Nordic M&A rebounds in Q2 in return to form - Return to activity is a positive sign, but the heights of 2017 and 2018 appear to be some way off.

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White & Case LLPNordic M&A activity has staged something of a comeback. Q2 2019 witnessed a sharp quarter-on-quarter rise in total value of 198% (to US$25.6 billion) versus a slight 6% fall in volume (to 259 deals), giving reason for optimism. However, while such spikes may be caused by a resurgence in big-ticket deal activity, the largest transaction of the quarter was valued at a relatively modest US$3.6 billion.

The deal in question was the long-awaited demerger of Denmark-based logistics firm Maersk’s oil and gas drilling unit, The Drilling Company of 1972. The spin-off comes amidst recent consolidation in the oil and gas drilling industry, including Switzerland-based Transocean’s acquisitions of Cayman Islands-based Ocean Rig and Cyprus-based Songa Offshore for US$2.6 billion and US$3.2 billion respectively, and UK-based Ensco’s US$4.4 billion acquisition of US peer Rowan.

The merged Ensco/Rowan entity has been rebranded as Valaris and is now the largest offshore drilling firm by fleet size. This wave of consolidation is the result of stress on the industry due to the oversupply of rigs and the continued subdued price of oil, particularly as offshore drilling is costlier than onshore.

But it was the TMT sector that claimed the most value in the Nordics during the second quarter, accounting for both the second- and third-largest deals. These were Norway-based Telenor’s acquisition of Finnish telco DNA for US$3.5 billion and Apax Partners‘ sale of Norwegian IT services company EVRY to Finnish competitor Tieto in a deal valued at US$2.2 billion. These two deals contributed to a 350% rise in TMT deal value, to US$9.9 billion.

Taking a broader view, the ten largest Nordic deals of Q2 had a relatively modest aggregate value of US$20.5 billion. It is therefore too early to be overly enthusiastic about recent deal figures just yet. What appears to be a healthy surge in activity might be better characterized as a return to normality.

Indeed, while M&A value nearly tripled between April and June this year across Denmark, Finland, Norway and Sweden, the surge followed the slowest start to a year in the region since 2013. In the first quarter of 2019, only US$8.55 billion of deal value was recorded.

It will be difficult for Nordic M&A in 2019 to top 2018's performance. Last year saw 1,209 deals, with both Sweden and Finland delivering their highest deal count on Mergermarket record. Value-wise, US$103.1 billion was invested, the second-highest figure on record since the financial crisis of 2008 after the US$117.3 billion put to work in 2017.

Notably, 2018 was front-loaded, with the majority of M&A activity concentrated around the first half. This means that the deal dearth seen at the beginning of this year was very much a continuation of a deceleration that started midway through 2018 as escalating global trade tensions—largely centered in the US and China—eroded confidence not only in the Nordics but worldwide.

Sweden's economy cools

As Sweden is the largest economy and largest M&A market in the region, when Sweden coughs, the Nordics catch a cold. The US$4 billion in value recorded in Sweden in Q1 has weighed down half-year figures not only for the country but Scandinavia as a whole, driving Nordic M&A value in H1 down 84% compared to the corresponding period the year before.

A resurgent Q2 could carry momentum into the second half of the year; however, most signals now show that the Swedish economy is in a phase of deceleration. GDP grew by 2.4% in 2018, and is anticipated to fall to 1.8% in 2019, bottoming out at 1.4% by 2020, according to figures published by the country's central bank.

The weaker outlook is dampening manufacturing output, in line with a global downtrend precipitated by the uncertainty surrounding trade. Both business and consumer confidence have been falling. Sweden is dependent on exports, so any pullback in trade is felt in the wider economy and, consequently, in appetite for M&A in the country. The heights of dealmaking activity reached in the region in 2017 and 2018 are unlikely to be matched in the near term.

Regional bright spots

A number of factors are working in the Nordic region's favor, however. A perennial strong point is that its companies typically have stronger balance sheets than their Western European peers, with lower levels of debt and greater cash reserves. This robustness makes them especially attractive in the latter stages of the business cycle as they are generally better prepared to weather economic downswings.

Another draw is that the Swedish, Norwegian and, to a lesser extent, Danish krona have weakened against the US dollar and the euro in recent years. While acquirers seldom transact solely on price, any Nordic deal targets that have already been shortlisted have never been more attractive on a forex acquisition basis (although it should be noted that this is counterbalanced by any revenues that are reported post-acquisition in dollars or euro).

Meanwhile, unlike an increasingly protectionist Western Europe, which has been following in the footsteps of the US by paying closer scrutiny to inbound Chinese investment, the Nordics are less circumspect. Chinese companies are especially keen to expand their technology capabilities and assets, and this is one of the Nordics' strengths.

For instance, a Chinese firm made a play in the electric vehicle space: the Shenzhen-headquartered diversified holding group Evergrande purchased a 51% stake in National Electric Vehicle Sweden (NEVS), formerly a unit of automaker Saab, for US$930 million.

Other countries are also keen to tap into the Nordics’ innovations in industrials. The biggest deal in Q2 in the industrials and chemicals sector was the sale of Norwegian robotics firm AutoStore to US-based PE firm Thomas H. Lee Partners for US$1.9 billion. Another significant tech-centric deal in the sector was the US$1 billion equity capital investment raised by Northvolt, a Swedish firm developing lithium-ion batteries for electric vehicles. Investors in that transaction included automakers Volkswagen and BMW, as well as pension funds and other financial investors.

These deals helped to ensure that industrials and chemicals was the second-highest value sector of Q2 2019, with US$18.7 billion worth of deals recorded. With an open-door policy to a tech-hungry and acquisitive China—and with Western Europe and the US raising their guard—Nordic M&A may be able to sustain momentum through the second half of 2019 and beyond.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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