UK SMEs resilient in Q3 2017 with fundraising plentiful

BY Fraser Tennant

Despite prevailing uncertainty in the macro-backdrop, the UK small and medium-sized enterprises (SME) sector is proving to be resilient having seen a strong Q3 2017, according to figures published this week.

In its ‘Growth Capital Update Q3 2017’ report, Kingston Smith reveals that 117 private companies raised £501.3m of growth funding in the third quarter – figures which accelerate the sector’s momentum and suggest 2017 will end up being a record year for growth equity capital fundraising in the UK SME sector.  

The firm also notes that last quarter’s figures bring the year-to-date total to £1.35bn raised by 330 companies, which suggests that 2017 will comfortably exceed 2015’s peak when 394 businesses raised £1.53bn (Kingston Smith’s analysis covers mid-market range transactions in which UK private companies have raised £1m to £15m of growth equity capital).

Underlining the appeal of the UK SMEs, two of the quarter’s top-three backers were international venture capitalists (VCs). The reason for the uptick in interest, according to Kingston Smith, is due to many of the UK’s growing SMEs being at an early stage in their development,  the global reputation that UK businesses have for being potential ‘world-beaters and the opportunities a weakened pound presents to international funders.  

Among the notable deals in Q3 2017 was the £15m investment made by L Catterton, a US private equity firm specialising in consumer brands, to acquire 27.9 percent of the Scottish craft beer brewer Innis & Gunn; Foresight Group’s £2.25m investment into Cinelab London, a postproduction service provider with expertise in film; and the £3.5m investment made by Business Growth Fund, one of the UK’s biggest investors in SMEs, into Filmore & Union, a chain of UK restaurants focusing on healthy eating.

In addition, the report states that approximately 65 percent of the funding in Q3 came from  institutions, many of which are international, including L Catterton (US), Creandum (Sweden) and Partech (Transatlantic).

“We are genuinely encouraged to see this dynamic part of the market grow,” said John Cowie, partner and head of growth capital at Kingston Smith. “While we understand the tremendous growth prospects these businesses have, it is very promising to see more international backers invest as a vote of confidence. The figures highlight the strength of this part of the UK economy.”

Report: Growth Capital Update Q3 2017 – UK SMEs set for record year of growth equity capital fundraising

Armstrong Energy files for Chapter 11 reorganisation

BY Richard Summerfield

In yet another blow for a depressed industry, coal mining company Armstrong Energy, Inc. has announced that it, and substantially all of its wholly owned subsidiaries, has filed for reorganisation under Chapter 11 of the US Bankruptcy Code.

The collapse of Armstrong is the first such bankruptcy since president Donald Trump vowed to end the so-called ‘war on coal’, though it is one of many companies to have opted for bankruptcy in light of the emergence of cheap natural gas in the US in recent years.

Armstrong Energy has taken the Chapter 11 route (in the Bankruptcy Court for the Eastern District of Missouri) in order to consummate the transfer of substantially all of its assets to a new entity to be jointly owned by Knight Hawk Holdings, LLC and Armstrong’s secured noteholders. Once the proposed assets have been transferred, Knight Hawk will take control of Armstrong Energy’s ongoing operations.

A producer of low-chlorine, high-sulfur thermal coal from the Illinois Basin, Armstrong Energy operates both surface and underground mines. As of 30 June 2017, the company controlled over 445 million tons of proven and probable coal reserves in Western Kentucky and currently operates five mines. Armstrong also owns and operates three coal processing plants and river dock coal handling and rail loadout facilities, which support its mining operations.

"We remain firmly committed to serving our customers and to being a good employer by maintaining safe, productive operations as we undertake this process," said J. Hord Armstrong, III, executive chairman of Armstrong Energy. "We are confident that this court-supervised process is the best way forward.”

Citing “recurring losses from operations”, the beleaguered company had initially stated in an August filing with the US Securities and Exchange Commission (SEC) that it foresaw a need to reorganise under the protection of a federal bankruptcy court.

Armstrong Energy has filed various motions with the Missouri Bankruptcy Court, including requesting authorisation to continue paying employee wages and providing healthcare and other benefits. The company has also asked for authority to continue existing customer programmes and intends to pay suppliers in full under normal terms for goods and services provided after the filing date of 1 November 2017.

Kirkland & Ellis LLP is serving as legal adviser, MAEVA Group LLC is serving as financial adviser and FTI Consulting, Inc. (FTI) is providing interim management services to Armstrong Energy in connection with the Chapter 11 process.

Armstrong Energy expects its mining operations and customer shipments to continue in the ordinary course throughout the Chapter 11 process.

News: Coal-Mining Armstrong Energy Files for Bankruptcy Protection

Broadcom proposes Qualcomm acquisition in $130bn transaction

BY Fraser Tennant

In what would be the biggest tech deal ever seen, Broadcom Limited has announced a proposal to acquire fellow semiconductor company Qualcomm Incorporated in a deal valued at $130bn.

The acquisition would see Broadcom acquire all of the outstanding shares of Qualcomm for a per share consideration of $70.00 in cash and stock ($60.00 in cash and $10.00 per share in Broadcom shares). Broadcom's proposal represents a 28 percent premium over the closing price of Qualcomm common stock on 2 November 2017.

"Broadcom's proposal is compelling for stockholders and stakeholders in both companies,” said Hock Tan, president and chief executive of Broadcom. “Our proposal provides Qualcomm stockholders with a substantial and immediate premium in cash for their shares, as well as the opportunity to participate in the upside potential of the combined company.”

