This article includes a summary of the market, trends, and legal aspects of the M&A activity in Spain throughout 2023, along with an overview for 2024. It intends to provide readers with a clear understanding of the impact of the prevailing macroeconomic conditions on the M&A landscape, while also highlighting key practical trends in this practice area.

Performance of the M&A Market in Spain in 2023

As envisioned during 2022, 2023 has been a complex year for the M&A practice area. There has been a clear slowdown in the number of deals closed, although not as pronounced as in 2022. The uncertain climate due to the current global macroeconomic landscape, marked by disruptions in logistics, volatility in strategic raw materials, geopolitical tensions, inflationary pressures, and interest rate rises has all led investors to approach M&A cautiously.

As a result, investors have encountered challenges in securing funding, reshaping their debt strategies, and evaluating alternative financing options amidst the backdrop of elevated interest rates. Furthermore, the widening gap between buyers’ valuation of target companies and the prices that sellers are willing to accept, has delayed or even blocked the closing of many deals.

According to TTR Data’s 2023 annual M&A report, a total of 3,032 deals were closed (6.97% less than in 2022). Despite this decrease, the overall value of deals closed only experienced a slight reduction to EUR91.121 billion (0.51% less than in 2022).

While smaller transactions dominated throughout 2023, numerous deals were also completed, both in terms of value and complexity. Among the spotlighted transactions for 2023 are Generali’s acquisition of Liberty Seguros España and Liberty Mutual for EUR2.3 billion, along with the State of Singapore’s Sovereign Wealth Fund (GIC) acquiring a 35% stake in Hotel Investment Partners from Blackstone for EUR1.4 billion, in which Deloitte Legal’s corporate M&A team provided tax advice.

The main sectors in which most M&A deals were closed last year are those known for their stability and reliability. On top, the real estate sector recorded 663 deals, followed by the technology, media, and telecommunications sector with 379 closed deals, and the healthcare or sanitary sector with 173 closed transactions.

M&A Landscape in Spain for 2024

There are high expectations for a recovery of the M&A market during 2024, especially from the second quarter of 2024 onwards. Key indicators for that are higher demand and liquidity for M&A deals, improved financing conditions as a result of the expected interest rate decrease, and the increasing necessity for business model transformation.

As reported in TTR Data’s monthly report for February 2024, the transactional activity already hints at a recovery trend. A total of 447 transactions have been registered, for an aggregate value of EUR6.656 billion. This optimism stems from the pending completion of numerous transactions announced for a total value of EUR53 billion, which represents 58% more than the total investment value in 2023.

Among the factors expected to influence the increase of deals in 2024, the authors would highlight the following.

• Decrease of interest rates – forecasts suggest a gradual reduction in interest rates over the course of the year, which, combined with moderation in inflation, are expected to reduce the cost of debt and facilitate access to financing. Consequently, this is likely to increase investors’ appetite for M&A deals as well as to reactivate many deals which were put on hold in 2023 due to the then existing gap between company valuations and prices sellers were willing to accept.
• Availability of liquidity – the reduced number of deals completed throughout 2023 has led to an accumulation of liquidity within the market, causing a desire to undertake potential M&A deals.
• Business model transformation – companies are seeking to evolve, drive growth, and adapt to the latest trends in the business landscape. This transformative process not only will stimulate investment and divestment activities but will also enhance the access to key resources such as technology and talent, empowering companies to achieve their growth objectives efficiently.

M&A Market Trends in Spain in 2024

As we look ahead, several significant trends are envisaged to shape the M&A landscape, providing businesses with pathways for growth and adaptation, as outlined below.

Promotion of alternative sources of funding

Given the challenges in accessing credit and the high cost of traditional bank financing, 2023 witnessed a notable interest towards some creative financing alternatives. The concept of “vendor finance” gained relevance, allowing buyers to defer a portion of the transaction price through various legal mechanisms. The authors anticipate that the use of such financing alternatives will continue through 2024. Key vendor finance structures include:

