US bidders had the opportunity to capitalize on the strength of the dollar in 2022, which rallied as the Federal Reserve took action on its interest rate policy to curb inflation

For deal certainty, it is essential that US acquirers develop a clear FDI roadmap that accounts for any potential obstacles.

There were 1,309 M&A deals in Europe involving US bidders last year—a 9 percent decrease in volume, year-on-year, and a 41 percent decrease on 2021's total value, at US$423.3 billion. Despite these declines, however, US buyers who pursued targets in Europe enjoyed one of the strongest exchange rates in years, with the US dollar achieving parity against the euro for the first time since 2002.

The largest deals of the year all have one thing in common: They center on infrastructure assets. In the lead was the US$46.4 billion acquisition of Atlantia. Blackstone financed a take-private of the Italian infrastructure firm, taking a minority stake alongside existing majority shareholder Edizione, the investment vehicle of the Benetton family.

The second biggest deal also involved Blackstone, which made a US$23.8 billion recapitalization of Dutch last-mile logistics real estate firm Mileway, passing an interest in the company to one of its long-term funds. In the year's third-largest deal, Brookfield Infrastructure Partners and DigitalBridge Group took a 51 percent stake in Deutsche Telekom's towers assets for US$10.7 billion.

A safe haven

Infrastructure is something of a safe haven for investors. These assets provide essential services spanning transportation, energy and water supply and distribution, through to communications and data storage. Demand for these services is typically stable, even in times of economic weakness. Many infrastructure assets are also regulated, with contract provisions tying their revenues to inflation. This is especially relevant in the current macro environment, as infrastructure delivers an attractive hedged yield.

However, in a cross-border context, the sector also sits squarely in the line of sight of Europe's national foreign direct investment (FDI) regimes. Infrastructure assets are often considered highly strategic and critical to national security.

The pandemic only tightened these regimes, and events in Ukraine further cemented this resolve. Indeed, in some instances, the scope of FDI regimes was expanded to include more sectors, covering everything from medical technology to pharma, cybersecurity and banks.

Thresholds have also been lowered and while these measures were initially considered a temporary response to pandemic-related disruption, 2022 saw some stricter regimes made permanent, as was the case in Italy and Spain.¹

For deal certainty, it is essential that US acquirers develop a clear FDI roadmap that accounts for any potential obstacles and, where possible, the geopolitical intricacies involved in any proposed transaction.

ESG considerations

Naturally, this roadmap should not stop at FDI. All US bidders developing a European M&A strategy will require a sophisticated understanding of the region's progressive environmental, social and corporate governance (ESG) legislative developments. Bidders should expect to pay an ESG premium for companies that have sustainable business models, have made major progress in decarbonizing their operations, or are otherwise positioned to benefit from the concerted policymaking efforts of the European Commission and member states.

There are also capex requirements to consider, particularly with regard to highly regulated assets in the infrastructure space. These investments need to account for any short-term and long-term capital necessary, for example, to reduce companies' carbon footprints or audit and improve supply chains to meet stricter regulatory standards.

After peaking in September at a two-decade high, the dollar finally fell back below parity against the euro in Q4 2022. If this continues through 2023, there will be pressure on US bidders to continue making the most of this forex advantage in the near term while it is still available.

1 https://www.whitecase.com/insight-alert/eu-releases-its-second-annual-fdi-report-showing-increased-momentum-fdi-regulation

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