Mergermarket Proprietary Intelligence
Main body :
– Italy racks up EUR 11.5bn in 1H M&A
– Vital mid-market buyout scene with Marelli Motori and Doc Generici
– 2H live auctions include Octo Telematics, Panini and Valvitalia
– Concern over saturation of export-driven assets
There is a growing discrepancy in recession-hit Italy between a relatively healthy and
sustainable deal-flow landscape and a shrinking economy overall, causing consumption
spending to plunge as debt grows to a postwar record. “Conflicting macroeconomic
dynamics and M&A can sometimes coexist,” said Carlyle managing director and co-head
of the Europe buyout group, Marco De Benedetti, noting that macro trends and deal flow
seem to be unrelated in the eurozone’s third largest economy. “I feel more positive now
than a year ago,” De Benedetti continued. “We have seen activity picking up in both the
primary and secondary market and there is a healthy pipeline of deals in the making.”
The Italian market has reacted positively to a general drop in European M&A. A string of
mid-market buyouts, alongside the EUR 3bn merger between Atlantia [ATL:IM] and
Gemina [GEM:IM], have given dealmakers little reason to complain. Italy has staged EUR
11.5bn worth of M&A deals on the back of 138 transactions. Many buyout funds have
opportunistically timed their investments, taking advantage of the strong need for fresh
liquidity due to the progressive drop in bank lending. In January, CVC Capital Partners
sent shockwaves through the market with the milestone EUR 1.13bn purchase of business
information provider Cerved from sponsor Bain Capital.
The global doldrums have caused a slight contraction since 2012, when 154 1H Italian
deals were valued at EUR 18.9bn, finishing the year at 320 transactions worth EUR
38.4bn. But dealmakers feel confident about Italy’s 2H performance as international
private equity funds have consistently invested in Italian assets in spite of the economic
gloom. Doc Generici, a generics pharmaceutical player, sold to Charterhouse Capital
Partners for EUR 340m in May. The asset was contended by heavyweight PE funds, from
which BC Partners and Clessidra made it to the final round. In June, The Carlyle Group
secured control of Marelli Motori from vendor Melrose Industries for EUR 212m.
Most recently, the abrupt EUR 2bn sale of luxury cashmere clothing provider Loro Piana
to LVMH confirmed the appeal of Italy’s core retail and luxury industries. In April,
Pomellato, another national trophy, was snapped up by PPR for EUR 300m. A
manufacturer of jewelry and watches, Pomellato reported EUR 146m revenues in 2012. It
was sold by its controlling Rabolini family.
Vital M&A scene
Regardless of political instability, which almost resulted in governmental paralysis early
this year, Italy’s vital M&A scene is an expression of the country’s entrepreneurial class,
which is still capable of success stories. Family-owned businesses are proving well
positioned to stir the appetite of international investors, as evidenced by privately held
Inver, which sold to US-based The Valspar Corporation for a reported EUR 320m in June.
A few weeks later, crude oil refining specialist Saras entered a 50-50 joint venture
agreement with Rosneft following the same Russian oil group’s purchase of a 21% stake
for EUR 178m. Most recently, Averna sold its chocolate brand Pernigotti to Turkey-based
Toksoz for EUR 320m, according to press reports. A conglomerate active in energy and
pharma with headquarters in Istanbul, Toksoz is an unconventional entrant in the Italian
market, seeking to reinforce its confectionary arm while simultaneously working on exiting
its pharma unit Sanovel, as reported. The Pernigotti deal seems to epitomize the growing
role of emerging economies in consolidating Western EU markets.
Despite internal stagnation, interest in Italian champions remains strong as long as these
assets have high export volumes, which is pivotal to mitigating declining demand in the
domestic market. “What is now crucial is to tackle the contraction in consumer spending
with ad hoc initiatives as GDP slumps,” said Fineurop Soditic CEO Eugenio Morpurgo,
also a founding partner.
Dealmakers are pondering the consequences of any sudden market turbulence which has
historically hit the country at the peak of its holiday season. “We stay alert for any
unforeseen market unrest,” said Morpurgo, noting Enrico Letta’s leadership has been
favourably received among international investors. Letta came into power at the end of
April ending two months of political stasis following inconclusive national elections in
February. An unprecedented grand coalition has since ruled the country amidst constant
discord between the left and right wings.
Defeating bailout panic
Italian bankers have strongly condemned recent reports which described Italy as sliding
into deeper economic crisis with the spectrum of an EU bailout likely to materialize within
six months, as reported by The Telegraph, citing a Mediobanca report. “Building up
catastrophic scenarios and spreading panic is counterproductive,” said Morpurgo, who
also acts as board member of Why Not Italy?, a think tank which promotes the Italian
entrepreneurial community among international investors. “Italy’s investment environment
has certainly become more risky but the market is not shy of business opportunities,”
echoed Carlyle MD De Benedetti, dismissing lack of trade competitiveness and the
urgency for an EU rescue.
The fashion industry, which has often been one of Italy’s favourite M&A playgrounds,
could further consolidate in the months ahead as the Versace family is reviewing options
for taking international investors onboard following strong interest from Qatar Holding, as
reported. A decision is expected to be formalized in October or November as PE investors
lie in wait, as reported. With revenues in excess of EUR 2bn, fashion house Giorgio
Armani also ranks high on the agenda of luxury-focused investors but its 79-year-old
founder and designer, Giorgio Armani, has repeatedly dismissed a sale alongside any
interest in floating the business, as reported.
