DACH Trendspotter: Market sentiment on the up as dealmakers assess growing pipelines

While markets spent much of 1H23 continuing to digest the external shocks that have rattled Europe over the past year, M&A practitioners are looking ahead to a potential uptick in private equity (PE) activity and good appetite for businesses with strong underlying fundamentals, market participants told Mergermarket.

“Compared to three months ago, the outlook is more positive, and it’s a question of whether we see a strong 2H23 or whether activity slides into 1Q24,” Stefan Jaecker, CEO of DC Advisory Germany, said. “The pipeline is building up and there is a real stock of deals which are in preparation but have not yet launched, across more or less all industry sectors.”

Although 2023 is unlikely to see transaction levels return to the highs seen in recent years, with the deal count in the German-speaking DACH region down 19% year-on-year in 1H23 at 943 transactions, activity is still above the levels of pre-pandemic periods such as 1H19 (632 deals), according to Mergermarket data.

Many of the factors that hampered M&A towards the end of 2022 – from uncertainty over interest rate hikes and energy prices to the war in Ukraine – stubbornly continued to hold back activity into 1H23, dealmakers said.

Financing markets – one of the chief obstacles to getting deals over the line – are slowly opening up, and participants are coming to terms with inflation and higher interest rates. Yet much still ultimately depends on how well buyers and sellers have adjusted to this new macro-environment, dealmakers caution.

“It took some time for sellers to adapt to different multiples, and to some extent buyers as well, but I think we have reached a new kind of balance,” Partner and Head of GIMV Germany Ronald Bartel said. “My expectation for 2H23 is that we see a slight pickup in dealflow, but still at somewhat more modest levels.”

Overall M&A volume in 1H 2023 reflects the toll that rate hikes, inflation and financing difficulties have had on dealmaking. Disclosed deal values for the DACH region in 1H23 amounted to EUR 47.83bn, down 32% from EUR 70.38bn in 1H22 and the lowest since 1H15 (EUR 43.48bn).

With big ticket M&A most heavily impacted, only one deal to date has cracked the EUR 10bn megadeal threshold in 2023: CarrierGlobal’s [NYSE:CARR] EUR 12bn acquisition of Viessmann Climate Solutions. The region’s secondand third-largest transactions so far are UBS’s [SWX:UBS] EUR 3.26bn takeover of rival Credit Suisse [SWX:CSGN] and Bain Capital’s EUR 3bn public-to-private (P2P) buyout of SoftwareOne [SWX:SWON], respectively, although the former is unlikely to be taken as a sign of the good health of the large-cap deal market.

Strategics versus sponsors

Corporate buyers such as Carrier and UBS feature prominently among the acquirors of DACH-based assets in 1H23, as many found themselves less constrained by lending markets than their private equity peers, dealmakers noted.

“It’s agood moment for corporates to buy given many have cash on their balance sheet to offer good pricing, and a few corporates are actively pursuing transactions in Germany right now,” managing partner at Waterland Carsten Ralfs said, adding that the share of financial sponsors selling assets to strategic buyers is likely to continue increasing into 2H23.

On the financial sponsor front, private equity had to dial back its ambitions in the DACH region in 1H23, with both buyout and exit levels struggling to match previous years’ hauls.

The DACH region was host to 53 sponsor-led buyouts worth a disclosed EUR 10.79bn in 1H23, down from 84 buyouts (EUR 8.59bn) in 1H22 and the lowest on record since 1H16 (47 buyouts).

Sponsor-led exits in DACH fared somewhat better, with the 26 exits worth EUR 2bn seen in 1H23, down from the 38 exits (EUR 9.71bn) seen in 1H22 yet on par with periods such as 1H21 (26 exits). Exits seen in the region include Afinum’s sale of LIFTKET Hoffmann to Ardian and EQT’s sale of BBS Automation to engineering group Durr for up to EUR 480m.

Aclash between buyer and seller expectations proved insurmountable for a number of transactions, frustrating hopes of a much-awaited spring rebound in the market.

“There was and still is a gap between valuation expectations in private markets, which led to the fact that certain deals didn’t go through this year given that some players were likely not under pressure to sell,” Eight Advisory partner Marc Niclas said.

Processes that were ultimately called off over valuation expectations include the sale of family-owned Heine Optotechnik, which was reportedly pulled in May.

Still, this gap in pricing expectations is expected to narrow in 2H23, dealmakers noted.

“Valuations are in the process of adjusting relative to peak levels and the very high multiples we have seen,’ Christopher Droege, co-head of M&A for Germany and Austria at Goldman Sachs said. “Once the bid-ask spreads between buyers and sellers narrow and adjust to the new normal, things will stabilize and get easier.”