How did the market and M&A activity develop in the first quarter of 2021 considering high degree of uncertainty and strong volatility in the stock market in 2020?
In this blog edition we present the key highlights of the most recent market developments as of Q1 2021 published in our quarterly Valuation Market Essentials Switzerland. The publication covers market multiples and cost of capital components per sector for the companies of the Swiss All Share Index (except general financial and real estate companies) as well as relevant macro-economic data used in business valuations.
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Trading Multiples Switzerland
During Q4 2020 EBITDA multiples remained predominantly flat as the enterprise values did not experience significant movements and the EBITDA figures were still based on June and September 2020 financials for most of the companies. In Q1 2021, however, the multiples of four out of six sectors increased considering the most recent financials as of December 2020.
The biggest increase in EBITDA median multiples during Q1 2021 was experienced by the sectors Retail and consumer products (10.1x to 15.1x) and Industrial goods and services (13.6x to 15.0x). The uptick in median multiples was driven by the increase in market capitalization for 80% of the companies in both sectors and additionally by the decrease in reported EBITDA for 60% of the Retail and 70% of the Industrial companies.
On the other hand, the median multiple of the Energy and utility sector declined from 13.1x in Q4 2020 to 11.6x in the current quarter, mainly driven by a sharp decrease in multiple of one of the five companies in the cluster. For Media, technology & telecommunication sector the median EBITDA multiple remained flat at around 12x.
For the first quarter of 2021, the European M&A activity declined (Q-o-Q) in terms of numbers of deals. The total number of transactions (M&A transactions, which were announced or announced & closed and have published at least one of the Revenue, EBITDA or EBIT multiples) across the six sectors fell to 195 as compared to 269 transactions in Q4 2020. At the same time, the average deal volume increased substantially, demonstrating an uptick of 46% (total deals value/number of deals) during Q1 2021. As compared to Q1 in 2020, the number of M&A deals increased by 14%.
From an industry perspective, the number of M&A transactions decreased across all sectors with the only exception being Chemicals, construction and materials. The number of deals in this sector increased from 16 in Q4 2020 to 21 transactions during Q1 2021.
The Retail and consumer products sector, which saw a 41% increase in the number of deals during Q4 2020, experienced a major slowdown, as the number of transactions shrunk from 55 to 22.
In Q1 2020 the top countries in terms of number of deals and location of the target company were the UK (28.2% of transactions), followed by Germany and Sweden (9.2% of transactions each).
The median unlevered betas across all sectors are continuously increasing since the beginning of the pandemic in early 2020. Increased betas lead to increased cost of capital providing an indication of higher levels of systematic risk and therefore lowering valuations (all else equal).
Debt to total capital ratio
In Q1 2021, the median debt to total capital ratio retained its declining trend for all six sectors, mainly driven by the positive development of market capitalizations, since for Q4 2020 and Q1 2021 the underlying debt figures are now based on most recently available reported financials as of December 2020 for most of the companies.
The GDP projections for Switzerland for 2021 and 2022 remain almost unchanged at 4.0% as compared to the previous quarter. The same holds true for the short-term projections of global and emerging markets. For Germany, however, the GDP growth projections for 2021 decreased from 5.5% to 4.9% compared to Q4 2020.
Long-term GDP growth forecast (geomean 2021-2030) for Switzerland, Germany, USA as well as global and emerging markets remain unchanged as of the current quarter.
The COVID-19 crisis in Q1 and Q2 2020 restrained demand for goods and services locally and internationally since the lockdowns restricted activities throughout production, tourism & leisure, travel, sports and entertainment services etc. This resulted in negative projections for GDP growth in 2020 for most of the countries.
Banking and Insurance Sector
Carrying forward the momentum of Q4 2020, the Banking and Insurance industry multiples increased further during Q1 2021. The median P/TB multiple for Global and private banks witnessed the highest increase as compared to Insurance companies and Retail and cantonal banks, growing from 1.1x in Q4 2020 to 1.3x during Q1 2021 mainly due to the increase in market capitalization.
For the Retail and cantonal banks as well as Insurance companies, the median P/TB multiples slightly increased during the same period from 0.98x to 1.00x and 1.16x to 1.20x, respectively.
Q1 2021 is mainly associated with a decline in recently available reported financials including revenue and profitability as of the year end 2020 for most of the companies of the Swiss All Share Index and the resulting impact on the parameters used in corporate valuations, such as multiples or benchmarking data. While the economy still finds itself in a transition period and for companies in various industries it is impossible to predict, when operations will catch up to sustainable levels, global corporate finance practices would require diverse (recovery) scenarios, multiple valuation methods, or more advanced statistical modeling.
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