European Buyout Market Made Massive Leap in 1997

The value of the Continental European buyout markets virtually doubled between 1996 and 1997, according to statistics released by the Centre for Management Buyout Research (CMBOR) and publishers Initiative Europe. And, from 1995 to 1997, the value of Continental buyouts increased by a staggering 230%.

The Continental markets’ combined 1997 value of GBP11.9 billion (ecu 11.8 billion) exceeded the GBP10.4 billion recorded in the UK, the first time in four years that the value of Continental deals has topped the UK’s.

Four of Continental Europe’s five most important buyout markets – France, Italy, Germany and Sweden – saw very substantial increases in value last year. The fifth and most mature Continental buyout market, the Netherlands, slipped back slightly, showing a 3% decline in value from 1996 to 1997. However, at GBP661 million, the Dutch market was 26% ahead of its 1995 value, while deal numbers, at 61, were up slightly on the 56 buyouts recorded in the preceding year.

Deal numbers were also slightly up in France, to 126 from 103 in 1996, but the 198% increase in market value to GBP3.2 billion in 1997 was due principally to the completion of a handful of very large buyouts. Chief among these was the buyout of Elis, for a price estimated at over FFr 6 billion (ecu 902 million).

Overseas players are currently thronging into the German market, which last year more than doubled in value to reach GBP2.3 billion. The largest German deal recorded during the period was Impress Metal Packaging, led by Doughty Hanson, with an estimated value of DM1 billion (ecu 504 million). However, the increase in German market value reflected a growing number of transactions, up to 84 from 62 in 1996, as well as larger average deal size.

The massive SEAT deal, ranking as Europe’s largest-ever buyout with total funding of close to L4000 billion (ecu 2.05 billion), single-handedly accounted for nearly 80% of the value of the Italian buyout market, which, at GBP1.8 billion was up 177% from 1996. The 20 deals recorded in Italy was two fewer than in the preceding year. Doughty Hanson’s $1.2 billion (ecu 1.09 billion) Geberit deal had a similarly distorting effect on results for Switzerland, which saw a 64% increase in value to GBP1.6 billion in 1997, but experienced a relatively modest increase in transactions numbers, recording 63 deals last year compared with 52 in 1996.

Sweden, where 17 buyout deals took place in 1997 – only one more than the previous year – saw market value rise by 77% to GBP920 million. In the absence of mega-deals, this is symptomatic of more general growth in transaction sizes.

Finland, too, saw a healthy increase in the value of its buyout market, recording 32 deals worth a combined GBP489 million in 1997 compared with 24 valued at GBP323 million in 1996.

If the four Nordic markets are taken together, their combined annual value has grown by 180% between 1995 and 1997, reaching GBP1.76 billion. Deal numbers have increased by 15% to 68 during the same period.

Consistent trends are harder to identify in Europe’s smaller and less mature buyout markets, though there are signs that activity in Spain is growing steadily, albeit from a relatively low base.

Corporate divestments remain the most important source of buyouts in Continental Europe, accounting for 43% of the number of deals in 1997. However, buyouts of privately owned companies are on the increase, making up 35% of transactions last year, compared with 28% in 1996. This suggests that family vendors on the Continent are finally becoming aware that sale to a financial purchaser is a viable option for the disposal of all or part of their shareholdings.

Activity has continued strongly during the opening months of 1998, reflecting the unprecedented liquidity of Europe’s private equity funds. For this abundant supply of equity capital – estimated at between $10 billion and $15 billion (ecu 9-13.5 billion)- to be deployed, at least $40 billion, and probably more, of senior debt will be needed.

Although, according to CMBOR, UK buyouts totalling GBP5.25 billion (ecu 8 billion) were completed during the first quarter (story, page 10), with around GBP3 billion (ecu 4.6 billion) more lined up for the second quarter, there are signs that the banks’ appetite for leveraged financings may be beginning to flag. Syndications for a number of-high-profile (and apparently highly-priced) deals have encountered problems, leaving the lead banks holding far more debt on their own books than they had originally envisaged.

The past two to three years however, have seen a rush of new entrants and re-entrants to the senior debt market. Even allowing for a diminution of appetite in some quarters, there are no signs of a lack of supply constraining buyout activity. But the debt market transition from famine to feast was rapid, and the tide could turn equally quickly. It has happened before, all it takes is a few spectacular failures.

There have been none so far in this market cycle, but it is crucial that the need for disciplined credit structures be kept in mind. Meanwhile, Europe’s private equity houses would do well to remember the dangers of treating debt as a commodity. When banks leave the game, they stay out for a long, long time.