The Post-Pandemic M&A Environment in Portugal
In this Chambers Expert Focus article, Duarte Schmidt Lino and Teresa Madeira Afonso, of PLMJ, discuss how Portugal is defying COVID-19 doubts, and taking full advantage of the EU's pandemic bazooka, to enjoy a record year of mergers and acquisitions.
Teresa Madeira Afonso
Strong growth in the Portuguese M&A market defies pandemic gloom
The COVID-19 pandemic seems to have come and gone while the M&A market in Portugal simply kept on growing; both the number of M&A transactions and their value rose steadily in 2021.
The first wave of the pandemic seemed to put an immediate halt on most transactions, principally due to the great uncertainty over valuations. Doubts about the duration, scope and impact of the pandemic made buyers fear paying too much. This created an understandable deadlock. Nevertheless, by the end of 2020 the overall M&A market in Portugal had grown by about 5% over the previous year, and two years later we are seeing more transactions happening, and at a faster pace.
"The M&A deal market had increased 31% in Portugal."
This is in no small part due to the huge liquidity reserves that have built up in the international market and fund managers' incentives to deploy them. These funds continue to look at Portugal as a very attractive market in itself and as a stepping stone to other Portuguese-speaking countries. As a result of these factors which existed before COVID-19 market players are now eager to close deals faster on the sell-side, either to seize the opportunities presented by the weakness of a target company or simply because there are many opportunities and no one wants to miss out.
Although Portugal still struggles with excessive bureaucracy, particularly in relation to real estate and industrial activities, it has been tireless in addressing this issue over the last two decades. The country has gradually overtaken many of its fellow EU member states through significant investment in innovative digital solutions for public services provision.
The critical factors remain the same when comparing Portugal with competitors for investment: political stability, security, the climate and attractive asset prices. As a consequence, the factors that make above-average returns for investors possible superior human capital, exceptional telecommunications infrastructure, a tax scheme friendly to foreign investors have created a business-friendly ecosystem and made Portugal a proffered destination for foreign companies and investors.
The numbers are quite revealing: by the end of 2021 the M&A deal market had increased 31% in Portugal with most deals (above 90%) closing by the years end. And the trend seems to be continuing, as the market just saw an year-on-year increase of 14% in the number of transactions in Portugal for January 2022.
"W&I insurance has increasingly been put on the table by sophisticated investors and international players."
The driving sectors of this growth are technology, real estate, hospitality, financial services, and the distribution and retail sectors. Closely related to the pandemic and the response to it are the insurance and healthcare sectors, which saw an unusual increase. The energy sector is also continuing to enjoy a considerable increase, and the growth of agriculture investment funds active in Portugal is also noteworthy.
In addition, Portugal has adopted a particularly aggressive stance on the decarbonisation of its economy for instance, it has already closed its coal-fired power plants which continues to create significant transactional opportunities.
The state budget and the EU bazooka
Similar to other EU member states, Portugal will receive a significant flow of EU funds under the EU Recovery and Resilience Plan (the bazooka) and the way the government intends to apply those funds in the coming years will undoubtedly be on investors' radar. The initial tranche will be injected directly into the public sector and public administration, leading to greater public investment. The benefits will include better services, more equipment and innovative tools required to increase digital know-how, decarbonisation of the economy, and strengthening of the health system. Nevertheless, this will naturally lead to increased opportunities for private investment in those areas, and companies that are able to access these funds or participate in the flow of funds to the economy will surely be the target of foreign investors.
Structural trends
Market players have, post-pandemic, become more focused on providing contractual mechanisms to control and allocate the risks of unpredictable and abnormal changes of circumstances that may impact transactions in the period between signing and closing. This has mainly been achieved through the resurgence of MAC clauses.
The demand for W&I insurance also grew, but it is still far from being an established market practice. The late rise of this type of insurance in Portugal is mainly due to the preponderance of low-cap transactions (as a result of the sellers' market we have been living in), a lack of sophisticated players and associated W&I costs. Nevertheless, W&I insurance has increasingly been put on the table by sophisticated investors and international players, mainly on the buy-side and more so since the start of the pandemic. This has given rise to more risk-adverse postures on both sides of the table and is steadily challenging the more traditional buyer indemnity provisions.
The forecast for M&A in 2022
The full restoration of economic activity after successive lockdowns, the high level of available liquidity and the flow of funds from the EU bazooka are fuelling optimistic forecasts for M&A activity in the year(s) to come.
"Portugal's tech scene will continue to flourish."
Portugal's favourable foreign investment arrangements, together with the end of the legal bank moratorium, which is likely to bring new distressed assets onto the market, contribute to Portugal being at the forefront of foreign investors' minds.
The hospitality sector will remain under the spotlight and is expected to continue its steady recovery, there being several significant deals in the pipeline. Real estate will also continue at its rapid pace, which did not even slow during the pandemic. As mentioned above, the energy sector is expected to continue to be particularly active, not only in deals involving wind and other more traditional renewable energy assets, but also in those concerning hydrogen and the exploitation of lithium.
Portugal's tech scene will continue to flourish, from e-commerce to fintech and insurtech, with technology companies becoming more and more appealing for investors.
As we say in Portugal, after the storm comes the calm, and investors have high expectations that the post-pandemic business and M&A scene will be a thriving one for Portugal.