RR Donnelly released the August edition of its Venue Market Spotlight, entitled Government Privatizations and M&A. In the report, a high-level summary of a survey of experts, RR Donnelly speaks to the effect that government asset sales and other forms of privatization are having on global M&A activity. The report forecasts that government privatization will become a key driver in the next 12 months and beyond.

This post will survey a number of aspects of this burgeoning phenomenon as summarised in the RR Donnelly report.

Growth, generally and by sector

Not surprisingly, 86% of respondents project a rise in M&A resulting from government privatizations and partnerships. As governments respond to financial pressures, they will continue to move away from direct ownership and operation of capital-hungry businesses. Instead, they will look to private sector firms to step forward into the role of owner/operator while governments step back into a regulatory role. The upshot of government privatization plans? Quality assets entering the market at reasonable if not discounted rates.

The industries which are most likely to see significant growth are those whose businesses require large amounts of capital to sustain operations: energy, TMT and transportation. Cash-strapped governments are finding it difficult to maintain, let alone upgrade and expand, infrastructure in these sectors and are frequently turning to private firms for solutions, whether by way of partnership or full-scale privatization.

Regional trends and deal types

Europe is projected to see the largest government privatization M&A boost. The recent economic crisis has driven European governments to the private market where they are selling burdensome assets at very attractive rates. Asia-Pacific is projected to see the next-largest rise in activity, with the growing private market there eager to expand by way of government asset purchases.

The majority of respondents forecast that public-private partnerships (PPPs) will be the most popular form of government privatization. PPPs, a partnership of government and one or more private sector companies which is created to complete a medium to long-term project, represent one significant advantage for governments over full privatization: these partnerships, unlike asset sales, do not require the government to step back and completely relinquish control over asset management.

Catalysts and challenges

Respondents reported asset use maximization, infrastructure improvement, and economic growth as the top three motivations of governments seeking privatization of assets. Governments looking to stabilize their economies and promote efficiency in the operation of their assets are turning to the private sector where they are finding the necessary capital, as well as abundant amounts of expertise and motivation.

As do all good reports, this one canvasses the challenges that privatization transactions might present to private sector firms. The majority of respondents stated that the process itself and regulatory compliance are the two most significant challenges facing companies seeking to take advantage of government privatization. Others noted that the transaction may result in the creation of legislative and regulatory regimes which would require time and expertise to put together and follow.

These challenges aside, the opportunities are significant. Private firms would do well to consider this growing market when contemplating their next transaction.

Jad Debs