Strong fundamentals drive M&A growth in France
2019 buoyed by large cap and PE buying
- Regulatory reforms support renewed corporate confidence
Restructuring-led processes to support M&A activity in 2020
The French M&A market closed out 2019 in spectacular fashion with the announcement that LVMH, the world’s largest luxury goods company, and owner of iconic luxury brands such as Louis Vuitton and Bulgari, had agreed to buy Tiffany, the U.S. jeweller, for a record US$16.2 billion.
It was a cross-border deal that reverberated around the world, redrawing lines in the global luxury market, while putting the spotlight back on Paris and a French M&A market that has been re-establishing itself in recent years.
Despite signs of decreasing activity in the large-cap sector during the first half of 2019, together with an overall slowdown in global and European M&A, activity in France during the year was strong.
M&A deal volume remains resilient
The headline story in H1 2019 was the impact of private equity buying, which fuelled resurgence in mid-cap M&A activity, peaking in July. A pause for breath in September was short lived with deal flow picking up significantly in the final quarter of the year, yielding a strong 12 months for French M&A overall, in terms of both deal volume and value.
The resilience of the French M&A market in the face of unprecedented levels of political uncertainty around Brexit, coupled with expected economic headwinds, can be attributed to several factors.
Fundamentals remain very strong among French corporates, supported by an abundance of liquidity and record valuations.
The implementation of large number of government reforms has also bolstered business confidence, and in turn, positively impacted M&A activity. Revisions to key employment laws, simplification of corporate law, and a reduction of the squeeze-out threshold from 95% to 90%, are just some of the notable changes that have helped the French business environment and fuelled appetite for M&A.
Restructuring a catalyst for M&A activity
Perhaps one of the most significant drivers of M&A activity in France has been restructuring-led M&A. Many companies are being forced to re-evaluate their business models in the face of increased competition and industry disruption.
It would be wrong to call this distressed M&A – in contrast to the financial crisis of a decade ago – because covenant breaches on financing terms have not been the catalyst for such activity. Instead, we have observed active intervention by the management teams at established, so-called “old economy companies,” eager to make structural and fundamental changes to the operating models of their businesses.
These actions have resulted in a growing number of non-core asset sales with clients seeking to re-establish, and focus on, what they do best. This trend is expected to continue in the first quarter of 2020 and beyond.
Pragmatic regulatory environment supports inbound M&A
Foreign interest in domestic French assets is also expected to remain high in 2020 despite CFIUS-style regulations being reinforced since 2014. French governments of all political hues have shown little desire to stamp on would-be deals, instead preferring a more measured approach.
Prompted by General Electric’s acquisition of Alstom at the time, the list of safeguarded, so-called “sensitive sectors” for M&A was extended to include energy and key infrastructure sectors. Changes in the make-up of the French and global corporate landscape mean that technology and data-driven companies now also find themselves subject to such regulations.
These regulations can include sanctions and provide for a golden share mechanism that can be imposed by the government on certain companies specifically referred to in a decree or listed on a stock exchange, and in which the French sovereign fund, Bpifrance, holds shares.
Although this protection gives the French government the right to prevent certain acquisitions, the approach until now has been to impose certain remedies, albeit it in a very limited number of cases, to ensure that key assets and governance are maintained in France.
It is interesting that the enforcement of CFIUS is having a greater impact on French M&A than domestic rules, with the Trump administration concerned about change of control of foreign companies that are key suppliers to the US economy.
U.S. restrictions on Chinese ownership, dubbed the ‘Huawei’ regulations, also seem to be deterring some U.S. companies from making even minority investments in France alongside Chinese companies for fear of regulatory capture in the United States.
Brexit continues to occupy the minds of those leading transactions involving continental Europe and UK assets. Cross-border M&A between French and British companies is marginally more challenging than in previous years and the Brexit game remains ongoing, despite the UK’s movement on the issue. However, it seems increasingly likely that Brexit will boost appetite for M&A across Europe.
Outbound M&A to continue
The revenues earned by French companies from foreign-based employees and assets surged by more than 60% between 2007 and 2014. Meanwhile, French companies received more than €54 billion in dividends from foreign investments last year, reinvesting more than €13 billion back into these companies. This trend is likely to continue given the low growth rate many are projecting for Europe in the coming year.
While this trend continues, we also expect interest in key sectors including technology and data-driven businesses to remain robust. Changes to the way economies are powered and the wider energy mix, together with the expected reorganisation of the nuclear and renewables sectors, mean M&A in the energy space will likely lead French deal activity in 2020.
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