Aggregate transaction value in the French SME space recorded a 52% drop from 2011 to 2012 as the number of foreign buyers fell, research from S&P Capital IQ, a leading provider of multi-asset class research, data and analytics, has revealed.
When singling out M&A transactions where French small and medium-sized enterprises (SMEs) are the targets, the level of activity has been much less volatile than in the broader market, with a fall in transaction volumes of only 4% from 2011 to 2012, compared with 47% for larger non-SME companies. However, the aggregate transaction value in the SME space recorded a 52% drop from 2011 to 2012, to EUR2.4 billion from EUR5 billion.
S&P Capital IQ data shows that this decrease is driven both by a fall in median transaction values, to EUR10.3mm in 2012 from EUR15.5mm in 2011, as well as a drop in median target size, to EUR15mm in 2012 from EUR20mm in 2011. However, domestic buyers appear to be sustaining M&A activity in the SME space, averaging 83% of all transaction numbers between 2004 and 2012. Cross-border activity, on the other hand, has declined to 13% of all SME transactions in H1 2013, from 20% in 2007 and 22% in 2004.
"With cross-border acquirers' interest waning, the data for H1 2013 does not indicate that transaction values in the French SME M&A market will pick up again in the near term," commented Chris Mowbray, Senior Modelling Application Specialist at S&P Capital IQ.
"Traditionally, countries that have demonstrated the greatest interest in French SMEs include the U.S., the U.K. and Germany. Between 2004 and H1 2013 they were the buyers in 148, 112 and 69 transactions, respectively. However, from 2011 to 2012, there was a 30% decline in cross-border activity, with the number of transactions involving U.S. buyers falling from 22 to 13, and those involving U.K. buyers from 12 to 9."
S&P Capital IQ highlights that French SMEs continue to perform well with no short term liquidity problems, are prudently leveraged with strong financial performance and valuations that are not running at depressed levels.
"Current assets exceed current liabilities by a comfortable margin, averaging 1.3x between 2009 and 2012, and their cash conversion cycle averages a very reasonable 47 days," continued Mowbray. "Furthermore, in the case of French SMEs, despite a substantial fall in 2009, the median implied enterprise value/total revenue transaction multiples held up quite well between 2007 and 2012, even exceeding the non-SME space in 2012.
"Furthermore, cross-border acquirers have tended to pay a higher multiple than their domestic counterparts – from 2004-H1 2013, foreign buyers median TEV/total revenue multiple stood at 1.02x, versus 0.71x for domestic buyers. This data suggests that French SMEs have been able to demand good valuations, and in 2011 and 2012 they exceeded the historical average since 2007 of 0.7x."
Based on the strong financial data for French SMEs, S&P Capital IQ suggests that foreign interest in French SMEs is driven, at least in part, by overall macroeconomic conditions, highlighting that there is an interesting positive correlation between overall macroeconomic performance (measured as year-on-year GDP growth) and the number of SME cross-border transactions.
As France slipped back into recession in 2012, the number of cross-border transactions fell sharply. This historical trend suggests that meaningful growth in M&A activity where French SMEs are the targets will return once economic expansion returns, as it is expected to do in 2014-15.
"Current and projected macroeconomic conditions in France present a strong headwind for SME M&A activity until the end of 2013," concluded Mowbray. "While domestic demand has remained relatively strong and has been the driving force behind M&A activity, even that seems to be faltering as transaction volumes for H1 2013 do not suggest a near-term increase.
"Without the return of cross-border buyers, aggregate transaction values will likely remain depressed and, with meaningful GDP growth not expected to return before 2015, the outlook for the French SME M&A market remains stagnant in the immediate term. If, however, the French economy experiences better than expected economic expansion, a quicker recovery in foreign interest in French SMEs and a subsequent revival in SME M&A activity in France could be expected."