Are UK deals on the rise or fall?

The answer is on the rise - at least when it comes to volumes. With 64 UK deals completing in Q4 2013, our latest Deals Index shows that it was the best quarter of 2013 from an M&A volume perspective.  It is fair to say that the improving macroeconomic environment, improving confidence and other capital markets activities like IPOs and capital raisings have helped drive at least small and mid-market deals over the last 18 months or so. 

But why are overall deal values falling?

We have also seen small and mid-market deals increase as a proportion of total deals throughout 2013. As a result, the average size of overall deals has decreased by c. 46% to £144m against the same time period last year and this has been driven by the fall in the average corporate deal size of around c. 56% to c. £120m over the same period (and by c. 13% between Q3 an Q4 2013). The average size of PE deals has decreased by c. 20% to £195m over the last 12 months. This is the first time since we started our Deals Index that the average PE deal size is larger than that of corporates and highlights the current cautiousness of corporate deal making, which is now focused more on smaller, tactical deals as opposed to larger transformational acquisitions such as Siemen’s acquisition of Invensys Rail or Schroders acquisition of Cazenove.

Market confidence is positive

The results of our Q4 2013 survey show that the market is expecting UK deal volumes – particularly of small and mid-market deals – to increase. Some of the highlights are:

  • UK M&A activity to increase over the next 3 to 6 months – 71% of corporate and 70% of PE respondents believe that volumes will increase over this period.
  • 48% of corporate and 75% of PE respondents believe they are likely to make an acquisition over the next 6 months. 
  • 81% of anticipated deals are expected to be valued less than £250m (an increase from 75% in the last quarter and this supports the proportional decrease of larger, transformational deals).
  • 7% of the expected deals are anticipated to be valued over £500m. On average, corporates are expected to make a larger number of these larger acquisitions than PE.

What’s in store for the rest of 2014?

In addition to a positive deal confidence, a number of factors support our view that M&A activity levels will increase slowly over the next 3-6 months. These include:

  • Improving macroeconomic fundamentals – the UK economy continues to improve, although the recovery is not spread evenly across the different sectors. This economic improvement is bringing increased investor optimism on the buy side from UK, European and non-European acquirers.
  • Improving deals funding environment – debt funding continues to be generally more available and affordable as a result of the strengthening credit markets. In addition, corporate balance sheets are still strong and capital is available in the PE sector, with a number of the more successful PE houses having been able to raise substantial new funds.
  • The global reallocation of capital – although the flow of equity from emerging markets to the Western economies could mainly benefit higher potential growth economies such as Spain and Italy, there are areas of potentially high return in the UK economy that should benefit from this.
  • However, there is an increasing trend of privately held companies being taken public rather than sold and we expect a number private equity investors to use this route to capitalise on their investments rather than finding acquirers who can offer the same value.

From an industry perspective Business Services, Retail & Consumer and Financial Services are all hot prospects for 2014. We expect:

  • Business Services activity to increase from 2013 as the UK mid-market environment improves. One sector to watch is property related businesses as a result of strong 2013 fundamentals.
  • An increasing number of small and mid-market Retail & Consumer deals as well as some larger transactions, including luxury goods and food and beverage businesses.
  • Capital and regulation light Financial Services deals to continue to increase, for example in the areas of payments and fintech, partly because of increased private equity activity. Some larger deals have the potential to materialise in 2014.

Get a snapshot of our Deals Index data here.

So how does this affect your deals strategy for 2014? To discuss this further contact us here or leave a comment below.

James Fillingham | Deals Partner
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