The pipeline of deals that will likely complete in the fall involves some of the country’s
fastest-growing companies such as Octo Telematics and Valvitalia, both of which are on
private equity radar. Octo’s sponsor Charme Investments wants to cash out at no less than
EUR 500m, according to press reports, which indicated a possible enterprise value of EUR
900m. Yet, several bankers previously polled by this news service questioned Octo’s
valuation, noting that a jumbo PE buyout would be hard to execute in the current market,
regardless of Octo’s strong European operations and double-digit growth.
Another live auction which could dramatically raise Italy’s M&A curve is the sale of
children’s sticker and cards company Panini, whose information memoranda were
recently dispatched by sellside advisor Nomura to prospective buyers. The asset could be
valued as high as EUR 1bn, according to press reports.
Meanwhile, Credit Suisse has launched the sale of family-owned Italian suitmaker Pal
Zileri, whose classic tailored suits compete with the likes of Ermenegildo Zegna and
Hugo Boss. Asian suitors are reportedly circling the asset which generated revenues of
EUR 143m in 2011. The mid-market pipeline combines a mix of PE and strategic
opportunities, with several trade buyers currently working on tabling bids for coffee
machine manufacturer Rancilio, also advised by Credit Suisse. Vendor Alto Partners has
agreed to exit jointly with the family owners and is reportedly in talks with Germany-based
WMF Metallwarenfabrik, Switzerland-based Franke and Italian restaurant group Ali.
Acquisition financing
With cheap, easy credit no longer available, private equity financing structures have
become more conservative. Unlike the UK and Germany, where high leverage and light
covenants remain possible, in Italy the average leverage ratio spans from 2.5x-4x
EBITDA, with 4x EBITDA only applied to high cash-generative businesses and top quality
assets, said Daniele Candiani, managing director and Italy’s country head at IKB Deutsche
Industriebank. He noted that CVC financed the EUR 1.13bn purchase of Cerved with a
bond structure. Leverage on the deal stood at around 5.25x EBITDA with Credit Suisse,
Deutsche Bank and HSBC among the main arrangers. Despite the assistance of a highyieldbond, a financing package in excess of 5x EBITDA remains hard to replicate in the current market, Candiani said.
Lower leverage multiples and significant covenants headroom have become a frequent
component of LBO transactions in Italy . Access to leveraged finance is playing a key role
in determining which PE transactions could successfully complete as debt accounts for
55% of acquisition finance on average. “Italy’s mid market is ready for further consolidation
as a series of deals are expected to kick off in September,” Candiani said, noting that
there is a kind of breathing spell in debt syndication in the summertime. “Mid-market
transactions are typically valued at between EUR 200m-EUR 500m. Deals in excess of
EUR 500m are less frequent as they would be hard to leverage through a senior loan,
whilst remaining possible mainly with a bond structure.”
The leveraged buyout landscape in Italy addresses a small circle of banking institutions
which are still active in the country despite its endemic lack of liquidity. Besides Unicredit
and Intesa SanPaolo, the main lenders include Natixis, Societe Generale, IKB, Credit
Agricole as well as HSBC, BNP Paribas and GE Capital.
Saturation looming on the horizon
The demand for mid-market assets will trigger more M&A in the coming months, but the
threat of saturation is looming on the horizon. “The question is not whether Italian
companies can be attractive to international investors, but how many of those companies
are left,” said Alberto Forchielli, entrepreneur and founding partner of Mandarin Capital
Partners. Forchielli pointed to a number of industrial districts in Italy that have been deeply
hit by a recent shift in luxury perception and demand, particularly in China and other Asian
markets, where most luxury spending is focused.
“The West is no longer dictating the rules in luxury as the emerging economies have now
taken over and their decisions are way more influential than those of Western spenders,”
Forchielli noted. He pointed to fashion, jewelry and cars as key investment areas for
Chinese investors on the back of a growing status motivation among Asian spenders. Yet,
the same investors are largely discounting some of Italy’s traditional high-end
manufacturing industries, including sofas and home furniture, Forchielli said.
In fact, Italy’s furniture design excellence has been hit by a sharp sales decline since
2011, a trend which especially applies to small players active primarily in the domestic
market. So far, export operations have proved unable to compensate for domestic market
collapse so much so that Northern Italy’s Brianza furniture district is now retrenching as
evidenced by sofa specialist Natuzzi’s 1,726 layoffs and plants closures, as announced in
early July.
Recession winds are also blowing towards Bologna in Central Italy and its dwindling motor
industry, once called “motor valley”, home to a number of motorbike equipment
manufacturers, including Ducati. Forchielli recalled the recent closures of Moto Malaguti
and Moto Morini, once well-established motorbike brands. The same applies to a number
of cutlery and kitchen utensils manufacturers in the Lumezzane district, near Brescia in
Northern Italy, Forchielli noted.
On a positive note, manufacturers of luxury cars and high-end automotive components will
continue gaining traction in Asia. Another territory where global demand will stay strong is
industrial automation as packaging and automated machines are boasting increasing
volumes of export sales as evidenced by Industria Macchine Automatiche, Forchielli
said.
Hydraulics and oleodynamics, as well as mechatronics, which blends mechanical,
electronic and control engineering, are also seen as high growth sectors with M&A
potential. “Some industries are simply not adaptable to the changing demand as the
emerging economies have revisited the need for certain products. Chinese spenders care
more about a Ferrari than a luxury sofa,” Forchielli said. “Italian entrepreneurs, often
blamed for their conservative and risk-averse approach, are heroes as they stand against
the wind of change.“
