European TMT Trendspotter: Software segment set for renaissance in hope of market rebound

News Analysis 17 July

European TMT Trendspotter: Software segment set for renaissance in hope of market rebound

  • Software assets tipped for rebound
  • Incumbent carve-outs to drive telco activity
  • B2B Information services, consumer research boost media sector

M&A practitioners are tipping demand for software assets to help technology, media, and telecom (TMT) activity in Europe return to healthier levels in anticipation of a more favourable dealmaking environment in the future. 

While TMT activity was comparatively active compared to its sector peers in the first half of the year, making up a fifth of all Europe M&A deals by volume, rising cost of debt, inflationary pressures and regulatory scrutiny hampered a significant revival of activity. Total deal volumes in 1H23 fell 52% compared to the first half of last year to EUR 50.4bn, while there was a 24% fall in deal numbers to 1877 year-on-year, according to Mergermarket data.

Despite subdued deal volumes, dealmakers are anticipating an uptick in activity after the holiday season as signs of rising activity begin to appear.

“We are likely to see something of an uptick in TMT deal activity post summer with many banks having big sell-side orderbooks, and pressure increasingly growing on private equity firms both to show realisations and to deploy new money,” said Phil Adams, Global Head of Technology at Houlihan Lokey.

Information technology (IT) services remain busy, but for the second half of the year, all eyes are on the software sector, Adams said. “The valuation environment for assets seems to have settled at the long-term mean of around 5x-8x revenues, which is driving increased appetite for buyers on the lookout for well-priced companies in a buoyant sector,” he added.

The most active areas within software are those sub-verticals that enjoy structural tailwinds in the current challenging macro environment such as compliance, environmental and social governance, human capital management, cybersecurity, and digital manufacturing, added Adams.

Assets expected to hit the European auction pipeline include a sale of Civica, a UK software provider backed by Partners Group; French software construction software Sogelink, whose owner Keensight Capital appointed Raymond James to launch a sale; and Francisco Partners-owned EG, which is exploring a minority stake sale in the EUR 100m- EUR 120m EBITDA Danish software and IT services company.

One of the first deals of 2H23 has been Kerridge Commercial Systems, a UK-headquartered enterprise resource planning (ERP) software provider backed by Accel-KKR reportedly, which announced a sale to CapVest Partners last week for an undisclosed fee.

Deal activity in the second quarter included the takeover of Danish investment management solutions software specialist SimCorp [CPH:SIM] by Deutsche Borse [ETR:DB1] for DKK 29bn (EUR 3.9bn). Meanwhile, founding shareholders in SoftwareOne Holding [SWX: SWON] agreed a deal with Bain Capital Private Equity; and Silver Lake began a public-to-private (P2P) deal for Software AG [ETR:SOW], which had reached more than 70% of the capital at the time of publication.

P2Ps are a core area of focus for sponsors, who still have dry powder, said a senior tech banker. “Sponsors weren’t only looking at all-equity deals – but several all-equity deals got done as it was more difficult to get debt financing,” he said.

Software surge

Tech M&A, which made up around 68% of total TMT activity in the half of the year, fell 48% by deal value compared to the first half of last year to EUR 34.2bn representing the lowest half year total since 1H17, according to Mergermarket data. The number of deals was down to 1623 from 1793 year-on-year.

Among the largest private transactions in the year included IK Partners EUR 700m sale of cybersecurity and network services operator Nomios to Keensight Capital; and a minority stake in Hellman & Friedman’s Italian cloud software specialist Teamsystem to Silver Lake for EUR 600m.

There are some interesting assets around Europe around online fraud risk management and ID verification as companies actively push their customers to engage through online channels, added the tech banker.

Norwegian-headquartered Signicat, which attempted a sale process last year, is tipped to be among the likely candidates for an upcoming exit with a score of 79 out of 100, according to Mergermarket’s Likely to Exit (LTE) predictive algorithm*. IDNow, a German-based IT security specialist, also explored a sale at a similar time.

Meanwhile, the ascendency of artificial intelligence (AI) is also expected to see companies ramp up their investment in the field, according to Lisa Chang, corporate partner at Linklaters. “Throughout the remainder of this year, we continue to expect rapid investment in generative AI, as companies look to bring in expertise and level up their AI offering,” she said.

Incumbent ingenuity 

The total volume of telecom activity in the first half of 2023 fell to the lowest half-year level since 2H17 to EUR 13.7bn and fell 53% compared to the same period the year before, Mergermarket data shows. The number of telecom-related deals fell 22% to 89 year-on-year.

The EUR 15bn proposed joint venture (JV) between Vodafone’s [LON:VOD] UK operations and Hutchison 3G (Three) was the largest telecom deal in the first half of the year. It still awaits regulatory approval. Vodafone is also mulling whether to exit its Spanish business, which could be worth EUR 3.9bn, as reported.

The JV between Vodafone and Hutchison 3G underscores optimism for four-to-three consolidation among European mobile operators that began with Orange’s [EPA: ORA] agreement to merge its Spanish arm with MasMovil last year, which is also pending regulatory approval. Sponsor-backed MasMovil has an LTE score of 68, based largely on its valuation.

Meanwhile, the sale of Wind Tre’s mobile and fixed network infrastructure assets to EQT Infrastructure in a EUR 2bn deal has been one of the top deals of the year so far.

Rising capex requirements caused by a bottleneck in demand for digital infrastructure are expected to prompt Europe’s largest incumbents to explore asset sales in certain geographies as well as exploring means to unlock value from prize infrastructure assets.

“For many sponsors, current macroeconomic conditions and changes in the financing environment do not offset the long-term bullish view on the digital infrastructure sector, given wider trends of the increase of data usage, high-speed connectivity and digitisation, and increasing policy focus on the development of digital infrastructure,” Daniel Law, Financial Sponsor partner at Linklaters.

The mooted EUR 23bn sale of Telecom Italia’s (TIM) [BIT:TIT] network division to KKR [NYSE:KKR] is also among the most widely anticipated infrastructure carve-outs in Europe, despite headwinds. Elsewhere, Orange has appointed Bank of America to explore strategic options for its tower portfolio TOTEM.

B2B information services, gaming drive media volumes 

B2B information services assets have propped up much of the European media pipeline in the first half of the year, as the prevalence of market intelligence, data and analytics has become invaluable in uncertain macroeconomic times. 

Nordic Capital’s announced sale of Macrobond to Francisco Partners for a reported EUR 700m valuation and Equistone’s sale of Acuity Knowledge Partners to Permira underscored the interest in the sub-sector.

Among the B2B information service providers tipped to hit the European auction pipeline include EQT’s Rimes Technologies which is expected to come to market in the next 18 months and could be valued at up to EUR 1bn. It has an LTE score of 77.

Another company to watch is Future plc [LON:FUTR], a digital media publisher, which has been flagged as a possible takeover target by The Morning Flash, despite enjoying gains on the stock market following a buyback.

Elsewhere in media, the second half of the year is expected to see more activity in the gaming sector, with a EUR 700m deal for Finnish gaming company Rovio by Sega Sammy Holdings [TYO:6460] among the largest European gaming deals so far.

*Mergermarket's LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction. 

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