In January, Stout established its newest office in London, welcoming a number of investment banking veterans to the firm. We recently spoke with Director Edward Matthews who offered his thoughts on merger and acquisition (M&A) activity in the UK, growth opportunities, domestic and international transactions, Brexit, and implications of the coronavirus.
Can you briefly discuss trends you have observed in the UK M&A market in the past few years?
A combination of record levels of uncalled private equity capital, cheap debt, and healthy balance sheets has helped sustain UK M&A activity over the past few years.
The total value of deals per year is increasing as the value and size of individual deals increases. This is despite the number of transactions declining, mainly due to the Brexit headwinds that have impacted confidence and activity over the last three years.
We expect the increasing clarity and certainty around trade negotiations with the European Union – as the UK prepares to exit the bloc in December 2020 – will help to increase activity in the M&A markets.
Elsewhere, corporates are increasingly focusing on what is at the core of their businesses. These areas should demand management focus and will drive returns on capital. This trend will generate transaction opportunities as non-core investments are reviewed and potentially disposed of.
What industries do you see the most growth opportunity in the UK? Are there any that are particularly interesting to you?
In the UK, the Technology, Media, and Technology, Financial Services, Business Services, and Healthcare sectors are likely to see positive growth. These are all sectors where Stout is active, and we are actively advising on a number of technology-enabled transactions, led by our colleague, Stout Managing Director Santiago Izaguirre.
In addition, those industries connected to infrastructure spending – including Transportation and Logistics, Industrials and Chemicals, and Energy and Utilities – are likely to see a boost in activity given the increased infrastructure spending unveiled by the Chancellor in the Budget on March 11.
We remain active in the Transportation and Logistics space, led by Stout Managing Director Jon Howells, and are increasingly influential in Industrials as we build on the expertise of our Stout Investment Banking colleagues in the US.
Which industries have been drawing the most capital from corporate and PE investors? What are the reasons?
The UK’s fast-growing technology sector is attracting significant investment both from domestic and foreign investors, particularly from the US and Asia. The country has a long-standing reputation for innovation, and the UK is one of the best places to start and grow a digital business. This is supported by access to a wide talent pool who ultimately help turn great ideas into products and services that consumers demand.
The UK has a well-regarded financial services sector which has recently seen significant activity. Banking deals have been strong led by the London Stock Exchange’s (LSE) £21 million takeover of data firm Refinitiv. The insurance brokerage sector has also attracted investment with the recent announcement of Aon’s acquisition of Willis Towers Watson for $30 billion being a stand-out transaction. Financial services M&A activity is being driven by structural shifts such as the high costs of regulation, the onset of open banking, and financial technology investment opportunities.
Interest in UK infrastructure investments is growing thanks to the robust attributes of the asset class and the steady flow of new opportunities as the government explores alternatives to the traditional public provision of assets and services. Financial sponsors are increasingly raising new or larger funds to invest in this space attracted by the stable cash flows, returns, and operational simplicity compared with traditional growth-orientated private equity investments.
Your team has discussed the positive elements of Brexit as it relates to M&A activity in the UK. Have you witnessed or do you foresee any potential drawbacks?
Investors will remain cautious, but deal activity is likely to remain robust with perhaps a focus more on the mid-/small-sized market. M&A remains a key strategy for growth. Corporates and investors will continue to focus on reviewing, rationalizing, and refreshing their portfolios. The long-term disruptive trends and uncertainty will not vanish overnight, but the cross-sector drivers for UK M&A remain strong.
You have worked on many international deals. Now that Brexit is official, what do you expect in terms of deal flow regarding international investors coming to the UK and UK investors seeking opportunities abroad?
The UK has always been an attractive destination for investors underpinned by fundamental factors such as a track record of economic growth, policy stability, and protection from the rule of law. There is currently a relatively high level of volatility due to regulatory change and the impact of the coronavirus. However, the UK remains a safe haven for investors, and change/volatility also creates opportunities, potentially at attractive valuations.
UK investors will follow the developments in trade relations with the EU and the US with interest. Given the UK government’s principal focus on striking a US trade deal, we expect that there will be increasing investment from the UK into the US and vice versa.
On a related note, what insights do you have or challenges have you experienced when working on international transactions?
The M&A market is increasingly global, meaning that firms need to become more competent and experienced in cross-border acquisitions. The economic and political stability of countries will always be at the forefront of executives’ minds, but comprehensive planning, using the expertise of external/local advisers and conducting thorough due diligence, will help clients to achieve their objectives.
Are there any transactions, domestic or foreign, that stand out to you as particularly unique in your career?
Recently, we advised a European government on acquiring an asset of national strategic importance. Nationalization of companies is a tool that is increasingly rare, so it was interesting to understand the drivers behind this and note the differing approach and priorities between institutions and governments.
Another UK company, which we sold in the maritime services space, had a higher level of complexity than perhaps is normal. The company worked across multiple sectors (e.g., shipping, oil and gas, and telecoms), part-owned international joint ventures (e.g., China), and executed multiple international contracts for global consortiums of corporates and investors. However, once we were able to break these characteristics down for investors to understand and mitigate their risks, the company proved to be an attractive investment for a US buyer.
Do you see any potential impact of the coronavirus on transaction volume?
Yes, potentially in two ways.
Those firms that were preparing to sell investments during the first half 2020 may consider delaying their processes to the second half to see how current trading is impacted in the next quarter. However, there is likely to be a trigger point when numerous postponed transactions come to market at the same time as the impact of the coronavirus dissipates. These opportunities are likely to be eagerly supported by financial sponsors, which will remain under pressure to deploy record amounts of capital by certain dates.
In addition, the global demand and supply chain slowdown may cause corporate distress leading to restructurings, potentially forced sales, and capital raisings.
What do US companies looking to do business in the UK need to know from both a cultural and geopolitical perspective?
The UK is an attractive destination for US companies looking to expand into foreign markets. The two countries enjoy a “special relationship” with close co-operation linked to a common language, democratic ideals and an intertwined history.
Despite the many cultural similarities, US companies entering the UK market face disparate laws, a different tax and regulatory environment and the potential implications of Brexit. If you are looking to invest in the UK, it is important to work with a local partner, like Stout, who fully understands the local financial, legal, and tax requirements.