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Mergers and acquisitions: The day-after

Mergers and acquisitions: The day-after

Despite the reduction of mega deals, 2019 was a strong year for M&A with specific sectors, such as technology and energy, driving growth. The impact of Covid-19 remains a key discussion point for those looking to sell, partner, or acquire in 2020.

There is no doubt that the M&A market in Cyprus has been impacted by an increased risk of businesses facing financial distress. But history repeats itself and, as shown, uncertainty gives rise to new opportunities. Our question is how to identify - and capitalise on - those opportunities. The IPO market has so far proven resilient, but that may change as the pandemic unfolds.

In our latest insight, our Cyprus Corporate M&A team provides a view on where the market is today, where the opportunities may lie in the next 12 months and what can be done now to make most of them.

Where is the Cyprus M&A market today?

As our latest industry publications have illustrated, no sector is left unaffected by Covid-19. Those with a strong B2C offerings, specifically with digital routes to market, benefited the most from the lockdown, with online orders becoming more embedded in Cypriot culture. Schools adapted to distance learning whilst the private sector adjusted to working from home.

Our dedicated M&A team in Cyprus has seen that the local market has replicated, to a large degree, international trends: for instance, deals that were close to term sheet being put on hold and deals which were in the process of closing doing so at adjusted rates. However, there is still interest in sectors such as energy and FMCG, two sectors which have been somewhat more resilient to Covid-19, but also the hospitality and retail sectors.

The opportunities lie ahead

Many sectors in Cyprus are reflective of an oligopoly structure, with few firms dominating any given market. Technology stimulated disruption, with many challengers attacking the traditional set up of these markets, a trend greatly anticipated to be more relevant in 2020. One significant shift in consumer habits is the digital fluency, which was created as a result of consumers being forced to purchase food, beverages and household goods online, which should increase Cyprus’ digital fluence from 39%, a factor that was lagging behind the European average of 63%. We anticipate that the familiarity will continue throughout 2020 and be more relevant in the years to come, with online companies benefiting greater than brick and mortar businesses.

Internationally, leveraged buyers and PE houses have put a pause on acquisition targets to focus on their current portfolio, reducing the number of international buyers and growing the acquisition power of domestic buyers. Domestic cash buyers are therefore in a stronger position to consider options than they may have been historically. In contrast, local players have been focusing on consolidating wealth by building resilience in their business. Those with strong cash balances are already using this opportunity to assess potential opportunities that may arise from this pandemic, a task which is of vital importance if they are to beat international buyers to the table. In addition, a pull-back from non-traditional VC investors could help drive down deal flow, while more and more startups may turn to debt financing options as a way to avoid down-rounds and dilution.

Where are the targets?

The wider sectors demonstrating more imminent M&A consolidation are:

Resilient sectors: these include sectors such as FMCG, energy, technology, online retail and healthcare. These direct to consumer channels which shall adapt fast in order to be able to offer products and services at a distance. A few companies were faster to adapt, with some supermarkets taking more than a month to allow online orders. This allowed smaller unknown producers or supermarkets to increase their market share, by offering telephone or email orders and direct to door delivery. The increase in familiarity with new payment solutions, such as card payments on your doorstep or online payments, may also change the options for online payment solutions as we know them today.

Challenged sectors which may face liquidity issues: hospitality & leisure, auto, travel. When incentives and general the debt burden come to roost, those looking to acquire and consolidate the market might be able to find undervalued brands whose synergy value might be worthwhile to their portfolio.

Non-core divestment: the sale of these assets will be even more of a focus, given the impact of Covid-19. The first wave followed the 2013 crisis in Cyprus and we anticipate many more entities looking at each brand in their portfolio, while considering if this is a value-add component or not.

How to capitalise on these opportunities?

For those looking to sell, the focus has to be on mapping out the new norms and in understanding their value drivers, in order to release the highest exit multiples. Ensuring your company is ready to capitalise on non-core divestment is also important, fact that requires investment documents and a feasibility study.

For those looking to buy, there should be a focus on building resilience in business models to ensure that the company is in a strong position to engage with advisors, assess and evaluate synergies, and to provide a relevant valuation to the acquisition that will provide value to the business. Effective integration in the form of a 100-day plan following an M&A event is also key to unlocking this value.

Stay connected: our dedicated M&A team releases a quarterly newsletter of opportunities in Cyprus, maps out bespoke needs and also provides end to end support to M&A needs. For more information, reach out to our team:

Andrie Santis, Senior Manager, KPMG in Cyprus, asantis@kpmg.com

Petros Kapsoullis, Assistant Manager, KPMG in Cyprus, pkapsoullis@kpmg.com