Watch Mergermarket's webinar on UK M&A and the impact of COVID-19 here.
UK M&A looks set to suffer a significant fall in activity in the coming months as firms react to the social distancing measures and the subsequent economic downturn caused by the coronavirus pandemic. Cross-border M&A, in particular, is likely to see a clear decline.
Prior to the outbreak of COVID-19 across Europe, M&A targeting the UK had a solid start to the year with several high-profile deals and continued interest from private equity firms. A total of GBP 48.4bn was recorded in the opening three months of 2020 across 286 deals, the strongest quarter since 2Q18 (GBP 69.7bn). This was largely as a result of the GBP 27.1bn deal between insurance giants Aon and Willis Towers Watson, which accounted for over half the overall value.
However, with the ongoing disruption to the standard M&A process, corporates will inevitably pause large spending in the coming months. Private equity exits dropped to just GBP 25.4bn in 2019, the lowest annual point since 2014, and look set to fall even further. Sponsors appear reluctant to pursue exits while uncertainty surrounding valuations persists, and just GBP 1.6bn has been announced so far this year.
Lucinda Guthrie, Executive Editor for Transactions at Acuris commented "a number of deals have been pulled, paused, or seen timelines extended. We have also seen parties going back in to recuit terms or add deal features to bridge valuation gaps."
Dealmakers will inevitably look for similarities between the impact of coronavirus on the economy and the 2008 financial crisis. A key difference between this crisis and 2008 is that 2008 had been fuelled by a huge volume of highly levered LBOs whereas this time around private equity firms are sitting on a significant amount of dry powder.
Lucinda added "there is a strong focus on portfolio companies and ensuring that they are in good shape for the hit they may be taking on earnings. In addition there are private equities who are keen to put money to work and are seeking out targets that may be suffering temporary pain or salvageable."
For now the majority of companies are looking inwardly and are focused on how COVID-19 will impact their balance sheets and indeed if they are eligible for government support. Even healthy companies are looking at whether they need to raise capital and we are seeing some companies already raising capital.
There was optimism amongst viewers of Mergermarket's live webinar on 7 April 2020. Live polls showed that 71% of respondents expect an uptick in M&A in the rest of 2020. Private equity could be a player in the recovery with deals that could include minority stakes and emergency funding. On the larger end, 75% of respondents expect more deals similar to KKR's £4.2bn acquisition of Viridor to come this year.
68% of respondents also expect Brexit to have a longer lasting impact on UK cross-border M&A than COVID-19, but cross-border activity may face additional regulatory scrutiny from the European Commission during this time.
Executive Editor, Transactions Division
Lucinda has been in business journalism for over ten years. Lucinda has experience reporting on markets in Europe, Latin America and Asia. Prior to this post, Lucinda was deputy editor for Dealreporter Asia based in the Hong Kong office and reported on corporate events in Japan and Australia. She also headed up Dealreporter's convertible bond coverage in Europe and Asia. Lucinda's team provides intelligence for the equity and fixed income markets that is tailored to hedge funds, proprietary trading desks, security lending, ECM syndicate desks and institutional fund managers.