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28 Oct 2019

Does the UK still have deal appeal?

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How attractive is the UK now for the world’s deal-makers?

This time last year, Stephenson Harwood published its Deal Appeal: Why the UK remains enticing on a global stage report. We surveyed domestic and international investors to understand their attitudes towards the UK as a deal-making destination.

The results were highly encouraging and supported our own experience of there being a strong pipeline of deals, despite some of the negative headlines around investor sentiment towards the UK in light of uncertainty around Brexit. Investors were looking beyond short-term volatility, with the UK’s strong rule of law and investor protections important long-term attractions.

Some of the key findings were:

  • 88% of respondents felt the UK was at least as attractive an investment destination as before the UK referendum, with 32% saying it was more attractive

  • 60% expected to complete at least one deal over the coming two years and just 1% of those not planning to do a deal said Brexit uncertainty was the reason

  • Quality of technology and IP in the UK, macro-economic stability and a skilled labour force emerged as the top-three attractions of investing in the UK

  • Public markets listings were the top deal type planned

  • Weak sterling was mentioned as a factor in deal-making rationale by around half of respondents, but cited by only 1% as the most important reason for looking to the UK for transactions

It’s clear that much has changed over the past year. A new prime minister, with a hard line on Brexit, is leading the government’s negotiations with the European Union but the huge uncertainty remains, not least with the latest "flextension" of the Brexit deadline to 31 January 2020.

Sterling remains highly volatile, with its trading performance against the Dollar and the Euro closely linked to potential Brexit outcomes, even despite some cooling of key continental European economies..

The UK’s deal-making activity in 2019

So to what extent has investor sentiment changed over the past year and how is this affecting deal-making activity?

Our own experience suggests there is still strong appetite for deals involving UK-based targets – our clients remain positive about the long-term prospects for the UK. Indeed, there is strong external evidence to support what we see in our own work.

One of the strongest indicators of the UK’s attractiveness comes from EY’s Global Capital Confidence Barometer, based on the views of 2,900 executives1, which ranks the UK as the number-one investment destination globally – the first time the nation has held this spot in the survey’s ten-year history.

Global M&A activity for H1 2019 was down by both value and volume when compared with the same period in 2018, according to Bureau van Dijk figures2, yet the UK held its own. It remained the third most active globally as a target for M&A deals (behind the much larger US and Chinese economies) by both value and volume – well ahead of markets such as France, Japan and Germany.

The report notes that “the UK once again dominates the top countries list” in Western Europe. And the UK M&A scene looks set to remain busy – a report by Intralinkslooking out to H2 2019 suggests that the UK, along with Spain and Germany will see “increased levels of M&A announcements over the next six months compared with the same period in 2018”.

A large element of this activity stems from private equity, where domestic and international firms with significant quantities of dry powder to deploy are finding opportunity in public-to-private transactions in particular.

Transactions announced in 2019 in the UK included: theme park operator Merlin Entertainments, taken private by a group of investors including Blackstone and the Canadian Pension Plan Investment Board (CPPIB); satellite communications group Inmarsat, acquired by Warburg Pincus, Apax Partners and the Ontario Tearchers’ Pension Plan Board and CPPIB; pub operator EI Group, acquired by TDR Capital-backed Stonegate Pub Company; and Advent International’s public offer for defence and aerospace company Cobham plc.

Public M&A
The first half of 2019 saw an increase in activity in public M&A, including the number of bids and the number of hostile takeovers. According to the Thomson Reuters Practical Law Public M&A Trends review, H1 2019 saw 9 private equity and other fund backed bids in the Main Market, and 4 in AIM market, versus 2 in Main Market and 3 in the AIM market for the same period in 2018.4

At Stephenson Harwood, we have worked on 4 public takeover deals since the start of the year, including: advising UK private equity firm Bowmark Capital on its £114 million takeover of AIM-listed Tax Systems PLC; advising easyHotel on its £139 million takeover by a consortium consisting of Ivanhoé Cambridge and ICAMAP Investments; advising gold miner, Patagonia Gold PLC, on its reverse takeover of Hunt Mining Corp, the Canadian listed mineral company; advising Miton Group plc ("Miton") on its recommended all-share merger with Premier Asset Management Group PLC, to be effected by means of a court-sanctioned scheme of arrangement between Miton and its shareholders under Part 26 of the Companies Act 2006.

