Podcast: M&A Outlook 2021

In this week’s episode of Dealcast, Julie-Anna is joined by Mergermarket Managing Editor for EMEA, John West. They discuss M&A activity in 2020, capital deployment in 2021, SPACs and the outlook for IPOs presented by Mergermarket and SS&C Intralinks.

In this podcast, you'll hear about:

  • Reasons why M&A dealmakers are optimistic about 2021.
  • How record levels of dry powder might be deployed in the coming 12 months.
  • The most active sectors to look out for.
  • The huge amount of SPAC activity in the market, both in the U.S. and more increasingly in Europe.


JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In this episode, we're looking at the outlook for Europe. What are the big trends? How will capital be deployed in 2021? I'm joined by Mergermarket's EMEA Managing Editor, John West.
Hi, John. Let's start by having a look at the end of 2020. It was a year like no other last year. But what happens to deal volumes in the region towards the end of the year?

JOHN WEST: Well, there's no getting past the fact that it was a tough year. But it's interesting just to agree with the framing of your question. It's interesting the degree to which it is a tale of two halves. Deal volumes across Europe in 2020, 6,658 deals in 2020 across the whole year. That's Mergermarket data. And it's the lowest on our record since 2013. So no doubt there that it's tough.

But if we tend to deal values, very interesting to see that that climbed in Europe 5.6% year on year against a global backdrop of a 6.6% fall. And if you look at the second half of the year, the deal values in the second half of 2020 in Europe were 88% higher than those in the first half. And the buyouts were a major part of that. So clear progression in terms of the recovery. November was particularly strong.

JULIE-ANNA NEEDHAM: And 2021, it hasn't got off to a great start in many places, such as the UK. But there is cause for optimism with the mass vaccination program that is underway globally, isn't there?

JOHN WEST: Yes, it's really striking how upbeat deal makers are. You would look at some of the headlines, appalling headlines, about hospitalizations, fatalities, lockdowns, and assume that the mood was cautious. But I think deal makers, corporates, private equity, they're looking through the current difficulties to that vaccination program and anticipating where the economy will be perhaps by the third quarter of this year, with a great deal of normality restored to some of the pillars of the economy that have been on ice and some of the accelerated trends that we've seen as a result of the virus around telehealth, remote working, and many others embedding into deal opportunities.

JULIE-ANNA NEEDHAM: And you mentioned it there we know that private equity is sitting on record levels of dry powder. Could this be the year that it's deployed?

JOHN WEST: Well, I mean, we already saw that certainly in the fourth quarter of last year, as I said and I believe so. I mean, look, coronavirus has accelerated certain trends, whether that's in the pill, as I mentioned already, but also online entertainment, tech infrastructure. We've seen that with the take out of Telefonica's Telxius this month. So those accelerated trends will have the private equity funds licking their lips and thinking about the opportunities that are out there.

And what I think is also very interesting is that those sectors of the economy that have bedded down and shuttered, whether that's sort of theatrical entertainment, hospitality, of course, pubs, restaurants, et cetera, educational settings, as those begin to come more online as the year progresses, the opportunities are there. And don't forget that there's still a lot of restructuring, very dented companies that have had balance sheet issues. Some of them have raised quite a bit of equity in 2020. But there are still airlines that are looking to rebuild their balance sheets. And private equity will definitely play a role there as they look to take a view on the recovery.

JULIE-ANNA NEEDHAM: And what other sectors do you expect to be active? You mentioned a few of them there.

JOHN WEST: Yes, I think telehealth is perhaps one of the ones where we're seeing most activity just in terms of obviously what we've seen, especially, in those socialized health care systems where the government is dipping his hand into his pocket quite a bit. They're actually seeing, in many cases, the productivity that is coming from people being able to do their GP appointment via video link rather than having to go in. Obviously, doctors, therefore, able to see many more people. That's true in North America as well as it is in Europe.
And of course, with tech infrastructure, with the rollout of 5G. We've noticed, of course, that Huawei is not able to play the role that it could in some European territories as a result of FDI, foreign direct investment screening. And so there's the opportunity for other players to scale up. And that could be the potential for investment clearly required to participate in that.

