Buy-and-build drives consolidation in DACH

Katharine Hidalgo
13 May 2019

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Fragmented markets, a wealth of small- and medium-sized companies, and high multiples are some factors contributing to the growing prevalence of buy-and-build in DACH. Katharine Hidalgo reports

DACH's share of European buy-and-build activity rose to 17% in Q1 2019 from 11% in Q1 2017, according to Unquote sister publication Mergermarket. Despite the drop in volume from 2017's record high of 93 acquisitions, 2018 still saw 69 deals in DACH, its second highest volume in the post-2008 era.

Fragmented markets, a wealth of small- and medium-sized companies, and high multiples are some factors contributing to the growing prevalence of buy-and-build in DACH. Additionally, in contrast to France and the UK, Germany has a network of large and productive cities, which creates a strong distributed economy.

Thomas Fetzer, head of DACH investment banking for Baird, argues buy-and-build has become a natural extension of the private equity toolkit: "Traditional sources of value creation are no longer available. For example, where multiple arbitrage used to be a source of value creation, GPs are now factoring multiple contraction into their models."

The healthcare providers sector saw the largest amount of transactions, with 12 bolt-ons financed directly by a sponsor in the past three years (and plenty more financed by other sources of capital). Relatively resilient to macroeconomic cycles and highly fragmented in Germany, the sector is a perennial favourite for buy-and-build investors such as Nordic Capital, Ufenau Capital Partners and Investcorp.

Waterland managing partner Carsten Rahlfs says his firm follows a buy-and-build approach regardless of the segment, but his portfolio companies still differentiate in certain areas: "Waterland generally tries to differentiate with higher quality services and not by price, because that doesn't work in healthcare. Thus, we look at developing quality in our therapies and acquiring quality real estate assets."

Waterland has platform investments across the healthcare industry, including rehabilitation clinics group Median Kliniken. The company has made 19 acquisitions since the firm's initial investment in 2011 and is now the largest rehabilitation group in Germany. Despite this, Philip von Hammerstein, a partner at Gimv in Munich, estimates that Median Kliniken still only has a share of less than 15% of the entire rehab and post-acute market.

Sometimes the value is in the eye of the beholder when it comes to targets… Finding the sizeable platforms is the bigger challenge" – Thomas Fetzer, Baird

Tooling up
Industrial machinery saw the most buy-and-build activity in DACH after healthcare providers, likely because the former is a fragmented sector with an abundance of small companies. During the past three years there were seven bolt-ons financed with extra sponsor equity, according to Unquote Data. Software follows closely, with five transactions in the same period. Like healthcare providers, software investments often attract high valuations and GPs can use buy-and-build to counteract this.

Much like the picture seen in the rest of Europe, financial services have been home to a significant uptick in consolidation, with fintech the main source of activity. Following a $114m funding round in February 2019, online saving platform Raisin announced it would use the fresh capital for strategic acquisitions and purchased MHB Bank in March from Lonestar Private Equity. Meanwhile, Finleap, a Berlin-based incubator, financed two mergers in 2019: High-Tech Gründerfonds' banking software provider Figo merged with Finreach in March; and Inception Capital also sold Penta to the incubator, with the business banking app due to enter into a formal partnership with Finleap's Beesy.

Private-equity-driven consolidation in financial services also continues at the larger end of the market, with Commerzbank likely to be taken over. US-based Cerberus holds 5% in the lender and publicly supported a proposed merger with Deutsche Bank before talks collapsed. Suitors now include UniCredit and ING.

Fetzer says DACH has been a sellers' market for some time and has noticed a decline in the quality of some targets coming to market, often with high valuation expectations: "Sometimes the value is in the eye of the beholder when it comes to targets. There should be a healthy supply of bolt-ons because the German economy comprises a large number of SMEs. Finding the sizeable platforms is the bigger challenge."