UK deals market hits 10-year low
MERGER and acquisition (M&A) activity in the UK slowed dramatically in the first quarter of the year, with the number of announced domestic deals dropping to their lowest level in more than a decade, according to new analysis by business and financial adviser Grant Thornton.
There were just £7.01bn in announced UK domestic deals in Q1, a drop of more than 40% on the same period in 2007 (£12.53bn) and the lowest quarterly value in more than four years.
It was also the first quarter that domestic deal numbers fell below 400 for more than a decade, with just 377 M&A deals announced in this period.
John Nutton, corporate finance partner at the Leeds office of Grant Thornton said: “There has been an undoubted rush to complete deals during the last couple of months in order to take advantage of the old capital gains tax regime. The underlying trend however remains influenced by the prevailing economic uncertainty – deals are taking longer to finance and complete due to funders becoming more and more risk-averse.
“That said, there are a number of interesting opportunities in the market as vendors review their activities and seek to concentate on those which are truly core. It will be increasingly difficult, but not impossible, to raise finance for all but the most marginal of transactions, providing vendors are prepared to be realistic on price.”
Despite the drop, several sectors have seen increased activity as consolidation plays are set in motion, with cash-rich trade buyers snapping up undervalued targets.
Sectors including food and beverage retailing, healthcare and professional services have all seen strong activity in Q1, while the banking sector, which saw a high level of domestic activity in 2007, has yet to register this year.
Offshore Acquisitions
While the value of announced offshore acquisitions, £20.4bn, was a significant drop on Q1 2007 (£37.19bn), it remained slightly up on Q4 2007 (£19.71bn). In total 309 businesses in 59 countries were targeted by UK companies in the first quarter of 2008.
Although the US remains the number one target nation for UK firms on the international acquisition trail, there is now a marked move towards more adventurous targets this quarter, with Brazil (2nd), Turkey (6th), Kazakhstan (8th) and Russia (10th) all featuring in the top ten offshore acquisition destinations.
Mining and extraction companies featured highly on the list of the quarter's largest announced deals, including the quarter's largest offshore deal by a UK firm; Anglo American's acquisition of all the outstanding stock of an undisclosed new company holding assets of MMX Mineracao e Metalicos (MM), a Brazilian mineral mining company. Companies extracting fossil fuels made up a significant proportion of offshore deals, including targets in Kazakhstan, the Philippines and Australia.
David Brooks, head of M&A at Grant Thornton Corporate Finance, said: “The competitive economic growth rates of most of the top 20 nations that UK companies are targeting reveal one of the drivers of international acquisitions, another is the race to secure natural resources as prices continue to rise. This process of acquiring these offshore assets is fundamentally positive for the UK economy and should be more actively encouraged by central government and business support agencies.”
Foreign Acquisitions in the UK
The volume and value of foreign acquisitions have fluctuated substantially over the past four years, and the previous quarter was no exception, dropping from a record of £125.69bn in announced M&A deals in Q4 2007 to just £19.16bn in Q1 2008.
The number of deals remained more consistent, however, rising from 249 in both Q1 and Q4 2007 to 268 in Q1 2008. Overall, there was a more predictable list of buyers in the top ten acquirer nations in the UK, including India, Italy, Canada and the Netherlands.
China trumped the US as number one acquirer of UK companies with one deal, as a consortium led by Aluminum Corp of China acquired a 12% stake in Rio Tinto for £7.18bn, while US firm JC Flowers & Co launched an unsolicited tender offer to acquire the remaining 97.3% interest of insurer Friends Provident for £3.42bn, in a leveraged buyout.
Mr Brooks said it was often the high profile UK brands that attracted foreign buyers, a good example being Tata's recent finalised purchase of Jaguar and Rover.
“While many people would struggle to name a famous Chinese brand, for example, the UK has a wealth of brands built up over decades or even centuries. It is these brands that are of extremely high value to many businesspeople in emerging markets, and it is likely we will see more such companies targeted in the year to come, credit crunch or not,” Mr Brooks concluded.
