German buyouts: the giant stirs?

Economic figures emerging throughout the first half of 2010 have indicated that, compared to many other key European economies, Germany is emerging strongly from its deepest post-war recession. Official figures released last week showed the largest single quarter of growth since reunification, easily exceeding previous forecasts. To a large extent, this growth is being fuelled by rapidly increasing export levels, though domestic consumption and government spending are also playing a role.

According to Ingo Krocke of local mid-cap specialist Auctus: "The German economy is reaping the rewards of 10 years of salary austerity, helped by real trade union discipline. In manufacturing terms the country's cost per unit has stayed pretty flat for a decade now and, as a result, Germany is much more competitive than it has been for a long time."

But it appears this rosy economic glow has not yet translated into deal completions. The first half of 2010 has produced just 17 private equity-backed buyouts in Germany, with an aggregate value of less than €1bn. Of those, only three are estimated to have involved a total funding of over €100m, while in other jurisdictions mega-buyouts are popping out of the woodwork with a regularity reminiscent of the pre-crash years (WorldPay, Picard Surgelés, Tomkins, Autobar, etc).

Part of the explanation, according to one local practitioner, is simply that the positive earnings projections did not actually start emerging until well into the first quarter of this year. Until this happened it was difficult to come up with sensible acquisition multiples, which has resulted in a time lag. Behind the scenes, the flow of new opportunities coming into the market has been accelerating rapidly, both in terms of quality and quantity and this augurs well for a spike in completions after the holiday period.

It isn't all plain sailing though. Finding acquisition finance with attractive terms remains a thankless task in the region. Many providers of leverage left the German market completely during ‘08 and ‘09, and those that remained have still largely been dealing with internal issues on their books. Although there are certainly signs that appetite is increasing, the banks are still demanding high equity contributions and premium margins. In addition to this, there are still significant disparities in the confidence levels between different market segments. Even in Germany's core engineering products and services sectors, banks are still only offering 2.5-3x EBITDA and expecting 50% in equity contribution. Meanwhile, the automotive and auto supplies segment remains firmly in the doldrums and raising finance for deals in that area is difficult.

It seems assured that the pace of buyouts being completed in the German market will pick up markedly in the final months of the year, but like a bear coming out of a long hibernation, it may take a little while for the market to find its feet.

A more detailed commentary on conditions in the German buyout market will appear in the upcoming issue of unquote" Private Equity Europe.

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• Topics
• Buyouts
• Buyout
• Small-cap buyout
• Mid-market buyout
• Large-cap buyout
• Germany