Dearth of mega buyouts in Germany

The abundance of cash-rich corporations in Germany has meant that the country is one of Europe's only major economies not to have realised a mega-buyout this year.

Carve-outs from large industrial companies have in the past acted as the main initiator of private equity deals in excess of €1bn. However, "the bigger corporates have a lot of cash right now, so there's no need for them to dispose of their assets to get some liquidity," explains Karsten Hollasch, corporate finance partner at Deloitte. Indeed, one of the only carve-outs to take place this year was that of agriculture firm K+S's garden fertiliser unit, Compo, which was sold to Triton in June. The result is that Germany's biggest deal of 2011 was Rhone Capital and Triton's joint purchase of Evonik from CVC for €900m - whereas France has seen four €1bn-plus deals, and the UK, Sweden and even Italy have completed three apiece.

The secondary buyout arena saw a surge of activity during the first eight months of the year however. As well as Evonik, there was the €700m secondary buyout of Jack Wolfskin by Blackstone in July and Cinven's acquisition of SLV-Group from Hg Capital. The state of affairs in the €250-500 buyout bracket is mildly encouraging too, as five deals have been signed off in this space so far, compared to only one this time last year.

Since August, though, the tide has turned and just like in 2010, financing difficulties have called a halt to dealflow - particularly at the larger end of the spectrum. This is due to the closure of both the high-yield bond market and the IPO market. Covenant-Lite appears a distant memory and large-cap houses are now turning to club deals rather than hoping banks will underwrite leverage to later syndicate. One reason for this is that syndicators are struggling to sell on debt packages structured to suit the institutional credit market (with bullet repayments) rather than the bank market, which prefers amortising tranches.

Clubs of banks are therefore taking on final holds of €30-40m each, while Peter Hammermann from Barclays Private Equity says even the largest of deals are seeing maximum multiples of around 4.5x EBITDA. "Not many banks really want to take the risk of financing very large transactions," concurs Hammermann, whose firm completed the secondary buyouts of Hörstel-based OASE from Cognetas and Hannover-based IN tIME Express Logistik from ECM this year. "If there's someone that really wants to sell a business worth more than €500m, I would assume they'd wait and see how things develop over the next couple of months before making the decision again." Nevertheless, Hollasch claims there are still a "substantial" number of banks willing to underwrite deals. "I haven't been aware of any financial sponsor who's pulled because of a lack of financing," he says.

A modest influx of trade buyers locally has led to further muted optimism. Much of the interest has hailed from the US, Japan and China, whose businesses have been searching intensively for German deals and bidding in auctions. "The rationale behind their acquisitions is either to increase their regional footprint or to gain access to new technology and customers," says Hollasch. Since the Fukushima Daiichi nuclear disaster in March, attention from Japanese banks has also increased significantly, because of the strong yen since then. Hammermann, however, doubts whether the current situation is radically different from that of previous vintages. "The sequence of exit routes in most cases is still private equity, then trade and in previous years, the stock market," he says. IPOs are not an option for most at present though, in contrast to last year, when the high-profile listings of Kabel Deutschland and Brenntag raised around €750m each.

When it comes to considering the outlook for 2012, sentiment is hard to gauge. Few appear willing to make predictions at a time of almost unprecedented economic uncertainty. "If I knew what was going to happen, I could become a rich man, because none of these so-called economic research institutions know what's going to occur over the next few years," points out Hammermann. "They've proven throughout the crisis that they have no idea what really happens, so it's very difficult to predict." What does appear likely is that the coming year will represent a strong exit window for many portfolio acquisitions of 2006-07. This could end up having a positive effect on the primary buyout market too, as corporations with non-core units could also decide to divest when conditions improve.

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• Topics
• DACH
• Buyouts
• Germany
• Large-cap buyout
• Mid-market buyout
• Secondary buyout