Broadcom has also stated that its proposal to acquire Qualcomm stands whether the pending acquisition of NXP Semiconductors by Qualcomm (the currently disclosed terms of $110 per share) is completed or terminated. Many commentators believe there is a serious possibility that Qualcomm's NXP acquisition will collapse in the wake of a Qualcomm-Broadcom deal.

Unanimously approved by Broadcom’s board of directors, the combination of Broadcom and Qualcomm will lead to a strong, global company with an impressive portfolio of technologies and products, according to Thomas Krause, Broadcom’s chief financial officer. “Given the complementary nature of our products, we are confident that any regulatory requirements necessary to complete a combination with Qualcomm will be met in a timely manner,” he said. “We look forward to engaging immediately in discussions with Qualcomm so that we can sign a definitive agreement and complete this transaction expeditiously."

Broadcom has stated its expectation that the proposed transaction would be completed within approximately 12 months following the signing of a definitive agreement.

Moelis & Company LLC, Citi, Deutsche Bank, J.P. Morgan, BofA Merrill Lynch and Morgan Stanley are acting as financial advisers to Broadcom. Wachtell, Lipton, Rosen & Katz and Latham & Watkins LLP are acting as legal counsel.

Mr Tan concluded: “Given the common strengths of our businesses and our shared heritage of, and continued focus on, technology innovation, we are confident we can quickly realise the benefits of this complementary transaction for all stakeholders. Importantly, we believe that Qualcomm and Broadcom employees will benefit from substantial opportunities for growth and development as part of a larger company."

News: Broadcom offers $103 billion for Qualcomm, sets up takeover battle

Optimism returns to M&A market with 2018 the year of small and middle-sized deals, says new survey

BY Fraser Tennant

Optimism is returning to the M&A landscape with smaller and middle market deals expected to lead activity in 2018, according to a new survey from Dykema.

The survey – the law firm’s 13th annual M&A outlook – reveals that 39 percent of respondents expect the M&A market to strengthen over the next 12 months, up from 33 percent last year and 37 percent in 2015. Furthermore, 60 percent predict a strong US economy in the year to come – double the result of last year’s survey.

In terms of the US, 55 percent of respondents indicated an expectation that president Trump will be a positive force on both the US economy and M&A market in 2018. Among the factors playing a role in this optimistic sentiment are the expected reduction in corporate tax rates, more favourable business regulations and the Trump administration’s perceived business-friendly positive economic policies.

“With the uncertainty around the presidential election in the rearview, our survey respondents are abandoning the ‘wait and see’ mantra, with an increasing number predicting that deal activity is back on the rise,” said Thomas Vaughn, co-leader of Dykema’s M&A practice. “However, we are still hearing that uncertainty around the Trump administration’s priorities and regulations will have the greatest impact on M&A from a global perspective.”

Additional key findings include: (i) the majority of respondents (70 percent) expect the volume of small deals (under $50m) will increase over the next 12 months, with 53 percent predicting an uptick in deals valued between $50m and $100m; (ii) for the fourth consecutive year, respondents expect technology and healthcare to see the most M&A activity over the coming year; (iii) 59 percent of respondents predict an increase in M&A activity between FinTech startups and established financial services organisations in 2018; and (iv) 68 percent of respondents said they would be involved in an acquisition in the next 12 months, sentiment consistent with 2016’s 70 percent.

Survey respondents also stated their belief that the leading driver of cross-border deals in 2018 will be companies seeking growth via entrance into foreign markets. More companies in Asia are also expected to pursue deals in the US, and outbound M&A activity from the US to Mexico and Canada is expected to increase in the next year, despite ongoing public statements by the Trump administration around the renegotiation of the North American Fair Trade Act (NAFTA).

With a high level of optimism not seen across the M&A landscape for several years, bullish dealmakers are heading back to the negotiating table intent on pursuing strategic transactions.

Report: Mergers & Acquisitions Outlook Survey 2017

Countering complacency key to defeating cyber criminals

BY Richard Summerfield

Despite an increase in the number of cyber attacks and data breaches over the last 12 months, including a number of high profile cyber events, there has been a decline in how seriously C-suite executives view cyber risk, according to a report from Zurich and Advisen Ltd.

In ‘The Seventh Annual Survey on the Current State of and Trends in Information Security and Cyber Risk Management’, 60 percent of the risk professionals surveyed said executive management view cyber risk as a significant threat to their organisation. However, this is down significantly from the 85 percent recorded in 2016.

The eroding of the importance of cyber security issues among senior management is a worrying trend, particularly in light of the number of cyber incidents recorded over the last 12 months, as well as the volume and value of the data stolen.

According to the report, only 53 percent of respondents knew of any changes to their companies’ cyber security systems in response to the high-profile attacks that took place in early 2017. Furthermore, growth in the purchase of cyber insurance has gone stagnant after a steady six-year increase from 35 percent to 65 percent.

“These findings may indicate that businesses are not up to speed on the magnitude of impact that business interruption losses are beginning to have on businesses,” said Erica Davis, head of Specialty E&O for Zurich North America. “Businesses must adopt a mindset of resilience that extends beyond the four walls of their organization. As cyber security breaches persist, it is more critical than ever to engage in an ongoing, comprehensive review of all business partner relationships including how those vendors and business partners approach their own exposures and controls and how the vendors’ supplier approach fits into their overall resilience plan.”

A total of 315 respondents, across a spectrum of businesses of all sizes, contributed to the report. Fifty-six percent of respondent were from companies with revenue of $1bn or less.

Report: The seventh annual survey on the current state of and trends in information security and cyber risk management

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