Numbers of French buyouts drop in 2001

01 February 2002

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As has been reported widely in the French press over the last two months, deal activity declined significantly in 2001. Traditionally the ContinentÂ’s volume market, France saw a dramatic slump in both deal volume and value in 2001, particularly during the second half of the year. The number of deals in the smaller bracket continued to fall, and there were also fewer mega-buyouts than in previous years, the only notable large transactions being Picard SurgÃ©lÃ©s, Cegelec and Antargaz. As a result, France remained behind the UK and Germany in terms of the value of its buyout market, and was in danger of losing third place to Sweden. The preliminary statistics recorded by Initiative Europe show that only 65 buyouts were completed in France in 2001, compared with 95 in 2000 and around 90 in 1999. Of these, almost 80% were completed prior to September. There was also a dramatic drop in the value of the market, from EUR 7.8bn in 2000, to EUR 5.3bn in 2001.

The global economic downturn is partly responsible for this, as vendors in France failed to adjust price expectations to changing economic conditions. Where deals did complete there was often a lengthy negotiation period; the buyout of the publishing arm of Vivendi Universal is a typical example of a deal which was begun in mid-2001 but where negotiations are continuing. The transaction is also expected to conclude at a far lower price than was originally touted.

Securing bank debt for transactions also became more difficult in 2001 as the larger financial institutions tightened their hold on deal structures, becoming highly selective over the deals that were backed, squeezing the credit on deals and demanding far stricter terms and conditions in the process. So although some banks were seeking new opportunities to offset old mistakes, deal volumes continued to fall as most investors struggled to structure satisfactory funding packages. The effect was compounded by recent consolidation in the French banking arena which has meant that all but a few very large banking groups, such as BNP Paribas, are able to provide the levels of senior debt required for buyouts. Smaller regional banks in France were showing extra caution over backing highly leveraged deals, and were unable to fill the gap.

Towards the end of 2001 it was also clear that several deals were in trouble, and many portfolio companies which had been acquired at high prices during 1999/2000 were failing to meet targets and having difficulty servicing debt. Autodis underwent yet another round of restructuring, contributing to a generally cautious attitude amongst investors, who have been increasingly stringent over using due diligence, forcing vendors to abandon expectations of a quick sale. Many of the larger successful deals had to find innovative solutions to providing the funding required, including vendor loan notes or a significant vendor roll-over. This was the case with the buyout of Photo France, in which the vendor, GrandVision, supplied a EUR 13.1m vendor loan, and with Picard SurgÃ©lÃ©s, which included a EUR 27m vendor note.

Finally, the events of 11 September wrought their effect on the volume of deals completed. Unlike in Germany, the French economy was still relatively buoyant at the time of the attacks, suggesting that French corporates had the luxury of waiting to sell off non-core assets until a higher price could be demanded.

Yet despite low deal volumes, the reluctance of private/family vendors to sell at lower prices, the caution of the banks and a widespread lack of confidence following the failure of a handful of deals, the general feeling amongst French buyout players is that 2001 will emerge as a blip in the development of the French market. Many deals which were begun in Summer 2001 are due to complete this quarter, and France is not forecast to slip into the same recession as is being experienced by Germany. The only worry is that the larger vehicles investing in France will reach full investment in the first half of the year and that a gap may emerge between the number of opportunities for investment and the amount of funds available as the fundraising environment remains hostile.