GDP gains could drive foreign interest in French SMEs, says S&P Capital IQ
Chris Mowbray, senior modelling application specialist at S&P Capital IQ, has said that an improvement in French GDP growth in 2014-15 could result in an upturn in M&A activity involving foreign buyers of French SMEs.
Over the year 2011-12 the level of foreign interest in M&A activity in the French SME sector fell away, according to data from S&P Capital IQ. This included both a fall in the number of deals, and the value of deals; the aggregate transaction value fell from €5bn to €2.4bn over the year.
The period also saw a fall in the number of foreign buyers of smaller French companies, which historically have mostly come from the US, Germany and UK – according to data covering period from 2004 to H1 2013.
Mowbray says, however, that while foreign interest in French SMEs may have fallen, the businesses themselves are continuing to perform well, with no short term liquidity problems, no excessive leveraging, 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. 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.”
On the issue of when foreign investor interest could return, Mowbray says that the data points to a positive correlation betweeen macroeconomic performance, measured as GDP growth, and the number of cross-border transactions.
This historical correlation means that when economic conditions improved as expected in 2014-15, there should be a rise in the number of cross-border transactions.
“Current and projected macroeconomic conditions in France present a strong headwind for SME M&A activity until the end of 2013. 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.”
2Without 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.”