The past year has seen a chaotic time across the country, with plans for Brexit still up in the air. However, this hasn’t stopped some major deals taking place throughout the year across the UK.
BLM spoke to experts operating within corporate finance, reviewed the challenges they have faced, and looked ahead to 2019 and beyond.
On the trendsshaping the M&A space going forward Henry Whorwood, senior consultancy associate, Beauhurst, believes that investors at the lower end of the market, with more money going into larger deals, will be more cautious.
He said: “In the current climate investors are looking for safer bets — companies with proven traction and revenue streams.
“We’ve also seen a significant level of investment from abroad. Fundraising with foreign involvement accounted for 31% of all deals in the first quarter of 2018, compared with 16% in the first quarter of 2015.
“This trend especially involves the largest deals — 71% of deals of more than £50m involve a foreign investor.”
This is highlighted by Californian-based HP announcing in August that the group would acquire Apogee Corporation, a London-based office equipment dealer for £380m, and University of Bristol spin-out company Ziylo being bought by global healthcare company Novo Nordisk, based in Denmark, in a deal worth around £630m.
These are big deals.
However, recent statistics by the Office for National Statistics have reported that the value of mergers and acquisitions of UK companies by foreign businesses fell by £15.8bn between April and June this year.
The drop, from £22.3bn to £6.5bn, reflected the absence of high-value transactions that were seen in previous periods.
However, the number of transactions was up by 106 to 182 and included the takeover of British manufacturer Fenner by French-headquartered tyre company Michelin, and the sale of book chain Waterstones to US hedge fund Elliott Management Corporation.
M&A deals of foreign firms by UK companies fell to the lowest level in almost five years, from £2.5bn between January and March this year to £1.9bn in the second quarter.
Notable deals included Aviva’s purchase of life insurer Friends First, and JD Sport’s acquisition of US athletic clothing brand The Finish Line. Domestic M&A activity was also down 33% to £4bn in the second quarter.
Transactions are only counted for ONS statistics when the deal is legally completed, if it has a value of at least £1m and if it results in a change of the control of the target company.
The Apogee and Ziylo deals represent a busy year in 2018, marked by some large deals over the past 12 months. Henry sees this trend continuing.
He added: “Average deal sizes are on the up. We recorded an average of £6.1m for Q3 2018, which is almost double the number for Q3 2016. We must point out again the huge number of ‘megadeals’ (£50m+) over the last 12 months.
“A number of these have involved challenger banks, which makes sense, given their need for capital. Standouts are £149m for Atom in March, and £180m for Revolut in April.”
Keeping it local
Meanwhile, it’s not just foreign companies investing in British firms, there was also major activity which took place domestically.
In March, Tesco completed its £3.7bn acquisition of Wellingborough-based wholesale food operator Booker Group, creating the leading food group in the UK.
Elsewhere, Spectris Plc, the productivity-enhancing instrumentation and controls company, acquired Concept Life Sciences Ltd from Equistone Partners Europe and company management for £163m.
In fact, Pitchbook’s research states that the latest estimates for mergers and acquisitions of foreign companies involving UK companies during the first quarter of 2018 saw a notable decline in value, falling to £1.7bn – the lowest value recorded since the third quarter of 2013.
Deal or no deal
Regarding what impact Brexit has had, The UK’s deal market has seen uncertainty due to Brexit, as Smith & Williamson senior manager of corporate finance Ronan Brophy details: “Despite ongoing uncertainty around Brexit, investment has continued in the lower-mid market for the most part.
“We have seen some impact on businesses servicing major investment projects such as government infrastructure or inbound investment from international blue-chip corporates, including some investment decisions delayed until next year.
“In the event of an orderly Brexit, an uplift in M&A activity can be expected – as those deals postponed until more visibility of the final departure terms are available come to market.
“A disorderly Brexit is likely to focus management attention on operational matters, particularly where buyer or seller has significant international trade links. M&A is unlikely to feature highly on the list of short term priorities for those businesses.”
Dan Sheahan, head of corporate finance for the North of England at Investec, added: “Private equity continues to pay good prices for good businesses: there’s lots of capital looking for investment opportunities and investors are feeling pressure to deploy that capital.
“So, despite Brexit, it’s a good time to be selling a strong business, and as we get further clarity on Brexit process and outcomes, we could well see a flurry of deals.”
In regard to what sectors are gaining traction and proving attractive to dealmakers, with an ever-growing increase in new technologies such as proptech and bitcoin, Whorwood believes that fintech will be the one to watch in 2019.
“The fintech sector has been particularly active”, says Whorwood. “This has been the case over the last few years. The buzz around the sector and the number of fundraisings continues to grow, reaching a peak of 45 deals in Q3 2018, and £309m invested.
“Brexit uncertainty doesn’t seem to have scared off the investors. Although dealing with much lower volumes, the PropTech sector has also seen steady growth in deal numbers.
“We think it’s one to watch.”