German M&A 2022 and Q1/2023: More Deals - Less Value, Strong Foreign Acquisition Activity, Weak Start into 2023

Dr. Winfried Weigel, Managing Director of weigelCF, www.weigelCF.com

Frankfurt, 19th April, 2023

For the German M&A market, the year 2022 and the first quarter of 2023 showed a mixed trend. Despite a substantial increase in overall DE M&A deal activity, the aggregated transaction values showed a substantial decrease. German domestic M&A activity saw a decline due to a lack of very large deals being announced, in particular with regard to German buyers. However, German investors stayed very active in foreign markets, both in aggregated deal value (DV) and number of deals. The first quarter of 2023 was in line with global markets, extremely weak, both in no. of deals and DV, except for one big foreign deal.

In 2022, the German M&A market, which includes target companies, buyers, or sellers from Germany, saw a decrease in the aggregated DV to €138.5 bn compared to €174.5 bn in 2021, representing a decline of 21%. The market recorded 311 deals with at least €10 million DV in 2022, which is an 18% increase from the 263 transactions recorded in 2021. The average DV for 2022 was €445 million, which is 33% lower than the average DV of €665 million in the previous year.

• We saw 31 (2021: 40) bn Euro deals with an aggregated DV of €79.7 bn (previous year: €133 bn),
• 121 deals (2021: 104) between min. €100m and up to <€1bn DV, with an aggregate DV of 42.5bn (2021: 36.3bn),
• 159 deals (2021: 119) deals from €10m to <€100m DV, with an aggregated DV of €6.5bn (2021: €5.1bn), and (not included in the totals above)
• 49 deals below reported DV of €10m with a total DV of €263m

This makes a total of 360 M&A transactions with disclosed deal values and a total German M&A deal value 2022 of €138.75 bn.

In 2022, the German M&A market saw a significant decrease in very large deals, with the biggest deal being just €10.7 bn. We observed a 22.5% reduction in the no. of Billion-Euro-Deals, with an average deal value of just under €2.6 bn compared to €3.3 bn in the previous year. This led to an overall decline of more than 40% in the aggregated deal value in this category.

The categories of medium and small DV witnessed a noteworthy surge, with an increase of 16.3% and 33.6% for the no. of medium and small deals, respectively, and a 17% and 27.5% increase in the total DV in these two categories, indicating a significant rise in M&A activity in both criteria.

Foreign acquisitions dominated the domestic German M&A market, with 155 deals and an aggregated DV of €62.5 bn, far surpassing the 41 domestic purchases that totalled just €9 bn in DV. German acquirors are more active abroad with 121 acquisitions with a total DV of €43.4 bn. On the other side, we counted 43 divestitures by German sellers to foreign buyers with an aggregated DV of €13.8 bn. German investors are net buyers abroad with an overhang of 78 net acquisitions and €29.5 bn marginal DV invested.

We need to put deal values and, therefore, corporate valuations into perspective with stock market valuations and inflation. The central questions is, whether we had positive or negative real interest rates in 2022, and today, and how this should impact valuations?

The DAX30 experienced a significant decline of 12.35% last year (compared to +15.8% in 2021), which has since been caught up in 2023 YTD (now DAX40). However, the M-DAX and S-DAX indices experienced even greater declines of 28.5% and 27.35%, respectively, and have only recovered less than half of those losses to date. In addition, the European key interest rate was raised from 0% to 2.5% over the course of 2022 and is now at 3.5%. The annual inflation rate in Germany was 7.9% in 2022 and has since decreased slightly to 7.4% as of March 2023 YoY, although some producer prices have increased significantly more. Despite the uncertain political and economic situation, the stock markets have approached their historic highs once again. Looking at 2022 we have to conclude that average valuations were substantially lower the in the previous years, plus, that buyers applied higher risk premia to its valuations.

However, the German M&A market had a weak start in Q1/2023, which is in line with the global trend. There were only 21 German M&A transactions with disclosed DV, thereof 19 deals having at least €10 million in DV and a total aggregated DV of €18.3 bn. This most likely makes it the weakest quarter since the financial crisis 2008/2009. The four largest transactions, with an aggregate DV of €16 bn, were the acquisition of Qualtrics International Inc. in the US by PE Funds Silver Lake Group LLC and Canada Pension Plan for $12 bn, in which German SAP sells a stake of $7.7 bn, and three PE acquisitions in Germany totalling a further €2.7 bn. More than half of the aggregate German deal value came from one deal abroad, with €4.3 bn DV not related to German M&A. That would reduce the German M&A DV in Q1/2023 to just €14 bn. Out of the top 10 deals, five are public takeovers in Germany, with the takeover of Pfeiffer Vacuum Technology AG for €477 million triggered by the conclusion of a profit and loss transfer and domination agreement, rather than aiming to acquire a larger stake. Deal 6 and Deal 10, in white letters, are not strictly M&A deals as they involve the takeover of outstanding shares from minority shareholders and do not result in a change of control. PE investors are highlighted in green and corporates in beige.

Table 1: Top 10 German M&A Deals Q1/2023 including non qualifying transactions in white

In Q1/2023, the top five M&A deals in Germany were all takeovers by private equity firms, with three of them being sold by strategic sellers and the remaining two as public takeovers. The remaining five deals consisted of three strategic takeovers and two PE investments.

The deals in white writing are excluded transactions as the do not qualify as M&A transactions, acquiring corporate control. The excluded deals are the mandatory tender offer to Pfeiffer Vacuum Technology minority shareholders related to entering into a profit & loss sharing agreement and a domination agreement with the controlling shareholder, the acquisition of a remaining minority stake in the soccer club Hertha BSC Berlin, the acquisition of a wind farm and a €50 million PIPE transaction acquiring a 9.09% stake of listed battery manufacturer VARTA AG by an institutional investor.

