State of the UK M&A market
September 2017 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
September 2017 Issue
Though the spectre of Brexit looms on the horizon, creating doubt over the future of the economy, UK M&A activity is gathering momentum.
The first half of 2017 saw new deals announced with encouraging frequency, culminating in the most activity since 2008, according to Bloomberg.
In a short period, since 2015, the question of Scottish independence, the Brexit vote and two general elections have created numerous headwinds, through which the market has remained surprisingly resilient. Though dealmaking stalled briefly in the build up to the most recent general election, activity has, on the whole, been consistent. “The market is arguably in year five of its normal five year cycle, although arguably we are still benefitting from the momentum driven by the pent-up demand for deals built-up during the dark days of the global financial crisis,” says Jeremy Furniss, a partner at Livingstone Partners LLP. “Deal volumes are undoubtedly being sustained by sellers wishing to monetise at the high prices being paid for quality assets, which itself is a function of supply and demand.”
Brexit, while sparking social, economic and political debate, has produced a favourable outlook for overseas investment. International investors have capitalised on the abundance of cheap financing available, and also benefitted from the weakening pound making UK targets attractive. Over the last 12 months the value of the pound has dropped around 20 percent against the dollar. Recent dealmaking activity is a vote of confidence in the UK economy, and as long as high quality targets remain available to overseas investors, there will be continued inbound activity.
Going forward, buyers from Asia-Pacific could feature prominently in the UK M&A market. In 2016, Chinese acquirers completed 26 deals for UK companies totalling $8.9bn. Though Chinese dealmaking is down in 2017, according to Rhodium Group, as Beijing continues to impose capital controls that will make it difficult to move money out of the country, they are still expected to remain active through 2017 and beyond.
Domestic acquirers have also been active. According to EY, 51 percent of UK firms expect to actively pursue deals over the next 12 months.
A number of industries have emerged as key targets in the UK in 2017. According to Goldman Sachs, the UK capital goods sector is attracting interest, particularly for “flow control companies, where challenging end markets have seen a pick-up in related M&A activity, as companies aim to unlock cost savings from vertical or horizontal integration”.
However, according to Mr Furniss, certain sectors are slowing. “Patchy consumer spending, high levels of personal debt and the associated risk of interest rate increases are tempering prospects for the retail and mainstream consumer goods sectors,” he says. But there are still bright spots. “Within consumer, we see sustained deal volumes across the travel segment – due to the ongoing and profound structural shift online – and reasonable activity in luxury goods,” he adds.
In late July, Moody's Investors Service predicted that M&A activity in the UK telecom sector would increase in the second half of 2017 and beyond, as fixed line companies begin to converge their services and as their revenue growth stalls.
Brexit is likely to be the biggest unknown quantity that the UK faces in the short to mid-term. With the two year negotiation window now open, the countdown is on. “As March 2019 gets closer, the inevitable press frenzy around Brexit, especially if the media judges any agreement to be a bad deal – or no deal – will prompt a reassessment of the fundamental attractions of the UK to overseas acquirers and investors,” says Mr Furniss. “This could prompt a sudden and profound reduction in deal activity. The M&A market is driven by sentiment: from past experience a downturn may well be catalysed by one high profile, highly-priced deal falling over and a herd instinct kicking-in.”
Food cost increases, caused by the pound’s declining value, has also had a negative impact on the number of acquirers targeting UK food manufacturers. Deal volume in the last year has fallen 25 percent to just 27, according to EMW.
While, in the short term at least, smaller and medium sized enterprises may struggle to attract investors or acquirers, some of the UK’s larger organisations will likely remain viable propositions, particularly if the value of the pound remains low.
M&A activity in the UK has proved resilient in the face of strong headwinds, partly thanks to the UK’s reputation as an attractive destination for inbound investment, the maturity of its legal framework, strong market governance, relatively low rates of corporate tax and ease of access to both EU labour and the single market. Whether the UK M&A market will appeal to potential investors after March 2019 remains to be seen.
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