And look, that plays in as well with the greater bandwidth for such things, resulting from that infrastructure, more online entertainment, more remote working applications. It's clear that every trend that's related to tech. And the way that it is revolutionizing our lives has been accelerated. Online retail, too, moving away from bricks and mortar. Everything is founded on tech infrastructure. That's definitely going to accelerate. But I think that the virus, in this case, is really just sort of turbo-charged things that were probably going to happen anyway.

JULIE-ANNA NEEDHAM: And one trend we've been seeing a lot in the US is a huge amount of activity to do with special-purpose acquisition vehicles or SPACs. I was just reading about the automotive industry in the US with all the electric vehicle technology. And they've been taking advantage of these vehicles. Is that vehicle -- excuse the pun there -- is that something you're expecting to see more of in the European region and? Have there been any of note recently?

JOHN WEST: Well, indeed. And it's interesting you should mention electric vehicles because obviously, here in Europe, in the UK, the electric vehicle group arrival said in November that it was going to go public on NASDAQ via merger with the US-based SPAC, CIIG. Merger called $5.4 billion enterprise value. So we're talking really huge opportunities that can be there.

Clearly, in 2020, we already saw a number of European companies deciding to list via SPAC mergers, but as with the case with arrival, primarily, US SPACs. But what I think is interesting is that a handful of European blank check companies went public in 2020. I mean, 2MX Organic, a good example, raised 300 million euros in a Paris IPO. But I think that we're definitely going to see some more of that in 2021.

One of the things that we've seen over the last five or six years is some stickiness in that route to market, on the public markets. Some debate about whether the book builds and investor education process just runs a bit too long or is too cumbersome for many companies, especially at an early stage. The SPAC route, which effectively takes a kind of private equity view, you're putting money into the blank check company on the basis of your view or your conviction on the deal makers at the top of it. In a way, seems to make it easier for those vehicles to then take private companies public. And it seems that the mood music is that we're going to see more of that in Europe this year.

JULIE-ANNA NEEDHAM: Oh, yeah. Seen by many as a shortcut to a listing, and it's something we saw a lot with mining companies some time ago, although many of them weren't very successful.

JOHN WEST: I was going to say that. That perhaps isn't necessarily the sort of track record that people want to point to. But I think if you look at some of those industries that-- well, the electric vehicle industry that you mentioned at the top there, there are quite a few in that vein or related to some of the tech trends that we mentioned earlier that I really believe offer such evident upside if you manage to align yourself with those trends, but also deliver products to market in short order. And that's particularly the case. Something that, for example, Nikola a slightly struggling with in terms of their electric -- their hydrogen fuel trucks in the United States. But if you can get a product to market, there are lots of industries where the growth return profile is potentially huge. And SPACs definitely will be a better route for market for some of those companies than the traditional listing route.

JULIE-ANNA NEEDHAM: And staying with the theme of listening, what about the traditional IPO market? How is that shaping up for 2021?

JOHN WEST: Having just dissed it, I would say that actually the IPO prospects are indeed solid. Despite the kind of headlines you're seeing around coronavirus and lockdowns, the VIX index remains roughly at 25, which is a kind of sweet spot for placings. There are a great many good companies that are looking to list. And some of them fall into those kind of categories that we were talking about that have been accelerated as a result of the coronavirus.

I think the jury is a little bit out on whether Deliveroo, which is the kind of food delivery company that's widely expected to make a listing attempt in the first quarter, UK-based-- now, they obviously have a business model of securing a network of riders-- it's kind of Uber-esque ask in that sense-- a network of riders who deliver food for different restaurants. Some debate as to whether it's really a logistics company, or whether it really should be considered a tech company.

And there's a degree to which as with all gig economy players, is it really a tech company or kind of regulatory arbitrage on employment law and the kind of public's willingness to accept quite flexible contracts for workers who aren't necessarily earning a great deal? So I think that those issues will definitely come up in the investor education phase. It's a really interesting deal, a bit of a bellwether for the European and UK IPO markets. But there does seem to be a lot of excitement about it because food delivery and ordering through an app and the tech-related side of it, it does seem to, at least, at face value play into those tech themes that we were discussing earlier.

