27 March 2017
HIGHLY POSITIVE OUTLOOK FOR MIDMARKET M&A TRANSACTIONS
The outlook for middle market corporate transactions (mid-size M&A transactions) in Spain has improved substantially in recent years, with an increasing number of transactions taking place compared to the preceding years. Several reasons have contributed to this reality:
If we focus on the country's macroeconomic environment, a substantial number of macroeconomic variables which directly impact companies' performance have improved recently. There has been a substantial GDP growth (+3.2% both in 2015 and 2016), which has benefited from good performance of incoming tourism -mostly due to foreign tourists- and the improvement of internal private consumption. Interest rates stand at historically low rates, helping the improvement of private consumption and the revival of household real estate market. In the case of companies, low interest rates reduce their cost of capital, which in turn helps making more new investment projects value accretive.
It is true, however, that certain other variables do not reflect such a positive picture of Spain. This is the case of public indebtedness (which stands at c.100% of GDP) or unemployment rate which, especially in the case of the youth, should be dealt with as a national emergency.
In any case, the improvement of Spain's economic outlook has not gone unnoticed for foreign investors, which again consider Spain as a reliable and attractive country for their investments, especially since our economy grows at rates significantly higher than those of our surrounding countries and since the price of certain assets (e.g. real estate) had dramatically been reduced during the recent economic crisis.
One additional element which has contributed to the increase of corporate transactions has been availability of financing (liquidity), which is currently extremely high, and which is a critical element in corporate transactions.
Also, Spanish companies now benefit from an increasing number of financing alternatives. The traditional banking finance remains open, with significant appetite from financial institutions for this type of transactions. New alternatives such as debt funds have also become more widespread. These provide a more flexible option than banking finance, as they are willing to adapt more to the client's or specific project's needs and also they are willing to take more risks in exchange of higher returns.
With respect to equity investors, these are also very active lately. Most local private equity funds have recently closed new investment vehicles, fueled by private international and Spanish investors as well as Spanish public investors (a special mention must be made with regards to ICO, Instituto de Crédito Oficial, as an important catalyst for the national private equity industry). Other alternatives such as MAB, Mercado Alternativo Bursátil, (Alternative Stock Exchange) have also materialized, although in this latter case with a mix of success stories and notorious failures.
The recent Spanish political instability, not fully over yet, and the European and Global macroeconomic and political outlook have to a certain extent thrown shadows at the aforementioned positive reality. However, all in all, the truth is that NOW we live a very good moment for corporate transactions in Spain.
Who may benefit from this?
- National and international companies willing to lever on corporate transactions as part of their growth strategy,
- National and international private equity funds in search of attractive investment targets,
- Shareholders searching for a financial partner which may help them in growing their business,
- Shareholders willing to divest and monetize for themselves the value they have been able to generate in their companies -many of them family owned- thanks to a lifetime of effort, or even through that of several generations, one after the other
Sergio Cerdán, partner Auren Spain