• Vendor loans – the seller grants a loan to the buyer to facilitate the payment of a portion of the purchase price, which has been deferred as per the agreement between the parties. Interest applicable to the vendor loan is typically lower, and in some cases may even be non-existent, compared with traditional bank financing. As a matter of example, in 2023 Vodafone granted Zegona a vendor loan amounting to EUR900 billion, the latter being able to acquire Vodafone’s business in Spain.
• Earn-out clauses – unlike vendor loans, under this structure the purchase price is not entirely fixed. Instead, a portion of the price, also deferred, is contingent upon achieving specific financial or commercial criteria and objectives agreed upon by the parties. Earn-out clauses offer several advantages, key among these being their flexibility and widespread use in situations where there is a significant gap between the valuation of the target company set by the buyer and the seller. By linking part of the price to future profits, earn-out clauses can facilitate the completion of deals that were previously delayed due to this valuation mismatch. Additionally, buyers are more willing to pay an additional amount when they can directly assess the company’s value. The most common earn-out clauses are:
1. Performance earn-out clauses – linked to the acquired business’s post-completion performance, particularly related to financial or operational KPIs like increase of sales, customer retention or expansion into new markets, etc. The buyer commits to pay the deferred price only if such pre-defined performance KPIs are achieved.
2. Economic earn-out clauses – the deferred purchase price is based on the performance of certain specific economic variables (eg, sales, operating income, and net profits) over a specific post-closing period. Earn-out clauses have been used in relevant transactions reported during 2023, such as the sale of Sacyr Facilities, S.A.U. (Sacyr Group’s facility management services division) to Grupo Serveo (Portobello Capital), and the sale of a 49% stake in Cellnex’s Nordic subsidiary to Stonepeak.

Expectations suggest that these alternative financing structures will continue to evolve during 2024, becoming a relevant tool in M&A deals.

Impact of artificial intelligence (AI) on M&A

Companies are increasingly investing in AI for its integration into their processes, including major consulting firms and investment funds.

While AI is breaking through M&A players and is expected to become more relevant in the short term, the authors have yet to see a significant impact on M&A deals.

Prevalence of technology and innovation and increase of start-up deals

Technological revolution and innovation are having a major influence on the Spanish M&A market (the main innovation hub in southern Europe).

Transactions in start-ups and scale-ups have suffered a 38% decrease, attributed to the global slowdown in technology company investments. This decrease has been particularly evident in mature companies (C rounds), whereas the decrease in early-stage rounds has been slighter.

However, domestic funds have increased their investment in these companies by 31%. In this context, noteworthy funding rounds in 2023 include:

• Fever securing over EUR101 billion, nearly doubling its valuation from January 2022;
• Jeff closing approximately EUR83 billion in a mixed debt and equity investment transaction;
• Cabify raising over EUR100 billion in a new funding round; and
• Wallapop concluding a Series G funding round worth EUR81 billion, achieving a valuation of EUR771 billion.

For 2024, the start-up ecosystem is expected to sustain its long-term growth path. Expectations point towards the reactivation of large funding rounds and/or exits throughout the year, particularly in the second half. This is partly attributed to the increase of available liquidity and the need for companies to adapt to new technologies. Furthermore, venture capital and private equity funds are increasingly focusing on innovative and disruptive companies.

In this landscape, secondary operations are likely to persist, offering exit opportunities for founders and/or FFF (Friends, Family and Fools) investors, whilst investment partners seek to consolidate their positions in companies within their portfolio, thus reducing the atomisation of their cap table.

The growing importance of ESG criteria in corporate decision-making and M&A transactions

In recent years, Spanish companies have prioritised the integration of environmental, social and governance (ESG) criteria into their corporate agendas, impacting their growth strategies on a global scale.

In M&A transactions, investors are increasingly prioritising a thorough review of the target company’s compliance with ESG standards during the due diligence phase. This review encompasses various aspects including corporate, financial, and technical aspects. Also, any identified risks and opportunities for improvement are incorporated into the transaction’s business plan and executed as part of the buyer’s project.

The integration of ESG criteria into investment decisions is now deemed essential by investors. Over recent years, awareness regarding the importance of investing with a focus on sustainable growth has increased, contributing positively to social and environmental conditions. As a result, investors no longer solely rely on financial metrics but also evaluate their investment opportunities based on ESG criteria, aiming to enhance their reputation and ensure the resilience of their investments.

Additionally, at European level, there is an ongoing effort to explore and regulate the integration and control of ESG criteria within the corporate framework. The objective is to foster the development of corporate sustainability policies aimed at enhancing environmental protection and upholding human rights.

In this regard, in December 2023 the Council and the European Parliament reached a provisional agreement on the proposal for a Directive on Corporate Sustainability Due Diligence (CS3D). The aim of the CS3D, which is yet to be enacted, is to encourage sustainable and responsible corporate behaviour, and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rule’s goal is to ensure that companies address adverse impacts of their actions, including their value chains inside and outside Europe. Among other provisions, CS3D (i) establishes a corporate due diligence duty for identifying, ending, preventing, mitigating and accounting for negative human rights and environmental impacts, and (ii) introduces duties for EU companies’ directors, including setting up and overseeing due diligence implementation processes and integrating due diligence into the corporate strategy.

