Texas M&A Activity Drops in Q1, Both by Volume and Value

Texas M&A Activity Drops in Q1, Both by Volume and Value

M&A transactions with companies and private equity firms headquartered in Texas dropped significantly in the first quarter of 2020. For the first time in over a decade, the energy sector was unseated as the biggest deal generator in the state, according to Mergermarket.

The Dallas Business Journal reported that the Texas deal tally in Q1 2020 slipped to 222 transactions. That represents an 18% decrease from the first quarter of 2019. The value of the deals announced in the first three months of 2020 tumbled almost 52% to just $11.8 billion.

Texas’ largest deal in Q1 was Pathway Vet Alliance’s sale to TSG Consumer Partners for a reported $2 billion.

The Start of the Pandemic Reflected in the Texas Numbers

Many industry insiders contend that the poor Q1 performance was due in large part to the out-of-favor oil and gas industry, which typically dominates M&A activity in the state. The numbers, which only reflect the initial impact of the coronavirus pandemic, has caused many dealmakers to pause until the crisis passes.

Global M&A activity has seen very few megadeals announced thus far this year. Q1 2020 recorded $690.1B in volume and $5.7B in revenue—representing a drop of 35.5% and 16.3% year on year and the lowest Q1 volume since 2013. Americas-targeted M&A volume experienced the greatest year over year decline of 50.2%.

Texas saw its deal count in the first quarter at the lowest since the third quarter of 2015, which followed the most recent oil price collapse. The Q1 deal value was the lowest since the first quarter of 2009 in the middle of the last recession. However, the good news is that this was the 27th consecutive quarter of 200 M&A deals or more. By comparison, the second quarter of 2013 saw just 184 deals. But the transactions were smaller in this most recent quarter, with only two reaching $1 billion or more.

Mergermarket found that energy – including mining and utilities – was not the top business industry in Texas in terms of deal count, as it had been for 51 consecutive quarters in the Lone Star State. Rather, that title went to Energy came in fourth in the first quarter. The leader, industrials and chemicals, saw more than double the M&A transactions as energy in that time frame. And the seven biggest deals of last quarter were not in the energy sector, which saw only six of the top 20 deals.

As far as value, energy was the runner-up with $2.164 billion worth of deals, or 18.2% of the market. The top sector was pharma/medical/biotech. That sector generated $2.441 billion worth of transactions or 20.5% of the market in Texas, which is a sea change from the past three years, when energy was ranked first in terms of deal value among Texas companies, according to Mergermarket. However, the sector has been shrinking as a percentage of the total. It comprised 31% of deal count and 66.5% of deal value in 2017; 23% of deal count and 64.7% of deal value in 2018; and shrank to just 19% of deal count and 57% of deal value in 2019.

Even Industries Better at Defending Against COVID-19 Impacted

Those industries found to be more resilient to the coronavirus’ direct impact, like critical environmental and waste services, have experienced an M&A impact. For example, Texas-based Waste Management’s nearly $5 billion acquisition of Advanced Disposal was halted by the Department of Justice due to the COVID-19 pandemic.

In April, Waste Management announced was to acquire Advanced Disposal Services for $4.9 billion. Advanced Disposal Services, headquartered in Ponte Vedra, Fla. is the fourth largest garbage and recycling company in North America. Its main service area is the eastern half of the U.S. A press release on the acquisition stated that Waste Management would buy all of Advanced Disposal’s shares for $33.15 each. The deal represents a total value of $4.9 billion—including Waste Management assuming about $1.9 billion of Advanced Disposal’s net debt. The $33.15 price represented a 22.1% increase over the closing share price on April 12th, which was the final day of trading prior to the April 15th announcement.

Mergermarket anticipates that the technology, business services, and pharma/medical/biotech industries will continue to attract strong interest internationally.

The Future for Energy M&A in Texas

In the energy sector, oil and gas producers may sell midstream assets to raise cash in the post-COVID-19 environment. This may attract private equity-backed buyers, experts say, and a few petroleum software companies may leverage this opportunity to make acquisitions because of the anticipated decline in valuations after the pandemic.

In renewable energy, investment looks to continue with little effect, as the sector is driven by capital from private equity and infrastructure investors who have saved up capital over the past few years.

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