M&A in the North East in 2013

2013 began with some nervousness around UK economic stability and the timing of a recovery. Towards the end of the year the economy was showing clear signs of recovery and UK GDP growth was predicted to increase gradually to around 1.4 per cent in 2013 – rising to 2.4 per cent this year.

Whilst the North East economic recovery is lagging behind that of the South East in terms of momentum, the deals market in the North East is returning to the activity levels of 2008. There were 191 transactions that completed during the year, up seven per cent on 2012. Conversely, according to Dealogic, both global and European deal volumes for 2013 were down on the previous year.

Although deal volumes globally have yet to return to the levels of five years ago, activity over the last few quarters have continued to be driven by small and mid-market deals. Transactions less than £50m were also the drivers for activity in the North East. If we compare the number of completed deals with disclosed deal values of between £1m and £50m there were 28 during the year compared with 22 for 2012.  A similar trend is reported for larger transactions (greater than £50 million) with seven completing in 2013 compared with four the previous year.

In addition to existing funds raised five or six years ago which need to be invested, a number of private equity (PE) houses have recently raised new funds. Although the success of this has been mixed, the overall result is a strengthened appetite for deals from PE houses.

Nationally PE activity has materially increased on both the sell and the buy side. In the North East venture capital played a significant part in mergers and acquisitions (M&A) activity in the region and accounted for the majority of the total disclosed deal value of over £1.98 billion during the year. Momentum increased as the year progressed with eight of the 11 PE investments in the North East taking place during the second half of the year.

The largest deals were the £716m secondary buy-out of R & R Ice Cream by the French PE firm PAI Partners in April and the acquisition of the Newcastle headquartered boiler and radiator manufacturer ISG by Bregal Capital for a reported £230 million.  Other significant PE investments included £22 million by ISIS in exchange for a minority stake in Nigel Frank, LDCs investment in Express Engineering and the £25.5 million management buy-out of Fine Industries led by Craig Morgan and backed by NorthEdge. In June, NVM the regionally based private equity firm, invested £3 million to support the management buy-out of Cleveland Biotech.

There were two exits by private equity groups in the region during 2013.  One of the world’s largest investment firms, The Carlyle Group, disposed of Ensus, the bioethanol plant which was established on Teesside in 2010. In February August Equity sold 4Projects in a trade sale to US business, Coaxis.

IPO activity increased markedly in 2013.  This was due to a number of factors including lower levels of volatility in the economy and previously postponed IPOs attracted by realistic pricing and strong after-market performance of recent flotations.  The North East saw two companies listing on AIM during the year. Kromek raised £15 million in October and the following month Applied Graphene Materials raised £11 million.

The latest PwC annual survey of the Top 100 law firms showed that 2013 was a watershed year for the legal sector in the North.  Merger activity and restructures are consolidating and polarising the market from those that are growing to those that are struggling to survive.  On 1 May North East headquartered Dickinson Dees merged with Bond Pearce to create a new national law firm, Bond Dickinson.

The PwC Deals Index reported an increase in deal confidence amongst corporate investors. Funding for listed companies is generally more available as a result of the strengthening capital markets and this, together with large cash balances has resulted in much of the recent M&A activity being driven by corporates. Many of the North East PLCs continued to grow acquisitively during the year, most noticeably Vertu Motors and Utilitywise which listed on AIM in 2011.

It appears that the UK M&A market is experiencing the early signs of a recovery in activity. Deal confidence has increased slightly but this appears to have mainly translated into higher volumes of smaller deals. Confidence may have to increase further before we see the return of a greater number of larger deals.

In the short term, although the current potential pipeline of transaction completions looks relatively strong, it is always challenging to predict the activity level in the next one or two quarters. That said, I believe that the number of transactions is likely to increase during the next six months as we see a combination of continued improvement in the deals funding environment and realistic price expectations.