound activity from China slowed down this year, he said. As for outbound activity, large players such as Eni [BIT: ENI], Enel [BIT: ENEL], Ferrero, Mediaset [BIT: MS] and Generali [BIT: G] have been the most active consolidators, diversifying their asset portfolios outside of Italy.

In 1H20, catalyst sectors for M&A activity will be industrials, followed by energy, and telecommunications, Castaldo said. The real estate sector, particularly in Milan and surrounding area, will be a segment to watch, Gattai said.

The number of M&A deals in Italy over the coming month could be driven by the announced USD 32bn merger between Fiat Chrysler [BIT: FCA] and Peugeot [EPA: UG], Castaldo said. M&A trends will also be affected by the ongoing restructuring and consolidation in the banking sector and utility sectors, he added.

Investors looking at large corporates are especially interested in the “made in Italy” and designer brands, as well as in niche industrial companies with specific expertise, said Marco Perelli Rocco, Banca Imi’s head of M&A . Next year, there could also be more transactions in fashion and luxury, he said.

Despite concerns about a possible recession, the fact that Italy’s economy heavily weighs on small-medium sized enterprises that represent an abundant landscape of takeover targets for foreign buyers means that deal flow is not likely to be materially affected, Picone said.

Private equity upswing after dull year

Italian M&A is likely to be led by private equity investors next year, according to Gattai. The main international funds will continue turning to Italy for deals, due to the copious amount of companies featuring substantial growth opportunities at reasonable prices, he said, underlining the profuse liquidity in the PE market.

M&A contribution from financial sponsors was not buoyant over the past months. While the number of PE buyouts remained at the same level of 2018 (107 vs 111 deals), the value of 2019 deals plummeted by 58.5% to EUR 7bn compared to the year before, according to Mergermarket data.

PE activity has been affected by an overall volatile Italian environment, which caused a number of transactions to be postponed, Castaldo noted. Going forward, Italian PEs are expected to remain particularly active in the ECM sector, he added.

AIM drives ECM, while MTA drops

Meanwhile the Italian ECM market continued to be driven by the AIM segment's activity. In 2019, 32 companies floated their shares on the Italian Stock Exchange's platform dedicated to small and medium firms.

With EUR 187m of funds raised this year, AIM Italia topped the charts with the highest number of listings among non-regulated markets in European bourses, said Luca Tavano, Head of Product Development, Mid & Small Cap, Primary Markets at Borsa Italiana.

Last month, the Italian Parliament's Finance Committee changed the rules that discipline the “Piani Individuali di Risparmio” (individual saving plans), or PIR, which seek to favour larger investments into listed small and medium firms.

The new rules will strongly contribute to more listings of SMEs, aimed at financing growth projects, said Anna Lambiase, CEO at IRTop Consulting. Together with state-driven incentives for tax optimisation of listings, these will lay the foundation for a further development of AIM Italia in 2020, she said.

Even so, according to Gattai, the AIM market is still viewed as a first step towards uplisting to the MTA within a couple of years from the IPO. Given the general low levels of free floats, shares do not reflect the businesses' real market value propelling many AIM companies to become preys of private equity investors, he added.

On the main MTA/STAR platforms, excluding Nexi’s [BIT:NEXI] EUR 2.3bn IPO, which was the largest European listing YTD, volumes were significantly down, with several transactions pulled from the market after bookbuilding (for instance, Ferretti and RCF). This was due to investors' high selectivity and appetite mainly for large deals, said Stefania Godoli, global head of equity capital markets at UniCredit.

“Next year I do not expect to see any company listings comparable to NEXI”, Gattai said.

Meanwhile, high stock valuations have pushed the Italian ABB market up 4x more year-on-year with several exit opportunities caught by PE investors after recent IPOs (e.g. Unieuro, BFF, Gamenet and Dovalue), Godoli said..

Giulia Lasagni Assistant Editor, public markets EMEA Mergermarket

Giulia Lasagni is a London-based assistant editor at Dealreporter and Mergermarket, where she writes about M&A and ECM deals on the Italian market. She previously covered financial technology and the hedge funds industry for Incisive Media. Giulia holds a master’s degree from Northwestern University’s Medill School of Journalism.