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Brexit uncertainty bites as deal activity drops to lowest level in 10 years

12 November 2019

Katharine Byrne, Partner, BDO Corporate Finance discusses the current state of the M&A market in the UK and Ireland and where it appears to be heading.

With only 104 mid-market transactions completed in UK & Ireland in Q3 2019, this represented the lowest level of reported activity in 10 years. The drop in deal-making activity has been entirely across trade deals, as corporate buyers continue to take a very cautious approach to investment, with many buyers stalling M&A activity pending the outcome of Brexit.

Despite the decline in volume, total deal value remained steady compared to the preceding three quarters at USD 9.5bn, highlighting the growing trend towards larger deals. This is partially driven by buyers focusing on transformational M&A with an emphasis on the strategic acquisitions of technology and talent. Trade buyers are also focusing on companies that are less exposed to the current economic volatility and where synergies are more likely to be achieved.

Despite the decline in trade deals, PE buyers remain confident in the mid-market and continue to compete for M&A, with 22 transactions reported worth over USD 2.2 billion. Across UK & Ireland, there is a shift by PE towards considering smaller transactions and alternative deal structures in an effort to deploy cash and bridge price expectations.

 

KEY DEALS AND SECTORS

From a sector perspective, TMT remains the most active sector, accounting for 25% of all deal activity, although there was a notable drop from the 40 transactions in Q2 2019 to only 26 deals in Q3 2019. The quarter’s largest transaction in the UK was the acquisition of Jane’s Information Group by Montagu PE for USD 470m, while the largest deal in Ireland was the sale of Cignal Infrastructure to Spanish telecom group Cellnex for USD 232m.

Deal activity in Business Services in Q3 2019 also fell significantly, with only 12 transactions versus 23 in the preceding quarter while deal activity in both the Leisure and Pharma, Medical and Biotech sectors fell by 50%. In contrast to these falls, Industrial & Chemicals saw a reasonable level of activity with 21 transactions, while Consumer M&A doubled as buyers sought to consolidate market positions. It was notable that four of the top 20 transactions were Consumer deals - including Pilgrims Pride’s acquisition of Europe’s largest pork processor Tulip for USD 355m and the strategic sale of Tilda Limited to Spain’s Ebro Foods for USD 342m.

Despite the geopolitical and economic uncertainties, UK & Ireland continue to attract significant inbound activity as buyers from US, China and Europe look for opportunistic deals. The top 20 transactions represented over 60% of the total deal value and included 17 international buyers from eight different countries. Inbound M&A is likely to accelerate as international buyers benefit from weakened sterling and the strategic divestments of UK companies.

 

LOOKING AHEAD

Looking ahead, the BDO Heat Chart continues to highlight TMT as the most active sector with one in four deals expected to be tech-related. The search for disruptive and transformative tech companies is underpinning this, and with cash reserves continuing to grow, valuations are likely to remain strong.

A pick-up in deal activity is anticipated in both Business and Financial Services, although a lot will depend on the economic and regulatory impact of Brexit. Activity in Consumer and Industrials & Chemicals is also forecast to improve as consolidation continues to drive transactions. Overall the M&A outlook remains positive with increasing funds available, low interest rates and steady economic growth, despite the unpredictable macroeconomic climate.


Click here to download BDO Horizons 2019 - Issue 4