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UK Trendspotter: Domestic dealmaking heats up to ward off post-Brexit vulnerability

  • Share of domestic activity at highest level since 2009
  • Next-Gen disruptors unsettle various sectors
  • Deeper deal scrutiny impacts wider dealflow

Brexit’s nearing introduction and the growing realisation of its pending impact have coincided with a spurt of UK domestic deals taking place this year, suggesting that politics is playing a greater part than usual in directing the flow of deals coming into the island.

Half of the 10 largest deals conducted throughout the year’s first half featured UK companies spending domestically in an effort to help fend off fiercer, dominant global competition. J Sainsbury’s [LON:SBRY] spent GBP 7.3bn doing just that when buying UK rival, Walmart-owned ASDA.

The GBP 109.7bn worth of activity targeting UK companies is already fast-approaching the GBP 146.2bn that changed hands throughout the entire 2017 and has already surpassed 2014’s GBP 96.7bn total. Of this total, the GBP 47.2bn of domestic deals make up 43%; its highest ratio since 2009 (68.1%). Indeed, a widespread concern among corporates across all sectors is how to best bulk up and protect themselves and shareholders from losing touch with larger global players.

“Protectionism is going to be at the forefront of corporates’ minds, asking themselves ‘is this deal achievable?’”, Tom Whelan, global head of private equity at Hogan Lovells said. “From a buy-side perspective, you may think twice around whether or not you want to commit the time and effort. On the sell-side, if you have two bidders, and prices are not that far apart, you may favour a domestic bidder where there is less uncertainty over delivery,” he added.

Media was the strongest performing sector and has scope to continue spawning further deals in this shifting marketplace. The GBP 37bn worth of media dealmaking in 1H18 dwarfed last year’s GBP 808m equivalent figure as companies recognise the need to adapt to changing consumer habits. Comcast's [NASDAQ:CMCSA] GBP 29.2bn competing bid to buy UK broadcaster Sky [LSE:SKY] demonstrates this trend and is the largest foreign investment into the UK since 2015. The urgency to see off competition from the likes of Amazon [NYSE:AMZN] and Netflix [NASDAQ:NFLX] penetrating the broadcasting space is expected to lead to further media movement among established players and a new breed of service providers, keeping media-focussed bankers busy for the foreseeable future.

The UK, in fact, offers some of the limited number of feasible targets that could be of interest to domestic or foreign players. The likes of ITV [LON:ITV], long mooted as a possible target, may again rise to the forefront of buyers’ minds in the not-too-distant future, as recently reported by this news service.

Technology, media and telecoms each saw extraordinary leaps in the amount spent on acquisitions. Collectively, the three sectors were responsible for GBP 44.7bn worth of M&A during the opening six months of the year, a significant 9.1x bounce on last year’s equivalent figures.

The UK’s financial services sector can draw similar parallels to the TMT sector as an onslaught of tech-driven challenger banks and fintech providers look to usurp the old guard. The emergence of this new breed of retail banking service has placed the ball into the court of those being challenged. A similar case can be made for those focussed on SME lending after the likes of Barclays [LON:BARC], HSBC[LON:HSBCA], Lloyds [LON:LLOY], RBS [LON:RBS] and Santander [BME:SAN] have slowly retreated from the space.

Clydesdale and Yorkshire Bank Group’s [LON:CYBG] proposed GBP 1.7bn all-share offer for rival Virgin Money [LON:VM] was among the GBP 13.1bn of M&A to have been conducted in the UK financial services space this year. And with more tie-ups expected, investors have already ploughed into the likes of mid-tier peers Metro Bank [LON:MTRO], OneSavings Bank [LON:OSB] and Secure Trust Bank[LON:STB] in anticipation of further activity across the sector.

The pharma sector is another that may not prove immune to such potential disruptors. Here, Amazon’s name again crops up after heavily investing into the US pharmaceutical distribution arena in the last year. This has raised questions as to whether Europe’s stricter laws regarding drug distribution could be similarly penetrated by such disruptors. This year, GSK [LON:GSK] exercised its option to buy the 36.5% of its consumer healthcare JV with Novartis [SWX:NOVN] for GBP 9.2bn in what could be seen as a response to such potential threat.

Today's gift and tomorrow's future 

Companies in general are now needing to adapt their mindset, which has often overestimated what may happen in the short term while underestimating the longer-term vision, Mark McGregor head of strategy at Signavio, said.

An added ingredient of rising political populism and subsequent increase in the levels of deal screening conducted under the guise of national security has impacted how and where deals have taken place throughout the year.

“Tech-related deals are among those that will receive the greatest level of screening and could see larger degrees of disruption. Such potential UK sellers might automatically discount some interested buyers from the offset of a process if there is a clear likelihood of it being investigated causing possible delay” said Marc Israel, partner at White & Case. “Such government intervention could create an uneven playing field.”

“The UK’s Competition & Markets Authority (CMA) is laying heavier emphasis on scrutinising deals, now often asking for more detailed information and - in some cases - a wider variety of internal documents. There have been quite a number of Phase 2 referrals recently. So, where parties have overlapping activities, transactions are taking longer to finalise”, Israel said.

Add to this newly implemented rules allowing the government to intervene in deals involving computer hardware, military or dual-use goods and quantum technology, and the process of undertaking particular cross border deals will inevitably become more difficult where the target is involved in any of those sectors.

The UK’s position, however, is determined once Brexit becomes a reality; the imperative to buy and build domestically may only address immediate concerns over losing marketshare on a wider, international scale. Yet McGregor casts doubt as to whether the largest of UK monopolies are anywhere near large enough to compete on a global stage, potentially opening the UK up as a feeding farm for far larger and better positioned global giants.

Analytics by Jonathan Klonowski

Jonathan Klonowski Research Editor EMEA Mergermarket
Jonathan Klonowski Research Editor EMEA Mergermarket

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