France gearing up for a carve-out comeback

Corporate carve-outs have proven less frequent in France compared with elsewhere in Europe from 2014 to date, according to Unquote Data. During this time, this deal source has represented 10.8% of all buyout investments in the region, while the European average stood at 13.5%.

However, the past 18 months have shown a carve-out comeback across Europe, including in France, where carve-outs represented 11.76% of all buyouts in H1 2019. That said, the country remains some way behind some of its neighbours, with the Europe-wide percentage rising to 14.59% during that time period.

The France section of EY's recently released Corporate Divestment study gives some insight into the trends driving that recovery – and could encourage local GPs hopeful that further carve-out dealflow is still to be unlocked in the country. One of the key takeaways from the research – based on interviews with 40 senior executives of French businesses between September and November last year – is that French corporates have become much keener on selling parts of their business in order to foster core activities.

Olivier Sibenaler, a partner at EY, says divestments are no longer motivated mostly by the fact that a division is underperforming. The main driver seems to be strategic reallocation of resources, with 73% of French companies reinvesting the proceeds of carve-outs in product development and penetration of new markets or countries, against 60% of the companies interviewed outside France.

"Management teams have understood the value creation possibilities of divestments: on the one hand, some divisions, although profitable, do not provide many synergy opportunities within other divisions of the parent company," Sibenaler says. "On the other hand, some divisions are simply less profitable than others and, while they are not doing badly, their sale could allow some cash to be reinvested in the more profitable ones."

The rationale behind a divestment strategy also derives from the need to manage competition. "For some, it is a question of survival: technological innovation is forcing established businesses to make acquisitions or arrange spin-outs in order to keep up with new competitors that are disrupting their business models," says Sibenaler. In France, 80% of the companies surveyed in EY's study consider that technology will increase the pace of divestments over the next 12 months.

Moreover, given greater public market volatility in Europe, divestments have become a good alternative to IPOs in order to obtain financing. Finally, merchant banks have increasingly approached corporates with suggestions about which divisions to buy and sell, and therefore corporates are receiving an extra stimulus, says Sibenaler: "Advisory services to vendors have very much developed and it is significant that 58% of the French companies interviewed expect to see unsolicited approaches increase in the next 12 months."

PE influence
Overall, corporates are increasingly aligned with the tempo of private equity investing, with 66% of companies in the sample declaring that they carry out reviews of their portfolio every six months. In France, opportunistic exits also seem more common than elsewhere: 53% of divestments are initiated following the unsolicited offer of an acquirer, while the global average is 46%.

Sibenaler says the influence of private equity on the management teams of corporates is increasingly noticeable. "Corporates are starting to act more like private equity," he says. "Rather than taking into account the turnover generated and the profitability of the divisions, the return on capital invested is most important. Private equity invests to create arbitrage, and corporates are mimicking this. Moreover, corporates are regularly questioning and reviewing their portfolio business, just as private equity houses do."

With 21 private-equity-backed carve-outs recorded last year in France, and 12 deals inked in the first half of 2019, GPs have been eager to snap up opportunities after the quieter 2016-2017 period. The various factors putting pressure on corporates to focus on their core activities, combined with the sourcing conundrum experienced by private equity players in a competitive market, could signal a further rebalancing towards this attractive source of dealflow.

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• Topics
• France
• Investments
• EY (Ernst & Young)
• Unquote Data