Changing tack: high rates nudge acquirors towards equity financing

Data InsightECM Explorer 27 January

Changing tack: high rates nudge acquirors towards equity financing

In a new world where interest rates are not permanently pegged to zero and money is no longer free, corporates are increasingly likely to turn to equity to finance M&A deals.

The largely benign market debut in 2023 has fueled advisors' bets on more financing deals.

“We have clearly seen a very strong start of trading this year, arguably better than we had anticipated, which provides a perfect basis for ECM issuance,” said Paul Huysmans, global head of ECM at ABN Amro. Many would-be issuers have only been prevented from going to market by corporate blackouts ahead of earnings season, he noted.

Historically low interest rates have made debt a preferable option to diluting shareholders over the last decade. From 2012 to 2017, the percentage share of equity financing in Europe tagged for acquisitions or future acquisitions, including primary follow-ons or convertible bonds, rarely rose above 30% of the total market in any given year, Dealogic data shows.

In 2018, when the US Fed began to slowly pivot towards a more hawkish monetary stance, M&A deals shot up as a proportion of primary equity issuance. In 2019, the figure was still high, at 42.7% of equity deals being used for M&A.

While this dipped below 40% in 2020 during the height of the pandemic, it bounced back to 45% in 2021, before dropping to a measly 23.9% of deals last year as low share prices made dilution especially unattractive.

There were still some major deals in 2022 though including ALD SA’s [EPA:ALD] EUR 1.2bn rights issue to finance the acquisition of Leaseplan.

Amongst recent jumbo issuers were Vonovia [ETR:VNA], the German real estate firm which priced a EUR 8bn rights issue to fund its acquisition of Deutsche Wohen in 2021, and Spain’s Cellnex [BME:BME CLNX], a regular issuer of large ECM transactions to finance its consolidation strategy.

Acquisitive issuers have already started pivoting to equity, with interest rates unlikely to change in the near term. Low equity valuations after a brutal 2022 also make M&A particularly attractive.

“Debt isn’t the only way of funding deals,” added Hyder Jumabhoy, a London-based partner at White & Case and the co-head of the firm's EMEA financial services M&A practice. “Alternatives include all-paper deals, equity fundraising rounds to fill M&A war chests and the use of other instruments, such as warrants, options and convertibles.”

One ECM banker said infrastructure and renewable energy firms, which have a constant need of capital for acquisitive growth, are expected to launch significant equity raising operations this year.

French renewable energy firm Voltalia [EPA:VTSA] completed a EUR 490m rights issue at the end of 2022 and this week Louis-Mathieu Perrin, CFO of fellow French renewables company Neoen [EPA:NEOEN] said the company was considering a rights issue this year to meet its financing goals.

Equity, like debt in 2023, certainly isn’t free. But it may prove preferable when funding M&A this year and a darned sight cheaper in a higher rate environment.

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