How can Swiss investors make the most of opportunities in France? In this PwC Deal Talk we look at opportunities for Swiss companies in France and the pitfalls to look out for to make sure your deal is a success.
A close and important neighbour
Switzerland shares nearly 600 kilometres of common border with France, not to mention an official language. France is the second largest country in Western Europe with a population almost eight times bigger than Switzerland’s. The French economy ranks 13 places higher than Switzerland in terms of sheer size, with a GDP of USD 2.42 trillion versus USD 0.67 trillion, but lags well behind when it comes to GDP per capita, with less than half the Swiss figure.
Given their proximity and commonalities, it’s not surprising that the two countries do a huge amount of trade. In 2015, French exports to Switzerland came to USD 13.8 billion (mainly jewellery, agricultural products, pharmaceuticals and cars). This was more or less balanced by Swiss exports of USD 14.4 billion to France, primarily pharmaceuticals, chemicals and watchmaking-related items.
The ties don’t end with trade. With cumulative invested capital of EUR 42.4 billion at the end of 2015, Switzerland is one of the biggest foreign investors in France. Since Switzerland isn’t a member of the EU, business with France is substantially governed by a set of bilateral accords covering areas such as the free movement of people, technical trade barriers, public procurement, agriculture, and air and ground transport.
The French economy: full of pleasant surprises
After a rough ride in the wake of the 2008 crisis, the French economy has been recovering slowly for the past four years or so. GDP grew 1.1% in 2016, and unemployment fell way below 10% for the first time since 2012. There are signs of improvements in corporate margins, investment and jobs.
A more detailed breakdown of the French economy reveals some surprises. Despite its perceived importance, tourism accounts for only around 7% of French GDP and jobs. The economy is dominated by the highly diversified services sector, which contributes almost 80% of GDP and is also the fastest growing (followed by the much less dominant industry and agriculture sectors).
Another significant – and for many people perhaps surprising – point is that France is also emerging as one of the European countries most active in venture capital (VC). Recently there have been huge increases in investment in companies and the number of VC players and capital raised, thanks not least to public and private initiatives promoting France as a country of entrepreneurs and innovation. The 2016 Clarivate analytics index ranks France third in the world for the number of patents and innovation, only just behind the US and Japan (and well ahead of sixth-placed Switzerland).
M&A activity growing, despite low activity in H1 2018
While these positive developments have resulted in an increase in mergers and acquisitions activity in France in recent years in terms of both value and numbers, both inbound and domestic M&A activity slipped in the first half of 2018. For the second half of the year, we expect M&A activity to pick up again. In the first half of 2018 the M&A scene was dominated by industrials and chemicals, business services, consumer and technology. There’s an infrastructure to match this activity, with French institutional investors well established and accounting for one out of three deals.
A combination of the exchange rate situation and the turnaround climate in France is creating attractive investment opportunities in France.
Switzerland is well up there on the deals scene. While the US has dominated both inbound and outbound activity over the last years, Switzerland ranks among the top five inbound investors in France.
The stage is set for promising deals in France. So what are you waiting for?
Checklist for successful deals in France
Here's a summary of key points to look out for:
- Private equity: France has a mature and well developed private equity market covering everything from seed capital to LBOs, and with transactions such as secondary, tertiary and even quaternary buyouts happening today. The AFIC, which is the French equivalent of SECA, has 298 active members, and the French authorities also enhance private equity via the Banque Publique d’Investissement.
- Vendor due diligence: Vendor due diligence is extremely common in France, regardless of deal size. It’s often required by banks and lenders for a deal to be financed.
- Accounting standards: A common and mandatory accounting framework exists for all French companies. French GAAP has its own characteristics and is tax-oriented, so buyers should adapt their analysis of reported profitability and valuation accordingly.
- Trade unions: Unions still have a prominent influence on the French workforce and have to be considered when negotiating a deal. Since 2014 it’s been mandatory to inform employees ahead of the sale of a business, and companies with more than 50 employees have to request company committee approval.
- Legal factors: France made radical changes to its labour law in 2016. Agreements on working hours and conditions at company level between management and employees now prevail over agreements at industry level.
- Taxes: The French tax authorities are very strict on payment and allow no room for negotiation. There are severe penalties for fraud. France has a uniform tax rate of 33.33% for companies.
- Salaries and benefits: Personnel costs in France include more than 25 different items for the employer (versus ten or so in Switzerland). Employees are also entitled to a profit sharing scheme entailing specific accounting treatment.
Keep an eye on these points and you’ve already increased your chances of a successful deal. If you want to find out more, check out PwC Deals Talk France, or contact us for a more in-depth conversation about the risks and opportunities.
