Three years on from the UK’s decision to leave the EU, relentless political uncertainty surrounding Brexit and the future direction of the UK has shackled M&A throughout H1. M&A targeting the UK reached GBP 49.5bn, down 23.6% versus the second half of 2018 and 56.8% on 1H18, according to Mergermarket's 1H19 Trend Summary. Similarly, to the months leading up to the referendum, corporates are delaying M&A due to heightened uncertainty over the UK’s future trade relationships.

Brexit has left the UK in political limbo, with one leg in and one out of the EU. Outgoing prime minister, Theresa May, failed multiple times to pass her withdrawal agreement through the House of Commons. As it stands, either former London Mayor and Vote Leave head, Boris Johnson, or Foreign Secretary Jeremy Hunt, will take over where May left off, steadfast in their belief the UK will leave the EU on 31 October, even if this means no agreement.

All this leaves businesses mired in uncertainty – unable to fully factor in how operations will be affected, or when. “Sentiment surrounding Brexit remains the largest influence behind M&A decision-making for investors,” Head of Advisory at Investec, Jonathan Arrowsmith said. “It has now become even more difficult to predict in which direction Brexit will take the UK, and so paralysis has continued to prevent deals from taking place.”

The UK failed to secure any deals worth more than GBP 5bn during H1, compared to three in 1H18, further demonstrating the lack of confidence corporates have in parting with large sums of cash in such uncertain times. While this trend is not isolated to the UK, the country has suffered more than Europe’s other heavyweights.

Political paralysis 

The growing tendency for regulators to quash large intra-European M&A has further discouraged corporates to explore big-ticket deals, and the market is unlikely to experience a sudden fillip during the remainder of the year.

The UK’s Competition & Markets Authority blocked Sainsbury's [LON:SBRY] proposed merger with Asda, having concluded it would lead to an increase in prices both online and in stores, as well as at petrol stations across the UK.

“Greater scrutiny of deals – both from shareholders and regulators – will lead companies to be more wary of deals which have challenging antitrust or national security aspects,” Don McGown, corporate partner at Hogan Lovells, said.

The fall in activity has been most keenly felt in terms of foreign investment – which reached a total GBP 34.6bn this half – which is down by more than half compared to the equivalent period of 2018 (GBP 74.4bn). Brexit has so far erected barriers around the UK, which has consequently become increasingly overlooked as a destination in which to invest. Yet the UK remains home to a significant proportion of successfully established businesses and fast-growing start-ups.

“We still see a lot of interest in UK assets, particularly businesses that are international in nature,” McGown said.

How sterling reacts to an eventual Brexit outcome may further obstruct activity. At Mergermarket’s Corporate Development Summit, Matthew Ellis, founding member at Robey Warshaw, detailed the increased difficulty in undertaking large, strategic deals in the UK, caused by how wildly the currency could fluctuate in varying Brexit scenarios. Ellis noted that takeovers such as Shire and Inmarsat were conducted in US dollars in order to provide more certainty on the price being paid.

Those same barriers that have hindered inbound M&A have equally triggered a significant drop in outbound deal-making. Instead of looking to acquire beyond its shores, UK corporates have instead chosen to either spend domestically, or, as is becoming increasingly common, not to spend at all. This has left UK corporates paralysed, with just GBP 7.7bn worth of outbound deals recorded in Q2, the lowest quarterly value since the referendum.

Private chancer

Private equity, which is less reluctant than corporate bidders to curtail spending, has been a rare bright spot in an otherwise subdued environment. The levels of fundraising and dry powder, together with companies looking to simplify their business structures through divestments and carve-outs, has left private equity firms with ample opportunity to spend.

Specifically, sponsors have taken a shine to conducting take-private buyouts and have undertaken five such takeovers of listed firms worth a combined GBP 11.7bn so far this year. This represents the highest YTD value and volume since the financial crisis. The stock market could continue to be a hunting ground for private equity fodder as politics has dampened London’s equity market performance.

“Public market deals have been impacted and slowed more significantly than private deals, as the market has reacted more sensitively to Brexit sentiment,” Arrowsmith said.

A strong pipeline of UK businesses expected to either come to market or that are already deep in takeover talks, could deliver a more promising H2, with private equity the most likely source of buyer. The likes of judicial services group, Marston Holdings, WPP’s [LON:WPP] Kantar business and Dr Martens are all amid talks to be sold, with private equity players leading the field of suitors in each.    

Private equity activity looks to set to remain healthy, with various upcoming deals expected to attract sponsor interest. Baird has reportedly been hired to advise on the sale of specialist recruitment group NES Global Talent, according to Mergermarket intelligence, while Rothschild is running a sales process for property facilities manager Bellrock. Elsewhere, the likes of Barchester Healthcare, The Priory Group and Quotient Sciences not only all serve various medical and health spheres but are also expected to be sold to private equity firms hungry for greater exposure in this cash-generative sector, according to various Mergermarket reports.

This pattern of deal-making involving UK companies has festered since the Brexit vote was put to the general public. Should the UK ever leave the EU, it is difficult to gauge whether the amount of M&A conducted there will return to pre-2016 levels, or whether such weakening performances will become an irreversible trend.

Paul Francis-Grey Editor Acuris