Italian M&A has continued to show signs of vitality this year, despite jitters triggered by March's general election that threatened to derail the country's recovery seen in recent years. The vote resulted in a coalition being formed between right-wing Lega and anti-establishment Five Star Movement.

But degrees of post-election uncertainty have caused an increase in market volatility, making it difficult for dealmakers to agree on valuations, Paolo Sersale, partner at Clifford Chance says.

Such concerns are apparent when considering how inbound activity throughout 1H18 fell 46% to EUR 17.7bn across 114 deals, according to Mergermarket. Political risk is the likely factor behind the decrease in inbound investment. 

Marco Perelli-Rocco, head of M&A at Banca IMI, was quick to echo Sersale’s observations: “After a period of high liquidity and very high multiples, valuations are now starting to decline on the back of further increases in volatility and an expectation of higher interest rates.”

During H1, Italian M&A stood at EUR 23.7bn compared to the EUR 39.6bn invested over the same period last year.

There remain several interesting targets on the market, which implies there is still an interesting deal flow that could spur significant valuations, Luca Picone, a partner at Hogan Lovells, says.

Top Italian H1 deals

Richemont’s [VTX:CFR] EUR 2.7bn takeover of online fashion retailer YOOX Net-A-Porter Group [BIT:YNAP] was among the largest deals conducted over the period, again pressing home Italy’s reputation of establishing sought after fashion assets.

Richemont’s acquisition aside, Italy’s often most lucrative fashion sector has this year so far been usurped by pharma, medical and biotech (PMB), industrials & chemicals (I&C) and technology sectors. These became the half year’s most active, accounting for 28%, 16% and 14% market share, respectively.

While Italy’s food and retail segments generate interesting margins, it is crucial to identify strong target companies in these sectors, Picone says. A florid deal flow is also expected in the high-end manufacturing components space, he adds.

For instance, Magna International [TSE:MG; NYSE:MGA], an Aurora, Ontario-based automobile parts manufacturer, has reached an agreement to acquire Olsa, an Italian company that supplies automakers with lighting products.

The largest deal of the year so far has been CVC's EUR 6.3bn buyout of Recordati [BIT:REC].

Changes to Italy’s political landscape are more likely to impact some areas of dealmaking over others during H2, Sersale says, highlighting banking and retail, which are particularly exposed to political risk and could suffer as a consequence.

Yet attractive opportunities can be found, namely assets with outstanding brand recognition and technology, Sersale says. The industrials segment as well as lifestyle brands, for instance, have a variety of appealing targets, especially for foreign buyers.

Among others, Italian cosmetics packaging company Lumson is entering the second phase of a sale process, while Icam, an Italian producer of vertical lift modules, could open its shareholder base to potential investors. My Choice, an Italian manufacturer of leather bags and purses, and textiles producer Miroglio could consider a stake sale, while private equity Clessidra is rumoured to have put its fashion portfolio company Harmont & Blaine up for sale.

Elsewhere, large infrastructure players weighed by excessive debt, including Astaldi [BIT:AST] and Società Italiana per Condotte d’Acqua, are also likely to attract investors, Paolo Tramoni, a senior manager at Pirola Corporate Finance, says.

In the meantime, energy and utility deals are expected to continue apace, with large multi-utilities including Acea [BIT:ACE] and Iren[IRE:IM] honing their radars on independent operators and environmental services targets, Tramoni says.

Cable maker Prysmian [BIT:PRY] is another such company that could look at further acquisitions following its General Cable’s [NYSE:BGC] takeover.

Private equity funds still looking for targets

Private equity houses are expected to be active in 2H18, with several large auctions scheduled to be completed this year, Sciolla says.

For example, The Carlyle Group [NASDAQ:CG] is preparing Italy-based contact center and business process outsourcing services provider, Comdata, for sale, according to a Mergermarket report.

Italian private equity activity

Italy’s private equity market will remain an important M&A engine as the year progresses, as funds have increasingly adopted bolt-on acquisition strategies, Sersale says. To create value that justifies the high multiples paid, sponsors are now drafting subsequent aggressive acquisitive campaigns within their portfolio companies. This is expected to boost the value and volume of private equity activity taking place within the country.

For instance, Italian consulting company Business Integration Partners expects to complete an acquisition by next year with a EUR 100m war chest, following Apax Partners MidMarket's investment in April when it acquired Argos Soditic's majority stake.

by Valentina Caiazzo in Milan and Giulia Lasagni in London, with analytics by Mohamed Rais