Key 2022 M&A Market Takeaways?

1. Due to interest rates, SPAC transactions are becoming less popular. In a negative interest rate environment, SPACs were an attractive and safe way for institutional investors to park money at a positive, albeit low, yield. However, the tendency of institutional investors to decide against the proposed transaction has increased. In 2021, De-SPAC transactions worth €7.1 bn were eliminated from our M&A analysis as these are not a change of control, but essentially capital market transactions with a financing character for the acquired companies. In 2022 we excluded 3 De-SPAC transactions with an aggregated DV of €1.6bn.
2. Venture capital funding rounds of financing for start-ups and growth tech companies are likely to be a sustainable market development. In 2022, 139 financing rounds of German companies between €10m and €402m (average €55m) with a total volume of €7.5bn were eliminated from M&A analysis. We counted another 30 German funding rounds with DV below €10mn and an aggregated funding of €185mn. According to industry reports, the total German VC funding round accumulated to just under €12bn by the end of November 2022, which is around 45% below the previous year's level, but still >50% higher than 2020.
3. The dominance of private equity deals and PE investors is increasing. Despite falling DV and total volume, the larger deals increasingly show a PE investor as buyer or seller or a PE portfolio company as buyer. For the 19 largest German M&A transactions in 2022, a PE house was a buyer or seller in 18 deals, close to 100% and naturally decreases with smaller transaction sizes.
4. There is a clearly increasing trend of atypical transactions in the form of direct investments by financial and strategic investors in minority interests, buy-outs or squeeze-outs of minority shareholders through public or private offers or investments, and acquisitions of real assets such as patents and product rights, manufacturing plants, financial investment instruments, land and real estate investments, wind parks and solar parks, and other renewable or fossil energy plants, mines and raw materials, and infrastructure projects of all kinds, but also nationalizations and corporate restructurings such as debt/equity swaps or corporate spin-offs of business units to its own shareholders. Since these investments are not considered M&A transactions, they are eliminated from the analysis. For 2022, 48 deals with German participation worth €43.5bn were eliminated from M&A analysis (we included these deals in our transaction table in white writing).

The Largest German M&A Deals 2022

Table 2 illustrates that in most deals, there is a face-off between strategists (in beige) and PE investors (in green) as both buyers and sellers. In the largest deals in 2022, PE investors often dominated as buyers, while strategists more often appeared as a seller. There is also a trend that PE investors and corporates team up as a consortium in acquisitions, which again later could lead to a full corporate exit or a PE exit. Among the top 10 deals, there were two secondary PE deals and only one deal between a strategic buyer and a corporate seller. Lanxess was featured in the top 10 deals as both a buyer in the €3.7bn takeover of Dutch Royal DSM's Engineering Materials business and as a seller of its High Performance Materials business for €2.5bn, in both cases with PE investor Advent as a JV partner holding a 60% majority. Deutsche Telekom and Vodafone both acted as sellers of their antenna stations in special infrastructure companies, with PE investors as buyers in each case. Vodafone acted as buyer and seller in two partial transactions, selling a 32% stake in its remaining 81.7% majority stake in the listed spin-off company Vantage Tower AG to KKR and Global Infrastructure Partners for €3.2bn and launching a public takeover bid for the infrastructure company, which was floated on the stock exchange two years earlier, with a value of almost €3bn in partnership with these two PE investors.

The top three German M&A deals of 2022 are as follows:

1. The largest deal 2022 was Deutsche Telekom's €10.7bn sale of 51% of antenna company GD Towers to North American infrastructure investors Brookfield Infrastructure Partners and Digital Bridge Group for €6.6bn in cash and shares of debt assumed €4.1bn.
2. The second-largest deal was the $6.8bn strategic acquisition of Consolidated Edison Inc.'s clean energy business ?in the USA by German RWE′s US subsidiary RWE Renewables Americas LLC
3. The third-largest deal was the €4.9bn sale of 72.55% of German railway leasing and logistics company VTG AG through Morgan Stanley Infrastructure Inc. and the Joachim Herz Foundation to Global Infrastructure Partners LLC, which was virtually an intra-American deal.

Table 2: Top 11 German M&A Deals plus atypical transactions (in white) 2022 with strategic (beige) and PE Investors (green)

To provide a clearer picture, we have included the largest German transactions including deals that we previously excluded from our M&A analysis as non-qualifying deals. The biggest non-qualifying transaction 2022 was the nationalization of the former fossil fuel activities of E.ON, which was purchased by the state-owned Finnish utility Fortum Oyj through a public takeover after the spin-off into the listed Uniper AG and had to be rescued by the German government following the ttrade embargo against Russia. The second-largest transaction involved an intra-group transfer of a 25% stake in Porsche AG to Porsche Holding prior to the IPO. The third and fourth-largest deals were financial investments, the fifth-largest deal involved a real estate portfolio, and the sixth-largest deal was a minority financial interest in an offshore wind farm.

Conclusion

The German M&A market decreased in value in 2022, but only in Germany. Despite significantly lower transaction values, deal activity, i.e. the number of transactions, has not decreased in Germany. And the acquisition activity of German buyers abroad has continued to increase significantly, both in terms of the number of foreign acquisitions and the deal volume and average transaction values. Foreign acquisition activity is a multiple of foreign divestiture activity, both in terms of number of deals and Deal values.

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Dr. Winfried Weigel?????[email protected]?????+41 76 443 2001

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