M&A in Europe: The Brexit effect on manufacturing
March 31, 2017
2016 was a tough year all round for M&A in the EU. M&A activity was muted leading up to the EU referendum, and even more uncertain after it, not least because the result was not what had been expected. So what now, some nine months later, and after Article 50 has now been triggered? Have the markets regained their momentum, or are deal volumes still subdued?
Manufacturing: Making progress
Manufacturing has been one of the post-referendum winners. The UK Manufacturing Purchasing Managers’ Index is at its highest level in over two years, and the sector has been significantly outperforming the rest of the FTSE 250, driven by the fall in sterling and its relatively high proportion of overseas earnings. Smiths Group, Weir Group, Spirax Sarco and Renishaw all saw their share prices go up significantly after June 2016.
Likewise, overseas buyers have been picking off attractive targets in industries like chemicals and industrials in both the UK and Europe, with Chinese buyers especially active. Post-referendum deals have included the sale of Marina Imports Limited to Heibei Sitong New Metal Material Co, the acquisition of Thompson Aero Seating Ltd by Aviation Industry Corporation of China, and the purchase of Fine Industries Limited by Lianhe Chemical Technology Co. There have also been deals involving US buyers - three G4S businesses were acquired by First Reserve and one by Altra Holdings Inc in the second half of 2016, and MacDonald Humfrey was bought by L-3 communications Holdings Inc in November.
While there are uncertainties about the specific impact of Brexit that are not going to be resolved any time soon, investment confidence in the UK has proved to be surprisingly resilient. Domestic demand is holding up well, and manufacturers are bringing on extra capacity – and extra staff - to deal with it. Again, sterling is a big factor here and export-led sectors like automotive will benefit significantly from the pound at these levels - though it’s a sector where Brexit is also going to leads to considerable challenges, particularly in relation to the high proportion of parts sourced from the EU. Construction, by contrast, is still struggling with higher costs.
The impact on M&A is likely to be similar to other sectors: a cheaper pound is making UK companies attractive to overseas buyers, especially from China. That said, the regulatory burden is increasing, and that could subdue some Chinese interest, as could concerns from Beijing about how much capital is flowing out of the country.
If you would like to discuss any of the issues raised in this blog please share your thoughts below or schedule a meeting.