JULIE-ANNA NEEDHAM: And also, on the ECM front, what about rights issues? We saw quite a few companies move quickly at the start of the pandemic to shore up their balance sheets. Will we be seeing more of those?

JOHN WEST: Yes, it was fascinating. I think the UK authorities, in particular, moved very swiftly in the first part of the pandemic to say, look, cash box placements typically capped at 10% of the capital of a company. That could be lifted to 20% without having to invoke pre-emption rights. And that flexibility gave a lot of companies the ability to go to market with accelerated bookbuild, block trades style, capital raises. We did, of course, as you said, there also see some rights issues. No doubt about it. We're still going to see some of those in 2021.

A lot of those who tapped the market in 2020 have waited to see where the economy is going. And I think with some of the leading indicators, and especially if the vaccines roll out the way they should, I think we'll see some continued activity, where, I think, perhaps the equity story for some of those capital raises will be a little better. They'll be able to say, look, yes, we do need to restore the balance sheet, but here's our growth plan from this point now that there's a bit more of a sense of where the economy is going. But yes, I think we definitely will see some more of those.

Where I think we'll still continue to see challenging conditions is in the bricks and mortar retail sector. It's very difficult to -- some of these companies that we've seen fall by the wayside are household names, national institutions of the like people didn't think would collapse. The truth of the matter is that no bricks and mortar retail operation has a right to exist. And with everything transferring so much online, it's somewhat more difficult to see the kind of restructurings and equity tickets getting over the line in that particular segment.

JULIE-ANNA NEEDHAM: Yeah. And that's obviously having a knock on impact on some of those commercial landlords that are waiting or haven't been paid any rent for some time.

JOHN WEST: Indeed.

JULIE-ANNA NEEDHAM: And looking at the different countries within the European region, where are the bright spots and where are the problems?

JOHN WEST: Well, I think that one of the-- I wouldn't go as far as to say problem, but one of the areas to watch a little bit as the year progresses is obviously, with the UK, a lot of people had hoped that we'd put Brexit perhaps to bed with the trade agreement that was reached on Christmas Eve. However, anyone following the headlines would be well aware of the fact that there are massive logistical issues, companies in the UK and in Europe getting to grips with the new customs regimes, particularly the export of goods from Great Britain to Northern Ireland and from Great Britain to European Union. Lots of concerns about fish and the catch certificates and health certificates, and other things that have to be filled in. Some debate as to whether this is just teething problems or just simply the new reality that this has gummed up business quite a bit.

I think that there are opportunities. And I think that the services sector, which isn't really touched by the trade agreement, could continue to see some growth in deals. But I think anything related to logistics and trade, people might just hold off until later in the year to see whether those Brexit things are teething problems or not. More broadly in the region, I think that, obviously, Germany, France, Italy, generally seen as the motives of European growth. How they go goes to the continent.

In Germany, as you will be well aware, Angela Merkel steps down in September. Italy, we have at the moment a significant crisis with a minority party led by Matteo Renzi pulling out of the ruling coalition. France, politically stable, but with more than half an eye on the presidential elections next year, it's quite possible that the European Union will feel a little rudderless for the next 18 months. And so I see, although, the vaccine rollout is the main indicator and as that goes-- as long as that goes well, then the deal flow will follow. But on the macro side, there are those geopolitical risks, which I think could potentially throw a spanner in the works.

But I got to say that the overall view from deal makers is upbeat and positive. And as they see those vaccine numbers tick up, I think that for me, is the key risk rather than geographical picking. It's simply a case of as long as that number continues to climb the way that we hope it does and as long as the rollout of the vaccine outpaces, the new variants that are cropping up, then the deal makers optimism will be well-founded.

JULIE-ANNA NEEDHAM: Great. Thanks very much, John.

JOHN WEST: Thank you.

JULIE-ANNA NEEDHAM: That was Mergermarket EMEA Managing Editor, John West, speaking to me, Julie-Anna Needham. Thank you for listening to this week's episode of Dealcast, presented to you by Mergermarket and SS&C Intralinks. Listen and subscribe on Apple Podcasts and Spotify or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

22 January 2021