Likewise, during 2023 the European Sustainability Reporting Standards (ESRS) were adopted by the European Commission subject to the Corporate Sustainability Reporting Directive (EU Directive 2022/2464), which must be used by EU companies to prepare their sustainability reports, regardless of the sector in which they operate. The ESRS detail all information that EU companies must disclose both on their impacts on people and the environment, and on how social and environmental issues create financial risks and opportunities for the company.

Boom in cross-border corporate reorganisations

As a response to the transactional slowdown and global macroeconomic situation of 2023, numerous companies have initiated corporate reorganisations, aimed at consolidating their corporate structures and improving efficiency in group management and operations.

In this context, in June 2023 Spain implemented the European Mobility Directive (Directive (EU) 2019/2121 amending Directive (EU) 2017/1132) alongside other Directives. This introduced a new regulation applicable to both domestic and cross-border corporate reorganisations, within or outside the European Union (RDL 5/2023), replacing the previous legal regime.

The implementation of the new regulation introduced by RDL 5/2023 has created significant uncertainty, both in terms of legal interpretation and application. However, this uncertainty is expected to disappear gradually throughout 2024 as the Commercial Registers assess and qualify the execution of these corporate reorganisations.

M&A Trends in 2024 for the Main Sectors

Life sciences & healthcare

This sector was one of the most active and stable in the Spanish M&A market during 2023, driven by the ageing of the population and the emergence of new technologies. Companies operating in this sector remain active in the M&A market, seeking opportunities to expand their operations. Moreover, divestments from less relevant or lower-value businesses are also expected. Among the most relevant transactions to be executed during this year is the acquisition by Haier of a 20% stake in Grifols’ Chinese subsidiary Shanghai Raas, for approximately USD1.8 billion (EUR1.668 billion). This transaction received clearance from the Spanish antitrust authorities (the Spanish National Markets and Competition Commission – CNMC) and it is expected to close during the first half of 2024.

For 2024, a rebound in M&A deals is envisaged in the pharmaceutical industry, and in the healthcare sector growth is expected in mental health, nursing homes and specialised clinics.

Real estate sector

The market observed a decrease in closed deals in 2023. However, the authors anticipate a recovery during 2024, driven by an increase in transactions that were previously delayed and are expected to materialise in the next 12–24 months. While the real estate sector has emerged as the most active at the beginning of 2024, recording a total of 78 transactions according to TTR Data’s monthly report for February 2024, its path will depend on macroeconomic factors, especially those of a financial nature.

Private equity

An increase is expected in the number of transactions to be closed by private equity investors during 2024. In fact, according to TTR Data’s monthly report for February, private equity has recorded a total of 55 deals (increasing by 22% compared with the same period in 2023) and an aggregate value of EUR2.231 billion (increasing by 459% compared with the same period in 2023).

Private equity will also consolidate its position as one of the primary drivers of the transactional activity increase in Spain in 2024. Their dynamism in investing across different sectors, which often demand significant capital, as well as their creativity and ability in finding innovative closing mechanisms like vendor loans, co-investments and purchase agreements in which the seller can reinvest later, play key roles in strengthening their capacity to close deals.

Energy

An increase in public investment in renewable energy is expected, following the presentation of the revised National Integrated Energy and Climate Plan, until 2030, by the Ministry of Ecological Transition. This plan outlines a doubling of investment in renewable energy.

Tourism and hospitality

Following the joint-venture boom in the sector post-COVID-19, which facilitated strategic alliances among major stakeholders, there was a notable increase of interest in acquiring hotel assets in recent years. This led to an increase of hotel purchase transactions, especially by private equity funds, driven by the liquidity needs of hotel companies.

However, private equity funds are encountering significant challenges, primarily due to a shortage of hotels available for sale and the high prices or excessive costs associated with repositioning them. These challenges are largely attributed to the mismatch in pricing between buyers and sellers, and the liquidity existing within hotel companies, led by the sector’s strong performance in 2023. This will allow hotel companies to play a more active role in M&A transactions during 2024.

Transport and mobility

The transport and mobility sector is constantly evolving, driven by technological advancements, environmental considerations towards more sustainable and inclusive forms of transport, and changes in consumer expectations. Anticipated legislative and jurisprudential developments in 2024 are expected to impact rail transport, vehicle rental with drivers (VTC), and urban air mobility (drones). Likewise, the air transport sector is witnessing an increase of concentration deals among European airlines, with various transactions currently underway. Notably, in the Spanish market, the acquisition of Air Europa by IAG through a merger awaits approval by the European Commission.