The uptick in deal activity in Europe witnessed in the first half of the year is expected to continue in 2H24, according to dealmakers surveyed as part of Mergermarket’s Trendspotter series, though this optimism is almost always caveated with a note of caution.

Dealmakers across most European markets are optimistic of a continued rally in activity but are mindful of the volatility that has beset deal volumes in recent years.

The first half of 2024 saw deal volumes in the region start to recover, with a total of 7,382 deals worth EUR 432bn, according to Mergermarket data. This is up substantially from EUR 304bn in 1H23 – one of the worst periods for M&A in recent years – and also marks an uptick from the EUR 404bn worth of deals recorded in 2H23.

This year has also seen a number of large-cap deals. The largest deal of 1H24 has been German chemical company Covestro AG [ETR:1COV], which in June announced “concrete negotiations” with AdNoc (Abu Dhabi National Oil Co.) [ADX:ADNOCDIST]. At EUR 14.4bn, the deal accounted for more than 3% of the total volumes for the whole EMEA region in 1H24.

However, the performance in the first half is still a long way from the EUR 730bn of deal volumes in EMEA in 2H21 as deals that had been delayed during the pandemic returned to the scene after vaccines were rolled out. Volumes then fell sharply in 1H22 as Russia invaded Ukraine and again in 2H22 and 1H23 as central banks ramped up interest rates to fight the inflation that followed the end of cheap Russian gas flowing into Europe.

As a result of the changing mood, dealmakers in Germany, Austria and Switzerland (DACH) are betting on a boost of activity in September and October, particularly among German mid-cap companies backed by private equity firms. Valuation gaps are closing in the Benelux; French M&A practitioners are hoping a recent surge in activity will be resilient enough to cope with ongoing political uncertainty; Italian dealmakers also have their fingers crossed that the upturn will be sustainable; and Iberia has a solid pipeline.

Meanwhile, the UK might have disconnected from Continental Europe following Brexit, but the City of London remains a major financial centre for the region. UK-listed companies will continue to drive activity in the UK and Ireland, with regulators trying to encourage more flexibility and decisiveness in the future.

Signs of resurgence

That most important factor cited by dealmakers – underpinning hopes of an upswing in M&A activity – is the expectation that interest rates will come down. The European Central Bank (ECB) cut its deposit rate to 3.75% in June, but since then has left it unchanged. The next rate cut could come in September, but it might take longer if euro-zone inflation remains stubbornly above targets.

In addition, Mergermarket’s VDR Insight column, which tracks new virtual data rooms (VDRs), an early indicator of M&A activity, suggests that global volumes should continue to grow in 2H24, barring shocks in the Middle East or elsewhere.

And, while larger deals have been largely driven by strategic buyers, sponsors are continuing to increase their market share within European M&A. Secondary buyouts (SBOs) in Europe are resurging as the interest-rate cycle finally turns. Sponsors have also been finding new ways to structure deals to cope with higher debt costs.

Meanwhile, another notable trend is the growing significance of environmental, social and governance (ESG) investment criteria for dealmakers in Europe, particularly when compared to other regions.

Public-to-private (P2P) green-energy deals started to take off in 2Q24. One significant deal announced was the EUR 9.9bn ongoing buyout of French clean energy operator Neoen [EPA: NEOEN] by asset management giant Brookfield [NYSE:BAM, TSX:BAM]. The Morning Flash has identified Voltalia [EPA:VLTSA], Grenergy [BME:GRE], and Solaria [BME: SLR] as further possible P2P candidates in the space.

ESG is also a significant factor in industrials and chemicals, a sector where dealmakers are preparing for a round of consolidation when interest rates hit lower levels, probably next year.

Dutch chemicals company Stahl Holding is an example of this trend. The company, which is backed by investment firm Wendel Group [EPA:MF], has collected binding bids for its Wet-End Leather business, with a full sale following hard on its heels.

Given the mood of cautious optimism, we shall end this week’s column by misquoting Trainspotting character Mark Renton: Choose pitches! Choose deals! Choose private credit! Choose billable hours!