PwC Deals Index* – M&A Year to Q3 2016
29 November 2016
The result of the referendum had limited impact on UK deal activity in Q3 ’16, which remained in line with the previous two quarters (in volume terms) – but still below the record-breaking levels of 2014 and 2015.
The weakening pound has been facilitating inbound deals and helping to bridge valuation gaps, but the number of inbound transactions in Q3 ’16 was below the prior year, as uncertainty about the future status of the UK remains on buyers’ agendas.
On a rolling four quarters basis, our data suggests that Q3 ’16 deal value was 54% above prior year despite the declining number of completed deals (-20%). This diverging trend was mainly due to four mega-deals above £10bn in 2016 (Shell/BG Group; Softbank/ARM; the ‘reunification’ of Visa Inc and Visa Europe, and BT/EE) vs. no equivalent sized deals in the four quarters to Q3 ‘15. Excluding these four deals, aggregated deal value was c.20% down on prior year.
The UK M&A market seems to have settled after the hype of 2014 and 2015, but we have not seen any indication of longer-term post-Brexit distress following the initial panic evidenced in the immediate aftermath of the referendum. Buyers and sellers now seem accustomed to the new status of the UK, which we believe will represent “business as usual” - at least for the next few months.
Deals are happening and landmark inbound acquisitions, such as the Japanese acquisition of ARM, and the Chinese acquisition of Odeon Cinemas (more of which below), indicate that there is still appetite for UK assets - with the help of the weakening pound.
Guarded UK inbound activity
In the months following the EU referendum, inbound activity has been under intense scrutiny to see if the UK is still perceived as “open for business”.
Our data shows mixed results: the number of Q3 ’16 inbound deals completed was at its lowest level in the last two years (totalling 21 deals with a disclosed value), but deal value was high, primarily due to the aforementioned £24bn ARM acquisition by Softbank and a number of acquisitions from North American corporates in the £1bn-£5bn range.
Also, a number of high profile inbound deals were announced in Q3 ’16, such as the Odeon Cinemas acquisition by AMC (whose CEO, Adam Aron said “While we acknowledge that there are some uncertainties related to Brexit, we are encouraged that current currency rates are highly favourable to AMC”) and the VocaLink acquisition by MasterCard (whose CFO, Martina Hund-Mejan said “[Brexit] really had absolutely no impact on our negotiations”).
On a rolling four quarters basis, Q3 ’16 acquisitions from North American buyers were 35% below Q3 ’15 (in volume terms), whereas inbound deals from ASPAC and Europe remained broadly stable.
It should be noted that our data is based on completions and some of the Q3 ’16 completed deals were agreed pre-Referendum, therefore it does not capture the full impact of the referendum result (though we saw a (small) number of “Brexit walk-away clauses” for deals signed before the referendum and due to complete after it).
Soft UK outbound activity
There are mixed messages from the analysis of outbound deals. On a rolling four quarter basis, the number of deals was 15% down, with a broadly stable level of North American acquisitions and a 25% decline in volume of European deals. This trend is not unexpected given the softening in sterling that’s been in evidence since mid-2015 (and exacerbated by the outcome of the Referendum) and we don’t see any immediate change in this trend.
Within Europe, we have observed UK companies making more acquisitions in Southern countries (particularly in Italy, following significant private equity activity) and less in the “traditional” German, French and Dutch markets.
Private Equity picking up
As we predicted in our Q2’ 16 Deals Index, Private Equity (PE) activity has bounced back after a sluggish H1’16. The fundraising environment has been good for PE during FY15 and FY16 as investors look for yield. This has led to record levels of dry powder and some significant large fund closes, with many of these houses keen to deploy capital after being more cautious around the Referendum vote.
We have also seen increased direct interest in acquiring PE assets from sovereign wealth funds, pension funds and family offices, and a significant increase in activity from UK-based PE houses in Q3 ’16 vs. the first half of 2016 (both on domestic and outbound deals).
There have been some larger UK PE disposals completing in Q3 ‘16 at high multiples, and others currently live in Q4, which has provided confidence for other PE firms looking at exits, especially as the IPO exit route has proved harder for some PE assets than others in Q3 ‘16.
- Deals in the Financial Services space tend to be hit by uncertainty more than in other sectors. Deal volumes were down 30% (on a four quarter rolling basis) as concerns over Brexit were clearly in evidence.
- Perhaps more surprisingly, the number of deals in the Industrial Products & Services was 32% below levels in the prior four quarters to Q3 ‘15, primarily driven by the depressed Engineering and Construction segment.
- Technology Media and Telecom (TMT) also declined by 37% (in volume terms), following a record-breaking 2015 in the Technology space (particularly for corporates).
- Retail and Consumer remained broadly flat in volume terms, with an increasing Leisure-related deals.
- Healthcare and Pharma (+7% volume) has shown growth, maintaining the positive momentum achieved in H2 ’15 and H1 ’16, mainly driven by high private equity interest.
What lies ahead?
We think that the short-term Brexit shock has been absorbed by the M&A market, and that the level of activity seen in Q3 ’16 is likely to continue through to the end of the year and into early 2017. However, we see more uncertainty over the rest of 2017 (particularly on UK inbound deals), with “Article 50” (i.e. the UK’s formal decision to withdraw from the European Union) widely expected to be triggered in late Q1 ’17, and the resulting commencement of Brexit negotiations, as well as uncertainties over the outcomes of key elections in Continental Europe.
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*PwC Deals Index is a PwC analysis of UK deals involving a UK asset or acquirer, sourced from Thomson Reuters, Mergermarket and Prequin as at 30 September 2016, for completed deals with a disclosed value greater or equal to £25 million, and an equity stake greater than or equal to 25%.