Swiss dealmakers confident about strong M&A activity while preparing for political, economic risks
Dealmakers in Switzerland remain confident of a strong deal flow sustained by high levels of dry-powder but are starting to take a more cautious approach and conduct more case-by-case assessments of economic and political risks on planned acquisitions, panellists said during the Swiss M&A and Private Equity Forum on 24th October.
Signs of a synchronised slowdown are evident in the world’s largest economies, as global real GDP growth is at its lowest level since the European debt crisis in 2012/13, said Christa Janjic-Marti, from Wellershoff & Partners, a consultancy focusing on economics and financial markets. Politics is adding a lot of uncertainty at a crucial time for the world economy, Janjic-Marti added.
During the M&A process, it is becoming increasingly necessary to explore the target’s exposure to political risks, according to Marco Superina, head M&A Switzerland at Credit Suisse. As examples of such risks, he mentioned extended regulatory approvals and increased costs of manufacturing and production caused by changes in tariffs.
Businesses at an early stage of a business cycle and with historically volatile performance characteristics require increased scrutiny for political risks at this point in time, Superina said.
Signs of trading being affected by the current scenario are seen in companies de-stocking, or reducing inventories – a result of ongoing economic and trade uncertainties, which are ultimately slowing sales of some manufacturing businesses in Europe and the US, according to Boris Zoller, partner at private equity firm Capvis.
Companies will need to adjust capacities to the new situation, but at the same time should hold on to strategic initiatives, Zoller added.
More carve-outs, take-privates not too soon
Benefiting from an environment of low interest rates and high availability of capital, Switzerland has seen strong deal flow so far in 2019. Year-to-date, deal value has already exceeded the full year figures seen in 2017 and 2018, reaching EUR 60.3bn, Mergermarket data shows.
Corporate carve-outs, as seen recently in Nestle’s [SWX:NESN] CHF 10.2bn (EUR 9.2bn)-sale of its Skin Health business and ABB’s [SWX:ABBN] USD 11bn (EUR 9.9bn)-disposal of its power grids unit, will be an important deal driver in the context of a “deconglomeration” trend among large corporation, as pointed out by Superina.
Such transactions are especially attractive for financial sponsors, Giovanna Maag, a partner at Altor Equity Partners, said. Some of these business units are often neglected corporate orphans, which can prosper under a dedicated owner, she said. She added that for Altor these can be opportunities in which the firm can take a long-term horizon to develop the company together with local management.
This type of investment requires an extensive preparation, from managing the separation of previous shared services, to putting together a board of directors capable to guide management during the company’s transformation period, Maag said.
The acquisition of publicly listed companies, on the other hand, has been a less popular topic in Switzerland compared to markets such as the UK and Germany.
Even with significant dry-powder available, financial sponsors have had a more cautious approach to take-privates in Switzerland, most likely due to the high valuations in the local stock market, Credit Suisse’s Superina said.
As he noted, while FTSE companies trade at an average of around 7.5x 2020E EBITDA, businesses in the Swiss Performance Index (SPI) enjoy a valuation of around 14x 2020E EBITDA.
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