Notable companies have become active in the green technology M&A market in recent months: at the end of May, BASF bought Horta, an Italian company that provides digital solutions for agriculture. In June, Katjesgreenfood, the investment company of confectionery manufacturer Katjes, which specializes in sustainability issues, acquired Genius Food. The British company makes gluten-free bread.
Also in June, Porsche acquired e-bike maker Fazua—just a few examples of M&A deals in the green tech market. Mergers and acquisitions in the green tech sector are booming right now, and not just because Ukraine war unleashed energy crisis. But who are the relevant players in the market – and who are the green tech companies that are mature enough for big projects merger and acquisition?
What are green tech companies?
Traditionally, companies in the renewable energy sector belong to the green technology sector. Today, however, the region includes more sub-sectors. For Alex Stein, Managing Director of Nomura Greentech, companies in the areas of energy conversion, electricity, transportation, agricultural technologies, or heating and air conditioning technologies are part of the green technology sector.
“But we also bring together companies that support others in providing more sustainable products and services under the ‘Greentech’ label,” explains Stein. He names the last region Mergers and Acquisitions Consultant Technology Empowerment. As an example, he cites companies that offer fleet management software for logistics companies in order to make logistics more efficient and therefore more sustainable. According to Stein, companies that support other companies in preparing ESG reports can also be counted in the green technology sector.
Mark Romano, managing director at financial investor Mirova, uses the term greentech to sum up companies whose innovations “have a positive impact on the environment.” Mirova, a subsidiary of asset manager Natixis that specializes in sustainable investments, measures the positive impact of the “Sustainable Development Goals” (SGDs) proclaimed by the United Nations. According to the investor, recycling companies or companies that allow better resource management can also be allocated to the green technology sector.
Companies buy green technology expertise
One thing is clear: the market for green technologies is booming – and this, in turn, is fueling M&A activity in the industry. It’s a structural trend: companies have been trying to become more energy efficient and sustainable for years. Increasing energy prices and uncertainty about the future structure of the energy supply do the rest. All of these factors are potential catalysts for mergers and acquisitions: “In order to position themselves more sustainably and reduce their dependence on outside suppliers, companies are acquiring regional energy suppliers, for example,” says Stein, a consultant to Nomura.
Another example: Schwartz’s fall 2020 collection He took over the recycling division of the French Suez Group for 1.1 billion euros. With this deal, parent company Kaufland and Lidl have brought the theme of recycling in-house – with the aim of disposing of products that the company itself puts into circulation in a sustainable way.
The green transition is fueling mergers and acquisitions activity
In addition to topics such as recycling or so-called energy self-sufficiency, the shift to sustainable energy sources is also fueling mergers and acquisitions activity. It doesn’t always have to be a complete acquisition: Automotive supplier Schaeffler has formed a joint venture Innoplate with Symbio, a joint venture between Faurecia and Michelin. The aim of the collaboration is to strengthen commitment in the field of hydrogen engines.
In addition, there are companies that “outsource” their research activities in the green technology sector by investing in young companies – in order to then benefit from the development progress, according to investor Romano. This approach can be seen above all in companies that have their own venture capital unit, eg Evonik Chemical Company. For example, the Essen-based company has invested in startup Ovo, which has developed technology that can be used to determine the sex of a chick while the egg is still unshelled. Fewer male chicks are killed using the technology.
Private equity is already looking at green tech companies
However, it’s not just strategists who are buying into the green technology M&A market. “Massive capital is needed in almost every industry to go green Transformation Capital that also comes from financial investors, says Stein, an M&A consultant. “Growth funds, infrastructure funds and large-cap private equity firms that have a greater appetite for risk than mid-cap investors are positioning themselves as potential interested buyers in this sector,” Stein notes.
“Growth funds, infrastructure funds, and large-cap private equity firms with a greater appetite for risk are positioning themselves as potential buyers in this sector.”
Alex Stein, Managing Director, Nomura Greentech
Financial investor Romano agrees: “Early growth companies are gradually leaving the classic venture capital sector and evolving private equity it’s interesting. Dominique Degen, Senior Expert and Director at BCG, takes a more discerning view of the development. “There are some areas of green technology in which private equity investment is already taking place. However, some sub-sectors are not yet mature enough for private equity investment,” says the M&A expert.
Solar companies, among others, are already interesting for private equity. At the end of 2020, for example, Auctus acquired a stake in photovoltaic energy company Energiekonzepte Mitteldeutschland. The field of alternative energies is also exciting for private equity, and Aurelius has acquired Convertertec in this area. “New green technology sub-sectors are constantly reaching a level of maturity at which they are also interesting for private equity,” Deggin predicts.
High returns await in the green technology sector
The growing interest in private equity in green technology companies is an indication of the sector’s growth prospects. “We’re seeing generally positive sentiment in the green tech industry — despite or perhaps because of uncertainty about how the winter will turn out,” agrees Stein, Nomura’s advisor.
Positive prospects are also reflected in the evaluation level. “Purchase prices in this sector are sometimes surprisingly high,” says Stein. In addition to the degree of maturity of the company and its position in the value chain, government subsidies in particular determine the attractiveness of the company and, accordingly, the price.
But returns for investors can be impressive. “There are higher investment risks – and of course you have to face the increased financing costs. But the returns are definitely in the mid-teens,” says the M&A consultant. The danger here is, among other things, distinguishing between truly green companies and those that are only supposedly environmentally friendly. This can be done with one, among other things ESG due diligencealthough there are no uniform standards for this test either.
Whether it stays at the high valuation level depends mainly on the interest of potential buyers. At the moment, however, market experts do not see the dynamics of the transaction slowing down. Financial investor Romano: “We see a very good deal flow in the green technology sector until at least the middle of next year.”
Olivia Harder is an editor at Finance focusing on current developments in private equity and mergers and acquisitions. She studied philosophy, political science, sociology and geography at Justus Liebig University in Gießen, where she also held a teaching position. Prior to the finance department, Olivia Harder worked in the editorial offices of several weeklies and daily newspapers, including Gesner-Anzeiger.