Business Leader looks at the South West M&A sector and what trends we can expect going forward. To do this, we brought together a panel of experts.
How would you sum up deal activity in the region over the last year?
Ned Dorbin: “Despite the wider economic uncertainty, 2019 has been a fantastic year of growth across our South West portfolio, a reflection on the resilience and ambition of the region’s entrepreneurs. Now, more than ever, growing businesses need adequate support to execute a sustainable, long-term growth plan, and we have continued to partner with them and provide that funding and support needed to scale-up and go for growth.”
Martyn Fraser: “Perhaps surprisingly given the wider economic uncertainty during the year, our experience is that deal activity held up strongly. In terms of transactions completed, 2019 will be our strongest year since before the EU referendum and I know that is common across several firms in the South West.”
David Ferris: “The deal activity we have seen in 2019 in the region has been busy and held steady, even amid the national and international political turmoil. We have seen deals taking longer from inception to completion, but interestingly the reasons for this have varied, but perhaps reflecting a degree of caution because of that turmoil.”
Andy Killick: “We saw businesses deciding to get on with their plans rather than delaying any further, in part due to the continuing strong liquidity in the funding market and no doubt also spurred on because of the uncertainty around Entrepreneurs’ Relief.”
Andrew Hodgson: “Despite a marked reduction in national deal activity, the South West deal market has remained buoyant. We don’t see that changing. In fact, there may be a bounce in deal activity in 2020.”
Has the number of deals completed increased or decreased this year, compared to last?
Andrew Hodgson: “There’s probably been an overall decrease. From an advisor’s perspective though, you only need a modest number of high quality deals to keep the team busy so a single organisation’s perspective can be misleading.”
David Ferris: “The number of deals has been about the same as 2018, which was also a busy year. The sector mix has perhaps varied though, with very slightly fewer renewable energy deals due to changes in the subsidy regime, but a step up in the number of private equity deals.”
Are there any sectors that are particularly active?
Ned Dorbin: “Environmental, Social and Governance (ESG) criteria is high on the agenda and this will no doubt be reflected in the types of businesses presenting as attractive to investors. Innovative companies such as Exeter-based Lightfoot, the connected car technology company, are increasingly in the spotlight for their environmental credentials.”
Martyn Fraser: “Investor appetite remains high for innovative and disruptive technology businesses. We have also been involved in a series of transactions during 2019 in the cyber security space, involving both financial and strategic investors.
“Valuation is driven principally by the specifics of each deal and so broad brush statements around trends in deal sizes are not really meaningful. We have sold businesses during 2019 on what traditionally would be regarded as very high multiples.”
David Ferris: “The mix of sectors has not varied hugely but the focus on digital transformation as the purpose or driver of those deals has been the really noticeable element – across all sectors, whether energy, financial services, real estate, transport and/or infrastructure.”
Andrew Hodgson: “In some ways it is easier to be clear about the difficult sectors, like property and construction and general consumer businesses such as traditional retail and casual dining. Having said that, technology will continue to boom, so will anything that is generally market disruptive.”
Andy Killick: “In terms of sectors, technology continues to be one of the key areas of growth. The UK boasts world leading experts, products and services in this area and investors are seeking opportunities from the innovative smaller angel-type investing end through to larger institutional deals. Another growth area for us is in cyber security as part of due diligence. Our red flag cyber security reviews now comprise a regular part of our scoping as investors increasingly require this as part of risk assessment.”
Do you see any M&A trends emerging in the future?
Andrew Hodgson: “Now the election is out of the way, I expect to see a renewed focus by entrepreneurs on their tax planning. For many this might just mean a change to the way they hold their investments. For some, it might mean selling the business in the short term. There is a real risk of changes to Entrepreneurs’ Relief… and it certainly won’t be getting more generous!”
David Ferris: “We are already seeing, and expect to see even more, deal flow relating to strategic moves by corporates, particularly around digital transformation which is a major area of focus for Osborne Clarke.”
Martyn Fraser: “Anecdotally, you hear of vendors who delayed the launch of sales processes pending clarity around Brexit. Likewise, trade purchasers are said to be taking a more cautious approach to M&A for the same reason. If both are true then you might expect to see an increase in transactions involving strategic buyers in the coming years.”
What were the standout deals you completed last year?
Ned Dorbin: “Earlier this year, we invested in Equilaw, the UK’s only dedicated equity release legal adviser, to support its business growth plan. It’s a fascinating business model – the equity release market has grown substantially in recent years and Equilaw has positioned itself at the top, with an excellent reputation and track record. Led by an experienced management team and supported by market-leading technology, we’re excited about the opportunity for the business to capitalise on a growing industry.”
Andrew Hodgson: “We sold Francis Flower to LKAB in Sweden – this was a £100m sale to an overseas trade buyer. It’s always great to get those over the line. We also sold a large building materials business in South Wales to private equity and acquired Plimsoll for LDC in Bristol. It’s been a great year for us, having also advised Acquis, Vistgate, Molson, PJ Davidson and others on various transactions in the last 12 months.”
David Ferris: “The sale of Caerphilly aircraft parts provider Aerfin to CataCap, following the exit of CarVal Investors – we advised Founder and Chief Executive Bob James, who will retain a significant equity interest in the business.
“Advising Creo Medical Group, based in Chepstow, on its £50m fundraising, which will help it capitalise on opportunities presented by the emerging field of surgical endoscopy and provide a platform to explore potential strategic acquisitions
“Advising management and the purchaser vehicle on the management buyout of Newport-headquartered Acquis Insurance Management, an independent insurance broker and administrator that provides specialist solutions to the finance and leasing industry.”
Martyn Fraser: “The disposal of Swansea-based RAP International to the Japanese listed business Yokogawa Electric Corporation is typical of the deals we have been involved in during 2019. That saw the acquisition of an innovative technology business by a strategic buyer with a view to accelerating growth within a global market.”
Andy Killick: “A stand-out local deal for us at PKF Francis Clark, was our involvement with Eden Geothermal, where we acted as lead financial adviser on the £16.8m financing required to drill the first well for their pioneering geothermal heat and power project. This will bring clean, green technology to Cornwall.
“Phase one will supply a district heating system for Eden’s biomes, offices and greenhouses with phase two enabling Eden to generate sufficient renewable energy to become carbon positive by 2023, as well as aiming to be able to provide heat and power for the local area.”