French dealmakers announced significant outbound megadeals in the first quarter; Macron’s victory could provide a much-needed boost for inbound deals

In a deal landscape dominated by cross-border consumer megadeals, French businesses announced US$47.63 billion worth of deals in the first quarter of 2017—the highest value quarter since Q3 2008. This is perhaps surprising, given the uncertainty that persisted throughout most of the quarter regarding the outcome of the contentious French presidential election.

Click here to view graph

Consumer deals scale up

Cross-border activity accounted for 75.9% of total deal value, driven by large-cap deals targeting the consumer space. The US$25.4 billion all-share agreement to merge French lens-maker Essilor with Italian Ray Ban maker and owner of Sunglass Hut, Luxottica, marked not only the largest cross-border M&A deal this year involving European-only parties, but also the highest value cross-border deal conducted by a French company on record.

This transaction marks the latest in a string of deals undertaken among French consumer groups. Last July, French dairy giant Danone agreed to acquire US-based WhiteWave Foods for approximately US$12 billion. In the same month, cosmetics group L’Oreal announced it was to acquire US-based IT Cosmetics for US$1.2 billion.

At the end of last year, dairy food company Groupe Lactalis launched a tender offer for shares it did not already own in Italian group Parmalat to delist the business with a deal value of US$713 million. The business behind the Tefal brand, Groupe SEB, has also been on the outbound acquisition trail, with the approximately US$1.78 billion enterprise value deal to acquire German WMF group completed last November.

Changing habits trigger deals

These megadeals are being driven by changing tastes and attitudes among customers. In the food and beverage market, businesses are searching for healthier lifestyle brands, and such was the rationale Danone/WhiteWave said was behind the deal. “Danone and WhiteWave are a perfect match to build a global leader leveraging consumer trends and expectations for healthier and more sustainable eating and drinking choices,” said Emmanuel Faber, CEO of Danone, upon completion of the deal. “With leading positions in some of the fastest growing, health-focused categories, this combination will drive our ‘Alimentation Revolution’.”

Other driving factors named by companies seeking megadeals include meeting consumer demands for digital services or, more traditionally perhaps, gaining a stronger position in the marketplace. The latter was the rationale presented for the Essilor-Luxottica merger. In the words of Essilor CEO Hubert Sagnières, “the deal will create a global and integrated player in the eyewear industry.”

Divisive election dampens foreign interest

Although in value terms, the first quarter saw an increase on the same period in 2016, up to nearly US$15 billion from US$10.83 billion, there was a steep drop-off in the number of deals targeting French companies (including domestic deals), down to 164 deals in Q1 2017, from 205 in Q4 2016 and 244 in the first quarter of 2016. Uncertainty in the run-up to the election seemed to affect interest from foreign acquirers most acutely, with 44 deals worth US$3.44 billion penned in the first quarter marking a third consecutive quarterly drop in value, and a significant 26 fewer deals than in the previous quarter.

While domestic and inbound M&A figures have remained rather subdued compared with outbound statistics, the market can take some comfort from the fact that France is seen as the sixth most attractive country for investment on a global stage, according to the April 2017 EY Global Capital Confidence Barometer.

The private equity picture

Among those more confident about the prospects for French deals are private equity (PE) players, with 2016 showing a record year for private equity buyouts by volume at 238 deals, although value paints a somewhat less exciting picture. “There has been a strong trend for lower mid-market companies in France to start expanding internationally and they are looking to PE to help them,” said Charles Diehl, managing partner at Activa Capital. “They want to capture growth internationally, as France has been slow to emerge from the post-crisis slump.”

This confidence was mirrored by a strong year for fundraising in the industry last year, with a 51% increase on 2015 totals to €14.5 billion, according to the French private equity association AFIC. Bumping up the totals were international investors committing to French firms—they made up 45% of funds raised, higher than the 10-year average of 37%. “The results of this annual survey confirmed the trends observed at the end of the first half of 2016,” said Thierry Dartus, partner and head of transaction advisory at Grant Thornton. “These showed a bump in activity across all private equity market segments.”

However, the private equity numbers for Q1 2017 were down from the previous year, with just US$1.12 billion in value recorded for the period across 66 deals, suggesting a slowdown in confidence among firms. “The election has certainly slowed deal activity for the early part of the year,” said Diehl. “But not because of uncertainty. It has been more in terms of anticipation of tax reforms that were promised by François Fillon and Emmanuel Macron.”

Over the hurdle?

Emmanuel Macron’s recent electoral victory and his commitment to stay in the EU are likely to be encouraging factors for companies looking to carry out deals in the latter half of the year. The prospects for the rest of the year look promising, certainly in terms of inbound M&A, according to Diehl. “We did see some interest from international acquirers in the early part of 2017,” he said. “These were buyers with a longer term view, who weren’t so concerned with short-term election volatility. However, we will see more international interest now that the elections are behind us—this will be largely at the higher end of the market.”