Technology and innovation as a driver

In our report last year, we highlighted the UK’s strength in technology and innovation. A recent report by Merrill Corporation, Deal Drivers EMEA H1 20195, found that the UK and Ireland’s technology, media and telecommunications sector was the most active in the region.

GlobalData also recently released figuresshowing the UK as the top inbound M&A destination for technology companies globally by value, with disclosed values topping US$56 billion in 2018, far outstripping the US.

In addition, a report by White Star Capitalsuggests that 2019 is set to be a record year for UK venture capital investment. In H1, UK companies raised a total US$4.9 billion – double the amount raised in the first half of 2018 and representing 63% of VC funding in Europe for the period. Top sub-sectors, the report says, were Fintech and AI, attesting to the quality of UK-based technology and innovation.

Quiet Capital Markets
While our report suggested that public listings were set to be a major part of UK deal-making activity, overall the market has been subdued with London registering just £500m-worth of IPOs in the first quarter of 2019, according to IPO Watch Europe by PwC8.

However, the UK kept pace with trends across Europe, with activity picking up in the second quarter, when 16 IPOs valued at £4 billion were completed in London, the highest Q2 value total since 2014. At Stephenson Harwood we were busy working on four of these IPOs, including: the £200 million premium listing of US Solar Fund Plc; the £96 million listing of Distribution Finance Capital Holdings PLC; the standard listing of Starcrest Education; and the £120 million IPO of Argentex Group PLC (advising Numis).

However the third quarter has been much more challenging for the equity capital markets, with The Times reporting that “London had its lowest number of initial public offerings in a decade in the last quarter as listings were abandoned amid political uncertainty and global trade tensions.9

Grounds for optimism
There is a sense that if the Brexit uncertainty can eventually be resolved - with or without a deal - the basic fundamentals of the UK as a deal making destination remain strong. In addition, over the short term (and in a shift from our findings last year), weak sterling is undoubtedly boosting appetite for the UK. It is lowering asset prices for overseas buyers, many of which tell us they are looking to acquire technology and real estate in particular.

The sheer volume of activity in the commercial real estate sector, funded primarily by Asian investors, shows that the UK retains its attractiveness on the global stage: “Real estate research firm Datscha calculated that £47 billion of commercial property in the City, West End, Midtown and Canary Wharf was sold between January 2017 and June 2019. Deals this year have included Citigroup’s near £1 billion purchase of its London HQ at 25 Canada Square.”10

Looking ahead, while we would expect overall deal activity to moderate as the Brexit deadline approaches and the uncertainty remains - and for a period of time thereafter as companies take time to adjust to the new position - we remain confident that, as we highlighted in last year’s report and as the evidence we’ve outlined here demonstrates, the UK retains powerful attractions for deal-makers over the longer term.

To find out more from our survey results, download the full Deal Appeal report now.

https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/ey-capital-confidence-barometer/ccb20/pdf/ey-global-ccb-edition-20.pdf
2 https://www.bvdinfo.com/BvD/media/reports/Global-M-A-Review-H1-2019.pdf
3 https://www.intralinks.com/deal-flow-predictor
4 https://uk.practicallaw.thomsonreuters.com/w-021-1689?transitionType=Default&contextData=(sc.Default)&firstPage=true
5 https://www.mergermarket.com/info/deal-drivers-emea-2019-half-year-edition
6 Globaldata.com/us-tops-cross-border-ma-activity-in-technology-sector-in-2018-finds-globaldata/
7 https://www.altfi.com/article/5611_fintech-boom-and-oxbridge-helps-uk-steer-to-record-year-of-venture-capital-
8 https://www.pwc.co.uk/audit-assurance/assets/pdf/ipo-watch-europe-q2-2019.pdf
9 Clarence-Smith, L. (2019, Oct 7) "Listings fall to lowest in a decade" Times.co.uk Business.
10 https://www.standard.co.uk/business/commercial-property-investors-have-spent-50bn-in-london-since-2017-a4255776.html
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Duncan Stiles

Duncan Stiles
Partner

T:  +44 20 7809 2163 M:  +44 7768 122 740 Email Duncan | Vcard Office:  London

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