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End of Easy Money Raises the Risk of Deals Dying in Europe

·5 min read

(Bloomberg) -- Europe’s dealmakers are finding it harder to secure the most important component of their takeovers: the money.

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After more than a decade of freely-available financing, rocky markets are making banks less willing to lend for big mergers and acquisitions. This has cast a shadow over at least $25 billion worth of European transactions, including some high-profile deals in the UK, according to a Bloomberg analysis of ongoing situations.

“Banks today are under a lot of pressure, and the tap is tightening on lending in highly leveraged situations,” said Alison Harding-Jones, head of M&A in Europe, the Middle East and Africa at Citigroup Inc. “All of a sudden, we seem to be in a new paradigm, and I don’t expect to see this change in the short-term.”

A multitude of challenges have combined to roil global markets, from rampant inflation and rising rates to Russia’s war in Ukraine and the looming threat of recessions. This has seen even the biggest banks, including JPMorgan Chase & Co., cutting their exposure to leveraged loans for risk of being saddled with debt they can’t sell on to investors.

This year, banks have run into problems offloading £6.6 billion ($8.1 billion) of debt tied to Clayton Dubilier & Rice’s take-private of UK supermarket chain Wm Morrison Supermarkets Plc. The focus is now on how the financing will come together for deals including the possible £5 billion-plus buyout of British drugstore chain Boots and the £5 billion sale of UK gas station operator Motor Fuel Group Ltd.

Meanwhile, Reckitt Benckiser Group Plc has been struggling to attract bidders for its $7 billion infant nutrition unit.

“It’s clearly a different environment to last year, when cheap financing and lower volatility facilitated a lot of the transactions,” said Guillermo Baygual, co-head of M&A in EMEA at JPMorgan. “We are clearly not jumping into the pool without making sure there is water in it.”

Buyout Brake

The era of easy money that took hold in the years after the 2008 financial crisis was a particular boon for buyout firms, which crank up leverage to juice returns. It led to a boom in private equity dealmaking that’s left many in that industry unaccustomed to doing business in a downturn.

“We are taking time to educate the buyer universe and tailoring processes accordingly,” said Baygual. “There’s strong levels of activity from infrastructure funds who have lower cost of capital and typically long-term holding periods, which leads to lower return expectations.”

While the value of private equity acquisitions in Europe is up 9% year-on-year at roughly $170 billion, according to data compiled by Bloomberg, that’s in no small part thanks to the giant takeover of Italian infrastructure group Atlantia SpA. There are clear signs of things slowing, with values down 69% in June and a host of transactions that’d been expected to draw private equity interest faltering.

A possible multibillion-dollar sale of Spanish refiner Cepsa’s chemicals business and the $2 billion disposal of UK holiday park operator Parkdean Resorts by Canada’s Onex Corp. both stalled in part because of financing issues, according to people familiar with the matter.

Market volatility has also seen Ardian SAS’s plans for a roughly 3 billion-euro ($3.2 billion) sale of Italian health-care software provider Dedalus postponed until after the summer, the people said, asking not to be identified discussing confidential information.

A representative for Cepsa declined to comment, while spokespeople for Ardian and Onex didn’t immediately provide comment.

“When sponsors and other buyers cannot get adequate amount of leverage at reasonable prices, it hurts their ability to pay prices which would have been possible when markets were more conducive,” said Citigroup’s Harding-Jones. “This is creating a huge delta between buyer and seller expectations on value, and we are seeing deals stalling or falling apart because of that.”

The consumer, retail and industrials sectors are among those most affected by the slowdown in credit markets. But buyers that do want to proceed with deals in spite of the tight financing market do have other options.

One is to write bigger equity checks.

Bidders for a stake in the renewable energy provider GreenYellow SAS being sold by French supermarket chain Casino Guichard Perrachon SA are preparing to pay a larger-than-usual portion of any deal with equity, according to people familiar with the situation. The sellside banks so far are not providing staple financing, the people said. A representative for Casino declined to comment.

Another option is seek alternative forms of credit.

Banks’ reluctance to commit funding has opened the door to a group of private debt firms that have amassed more than $1 trillion to help plug the gap and snatch market share from traditional lenders. The buyers of Swedish medical freight firm Envirotainer AB tapped Blackstone Inc.’s credit unit and Goldman Sachs Group Inc.’s asset management arm to fund the $3 billion deal, Bloomberg News reported this month. To be sure, these alternative lenders also have limits and will often demand a higher price for their money.

Elsewhere, in a pioneering move for Europe’s leveraged finance markets, Goldman Sachs and two other lenders are underwriting the buyout of pharmaceutical firm Norgine with debt that they’ll sell directly to private credit funds.

“My pipeline has never been busier,” said Natalia Tsitoura, a partner in the European private credit team at Apollo Global Management Inc. “Middle market and large-cap sponsors are coming to private lenders like us because we are genuinely the only option to getting the deal done.”

Read more: Private Equity’s Mood Turns in City of the Bear

(Adds detail on Norgine deal in penultimate paragraph.)

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