European M&A saw a solid uplift in value in the first half of 2024. Western Europe saw US$390 billion of deals—a rise of 40 percent year on year, while the Central and Eastern European total was US$30 billion, up 25 percent compared with the same period in 2023.
There are several drivers for the increase in deals: a more stable interest rate environment; the return of private equity to the dealmaking table; a strong showing from the technology, media and telecommunications (TMT) sector; and continued distressed dealmaking.
European businesses have experienced a rise in distress over recent years, with a high interest rate environment, the ongoing impact of Covid, high energy prices and a drop in consumer confidence leaving many businesses struggling to survive.
While the picture has gradually improved in 2024, levels of distress remain high across the continent. The European Central Bank’s recent cut in interest rates, GDP improvement and falling energy prices are bringing some relief, yet a long road to recovery remains. The interest rate-cutting cycle is proceeding more slowly than expected, with inflation difficult to predict, and businesses are still dealing with liquidity challenges triggered by the pandemic.
Distressed M&A activity continues apace, reaching a seven-year peak in 2023 both in terms of volume and value, according to Dealogic. Last year’s activity was dominated by two large French restructurings—retail chain Casino and nursing homes group EMEIS (formerly Orpea)—which served to bump up overall deal value.
This pattern has continued into 2024, with the volume of distressed deals remaining high. A total of 233 such deals targeting European firms were announced in H1 2024—a 66 percent increase compared to H1 2023. If this rate of activity continues, deal volume could reach the highest point since 2016. The total value of deals, meanwhile, has not reached the highs of that year due to an absence of large-cap restructurings to date.
French restructurings fuel M&A
The French market attracted some big-ticket distressed deals in 2023. The largest was the restructuring of the debt-laden retailer Casino, valued at around €9 billion (US$10 billion), which has resulted in M&A opportunities as the retailer looks to shed its assets.
In January, it was announced that Casino had reached an agreement to sell 288 of its unprofitable hypermarket and supermarket stores and their attached service stations to two rival chains, Auchan Retail and Groupement Les Mousquetaires. The stores were valued at around €1.3 billion (US$1.4 billion).
The retail and consumer industry is one of the worst hit in Europe. According to consultancy Mazars, the number of insolvencies of European retailers reached 2,195 in 2023-24 (year ending January 31), representing a 19 percent year-on-year increase. The ongoing cost-of-living crisis, which is dampening consumer confidence, is a major reason behind this trend, along with ongoing supply chain disruptions complicated by conflicts in the Middle East and Ukraine. In light of these pressures, businesses are striving to balance operational costs with consumer pricing.
Another significant deal agreed in 2023 was the restructuring of nursing homes group EMEIS (formerly Orpea), led by a consortium of French investors including Caisse des Dépôts et Consignations, MAIF and MACSF, which aims to reduce its €9 billion (US$10 billion) debt pile by almost 60 percent. And, in April this year, digital marketing company Solocal Group announced its fourth restructuring in a decade. The deal will see tech startup Ycor take control of Solocal in a deal valued at US$45 million.
While relatively stable compared to its regional neighbors, France’s recent snap parliamentary election could signal more financial distress on the horizon. Since June’s election, the French ten-year bond yield has risen by over 30 basis points—a level not seen since the Euro area’s sovereign debt crisis.
UK energy and utilities receive a helping hand
In the UK, the unwinding of Covid measures has made turnaround opportunities harder to come by. The number of administrations increased by 27 percent in 2023—the highest level since 2019.
The UK delivered Europe’s largest distressed M&A deal in H1 2024: specialist renewables manager Schroders Greencoat’s US$890 million purchase of a majority stake in Toucan Energy’s solar energy portfolio. Toucan Energy fell into administration in 2022 following a period of financial distress.
In another significant turnaround investment, struggling utilities provider Southern Water received a US$703 million financial injection from Australian investor Macquarie Asset Management. It follows a £1.1 billion (US$1.44 billion) investment from Macquarie in September 2021 as the business seeks to overhaul ageing infrastructure.
Falling inflation and political stability post-election is reducing corporate distress in the UK, with consumer and business confidence on the rise. However, distress levels remain above the historical average due to weaker investment and tight liquidity.
Cross-border bidders eye distressed German assets
Germany, meanwhile, is facing the highest levels of distress in Europe. According to Destatis, the country’s federal statistical office, 5,209 German companies filed for bankruptcy in Q1, up 26.5 percent from the same period last year. That trend has continued, with bankruptcies rising consecutively in April (1,906) and May (1,934). The economy is expected to be stagnant this year, with forecasted growth of just 0.2 percent. In particular, the increased interest rates are challenging for many businesses in low-margin industries.
The automotive industry saw some significant turnaround deals in 2023. The sector is contending with supply chain issues, rising electricity costs and sluggish exports. In July, Dr. Schneider Group was acquired by Indian auto parts maker Samvardhana Motherson International in a deal valued at US$132 million. Dr. Schneider, an interior parts manufacturer, filed for insolvency in September following a failed restructuring process. Earlier in the year, Swiss automotive group Autoneum acquired Borgers Automotive from insolvency in a US$125 million deal.
Germany’s tech sector has also attracted interest this year. In April, Swiss lending platform Teylor acquired distressed business creditshelf, an SME financing platform, as it looks to expand its debt portfolio and extend its client reach.
Outlook
The economic outlook for businesses is gradually improving across the continent. The lowering of interest rates will bring some relief, boosting the financing environment and lifting consumer confidence.
While there are signs of recovery on the horizon, it will take time to have a material impact on businesses in distress. Lower-rated companies with debt maturing over the next six to 12 months may struggle to access the necessary credit as financing remains tight. This could result in an increase in restructuring activity toward the end of the year, particularly in the hard-hit automotive and retail sectors.
This outlook presents plenty of opportunities for cash-rich companies and PE funds flush with dry powder to hunt for new targets. Those with solid turnaround records will be looking to use their financial firepower to expand their geographical reach and invest in new capabilities. Companies and turnaround specialists will play a crucial role in helping distressed businesses reach their full potential.