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There’s no hiding this has been a tough year, with 2019 deal values down 35.4% YoY, according to Mergermarket data.
Festive cheer is in short supply given Brexit uncertainty, election risks and the cold wind of macroeconomic worries ranging from trade wars to the turn of the cycle.
Yet political clarity – or the perception of clarity – after Thursday’s poll may boost inbound volumes in 1H20, and low confidence in public markets has buoyed take privates through 2H19 - this will continue into next year. Sponsor cash is king.
Though deal counts are down across the board, the consumer and technology sectors saw an increased deal value in 2019, climbing 190% and 62%, respectively.
A deal fusing both sectors will carry over into 2020 – the tussle for online food ordering platform Just Eat. Yesterday (9 December) morning, Prosus [AMS:PRX] increased its over, valuing Just Eat at more than GBP 5bn – a deal value that had thus far eluded 2019. The ball is firmly in fellow suitor Takeaway.com’s [AMS:TKWY] court.
Healthcare and fintech are also viewed as increasingly attractive assets against the backdrop of tech’s sustained run.
Brexit has remained a limiting factor in 2H19, but fatigue over the political psychodrama has seen many dealmakers push past it.
Deal values in 2H19 climbed 11.24% higher than in the first half. "The volume of deals suggests that people are willing to take on some political risk,” according to Ian Hart, Chairman of UBS UK Investment Banking.
Hong Kong Stock Exchange’s [HKG:0388] ultimately unsuccessful bid to acquire London Stock Exchange [LON:LSE] was “a vote of confidence”, said Simon Branigan, corporate partner and co-head of the Bank sector team at Linklaters. “Despite the broader geo-political landscape, London is still a global economic powerhouse and is very much open for business,” he added.
Similarly, Advent’s GBP 4.146bn takeover offer for defence contractor Cobham [LON:COB] exemplified the growing appetite of US companies to buy British.
Half of the bidders in the top ten deals from 2H19, including for Cobham and RPC Group, were US-based.
“I would expect deal volumes to increase in the New Year, particularly where US players are involved, if we see some market and political stability,” Hart said.
Political strife is not wholly negative for UK M&A, however, as exemplified by the ongoing tension between the US and China.
“The drop in the value of sterling has made UK targets increasingly attractive, in particular to Chinese and US bidders. As there are currently less Chinese investments into the US due to their strict foreign direct investment rules, the UK has become one of the next best homes for that capital,” Matt Bonass, Partner and Head of Bird & Bird’s London Corporate Group told this news service.
There’s always a catch. “The US and China’s trade war could increase investment in the UK, but it is more likely that the UK could be hit by the shrapnel of manufacturing tariffs,” Branigan warned, also arguing Chinese consumers may feel the pinch.
This could have an impact on UK’s consumer sector: raising fixed costs and devaluing companies. In turn, however, it could make targets more susceptible to takeover offers and increase the number of deals.
Plant-based food ingredients supplier Vegetarian Express is expected to be up for grabs from private equity baker Bridges Fund Management in the next twelve months, but only once macroeconomic conditions improve, this news service reported last week.
Many UK businesses throw greater emphasis on domestic business policy than the grander themes buffeting global chancelleries.
As in 1H, the Competition and Markets Authority (CMA) is evermore a presence in dealmakers’ minds, as Brexit would pull the UK out of the EU’s merger control regime.
“There has been a recent change in the stance taken by the CMA on merger control issues […] anti-trust issues are likely to be a big factor for investors to consider next year when doing deals.” Branigan said.
Cease and Delist
Despite reduced visibility and skittish sentiment, private market valuations have remained high. This has boosted take-private activity, with 11 deals worth GBP 19.4bn announced in 2019 versus nine deals recorded in 2018 at a disclosed value of GBP 8.6bn.
“In addition to the weakness of sterling, private equity firms have cash to spend and are able to acquire public assets that haven’t necessarily delivered on to the market,” Jonathan Arrowsmith, Head of Advisory for Investec Corporate & Investment Banking said.
