Manufacturing update: The Brexit effect on M&A
July 28, 2017
In this quarterly blog we provide an update on UK manufacturing and discuss in-bound deal activity. We’ll also highlight some relevant macroeconomic and monetary policy conditions that M&A teams may want to consider.
UK Manufacturing Purchasing Managers’ Index (PMI) has been exhibiting a clear cyclical pattern since the Brexit vote with c.3-4 month periods. The index continues to be positive despite political and economic uncertainty. Recent peaks in April (57) and May (56.3) were largely driven by domestic demand according to Markit and these are the highest the index has been in 2 years.
UK Manufacturing PLC share price performance has varied, however our weighted index shows that in general the trend is positive. Renishaw, Spirax-Sarco Engineering and Melrose were some of the major climbers while Weir Group and Morgan Advanced Materials saw declines. There is no clear evidence to suggest that the result of the UK general election (held on 8 June) has had a role to play in the share price falls we noticed across our list of selected firms in June.
Moving forward, industrial sector players may want to keep one eye on the wider economy in general; for example the IHS Markit UK Services PMI hints towards a slowdown in growth as it dropped 2.0 points in May (53.8) compared to a 0.8 forecast and then an additional 0.4 points in June (53.4). Furthermore, June saw reports of concern around an unfavourable rise in consumer credit.
Deal value high, deal volume low, looks to be the summary for Europe in Q2 2017. Whilst some reports are referring to the current environment in general as an M&A boom, the number of in-bound Industrials & Chemicals deals completed in Q2 2017 appears to have decreased (c.20%) in Europe, and has remained almost flat in the UK. The latter does reflect a turnaround from the decrease during Q4 2016 to Q1 2017.
Whilst UK unemployment is the lowest it has been in 40 years, we highlight three factors that cloud the general economic outlook:
- The Bank of England* may increase interest rates in Feb 2018;
- The Monetary Policy Committee reports CPI inflation is above their 2% target, at 2.9% and could go over 3% by Q3; and
- In May it was widely reported that real wage growth in the UK was negative in Q1 2017 (the first time in three years).
All combined, we may see a slowdown in the domestic demand that has been buoying UK Manufacturing.
Will this impact deals for UK companies with a larger portion of their revenue from domestic sources? Will there be an impact on the timing of deals? With Sterling still c.20% down on its 2014 levels prices may be better now.
* We note that in June 2017 the Monetary Policy Committee (MPC) narrowly voted 5-3 to keep rates at 0.25% (Perhaps this was a signal and, or a test of the markets?)