German M&A flurry is powered by lasting tailwinds

Dsv A/S

04/11/2024 10:44

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Pierre Briancon
       BERLIN, Nov 4 (Reuters Breakingviews) - The titans of
German industry are shedding their old clothes in favour of new
ones. Whether that helps the country’s ailing economy is up for
debate. But it certainly bodes well for dealmaking.
    Admittedly, the volume of mergers and acquisitions involving
domestic companies has slumped in Germany, as in most countries.
The total during the first 10 months of the year was about $106
billion, according to Dealogic data – down 3% from the same
period in 2023, and barely half the equivalent year-to-date peak
of $185 billion in 2021.
    A recent flurry of announced megadeals, however, suggests
things may be changing. State-owned railway operator Deutsche
Bahn in mid-September agreed to sell its Schenker logistics arm
to Denmark’s DSV  DSV.CO  for $15 billion. In early October, Abu
Dhabi National Oil Company sealed a deal for German chemicals
producer Covestro  1COV.DE  at a $16 billion enterprise value.
Underlying the nascent trend is a radical reshaping of the
business model for Germany AG, which still has a long way to go.
    In the last two years, the country’s largest industrial
companies have struggled to adjust to the loss of two historic
growth boosters – cheap Russian energy, and what once appeared
like an endless Chinese appetite for German manufacturing
products. The lifeless economy, which shrank in 2023 and is
stagnating this year, reflects the scale of the problem.
    The response requires massive investments in new products,
factories and geographies to boost revenue and hedge the risks
of ongoing trade wars. Private conglomerate Bosch, for example,
made a play for U.S. growth with its $8.1 billion July purchase
of Johnson Controls International’s  JCI.N  residential heating
and air conditioning operations. Carmaker Volkswagen  VOWG_p.DE 
is trying to keep pace with technological change, announcing a
$5 billion investment in U.S. electric vehicle maker Rivian
Automotive  RIVN.O  this summer. Merck KGaA  MRCG.DE , the $73
billion technology and pharmaceuticals group, intends to grow
its life sciences division through acquisitions.
    Germany AG is also shedding peripheral businesses to
mobilise resources. BASF  BASFn.DE , the $44 billion chemicals
powerhouse, plans to list its agriculture arm and sell its
Brazilian unit. And buyout firms look increasingly like
plausible buyers for unwanted assets. CVC Capital Partners
 CVC.AS  failed in its pursuit of Schenker but won union
support, which would have been inconceivable a few years ago. In
that context, German hostility to UniCredit’s  CRDI.MI 
Commerzbank  CBKG.DE  overtures looks like an exception.
    With interest rates falling, buyout firms and blue chips
alike will find deal financing easier to come by. What remains
to be seen is whether an M&A wave will help stop or slow the
gradual shrinkage of Germany’s industrial base. Busy investment
bankers can ignore that question for now.
    Follow @pierrebri on X

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Graphic: Year-to-date M&A volumes in Germany and Europe    https://reut.rs/3YFtoAi
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 (Editing by Liam Proud, Streisand Neto and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  BRIANCON/ 
pierre.briancon@thomsonreuters.com))