The three largest UK take-private deals in 2019 were: Greene King (acquired by Hong Kong-based CK Asset Holdings), Inmarsat (acquired by an Apax and Warburg Pincus-led consortium) and Merlin Entertainments (acquired by KIRKBI and Blackstone Core Equity-led consortium). The total value of the three deals came to USD 13.3bn.
With PE buyout values a rare hotspot – climbing 43% over 2019 – it would seem sponsors are taking advantage of UK political instability and the volatility of the public markets to seize on under-performing London-listed corporates.
“The public to private trend looks to continue, as people are reminded of how to deliver P2Ps and therefore are more prepared to consider future opportunities,” Arrowsmith said.
That trend has not been working in reverse, with corporates showing scant appetite to join the ranks of the London listed stocks.
So far this year there have been 22 UK IPOs for a combined deal value of around EUR 3.42bn, compared with 63 listings for a combined EUR 8.42bn in the same period 2018 according to Dealogic. Acuris and Dealogic are both owned by ION Group.
ROXI Music’s IPO on London AIM until next year due to Brexit concerns, as reported. Businesses have "been wary of listing in 2019, because the public markets may give them a lower valuation,” Arrowsmith noted.
Regarding European IPOs as a whole, supply is also “partly constrained by limited private equity IPOs as PE firms are at a stage in the cycle where they currently don’t have that many assets to exit,” according to James Fleming, Citi’s global co-head of Equity Capital Markets.
Thank you, next
In terms of adding to their portfolios, private equity remains selective in what remains a seller’s market.
“Funds are looking for assets with high quality earnings and good visibility. These types of companies have predominantly been in pharma, fintech and other tech-supported industries and can sell as they transcend macro pressures.” Jamie Austin Corporate Finance Partner, Head of Private Equity at BDO said.
Companies outside these categories “are probably being held for longer as they will be hard to market now.” Austin added.
This would explain why the value of PE exits is down 48% on 2018, and are at the lowest level on Mergermarket record.
“PE exits have been down, and this reflects a lower confidence in the market in 2019 as firms are holding onto assets in the hope that 2020/21 might give them a better offer than 2019,” Arrowsmith said.
This trend, however, could end as the exit window closes for certain PE firms. There is a “big wave of exits to come next year, be that sales or IPOs”, Arrowsmith said.
The pipeline in “healthcare, business and financial services, TMT and in particular tech-underpinned services, will be a busy trend for M&A next year,” Arrowsmith said.
UK dental companies like Mydentist and Gensmile are on the radar, according to Mergermarket reporting. CBPE-backed ophthalmology chain SpaMedica could come to market in 2020.
Healthtech also remains in the spotlight for 2020, with Wellbeing Software set for a sale next year. First round bids are due before Christmas, this news service reported last month.
Fintech Firestarter - The Prodigy?
Financial services have long been unloved in deal terms in recent years, but tech is also casting its magic in the space.
“A lot of banks have been grappling with the penalties of historic misconduct, but this seems to have largely passed and M&A in this sector could be a major trend next year, particularly in the fintech space,” Branigan said.
Capital could come from Chinese investment looking for “IP-rich, technology companies. They are keen to embrace all kinds of technology, particularly fintech,” Bonass said.
Appetite for value-enhancing tech reaches into all sectors and record dry powder should see private equity activity remain robust in 2020.
All eyes are on Thursday’s election. The polls point to a Conservative majority and, therefore, Brexit in January. Yet the polls have been wrong before.
If the core scenario holds, Brexit via Prime Minister Boris Johnson’s negotiated withdrawal agreement would start the clock ticking on a likely tense set of talks on the future relationship between the UK and the EU. The hard deadline is 31 December 2020.
Any honeymoon Johnson enjoys for “getting Brexit done” could quickly fade when the enormity of what is yet to negotiate sinks in.
A no deal deadline at the end of next year could, once again, mean we’re weighing the impact of Brexit uncertainty on deal flows in 12 months’ time.
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