Deals Index* – M&A Year to Q1 2016

 

 As we remarked in our round up of 2015 deals, 2015 was a record breaking year for global and UK deals, largely driven by megadeals. What we are seeing in Q116 is a global cool down, with announced deals coming back down to a more “normal” level, with fewer of the megadeals.

 

While the UK is likely to follow this global trend, the major talking point is around the impact of David Cameron’s announcement on the 20th February of the referendum on our membership of the EU (the “EU referendum”). The potential impact of a “Yes” or “No” vote has been widely debated (and we don’t seek to engage on that debate here!), but what is certain is that uncertainty is not good for business, and we expect this to have an adverse impact on the level of UK deals, at least in the short term. There is however, potential for the short term impact to be somewhat offset by the significant weakening of the GBP versus the USD (at 10 year average lows), perhaps encouraging inbound activity.

Given the timing of the announcement (i.e. mid way through Q116), and that our data tracks completed deals (which reflects activity and deal sentiment up to 6 months ago), our Deals Index analysis suggests that overall the activity in the last 4 quarters through Q116 is up 59% by value but marginally down on volume by 6% versus the prior year, with inbound activity also up 69% by value and up 4% by volume.

We note that the Shell / BG deal (£54bn) completed in Q116, which significantly impacts the trends, such that value is up 18% rather than 59% when this deal is excluded, so from hereon we have excluded this deal from our analysis to see the underlying trends.

While our data isn’t quite showing a cool off as yet (especially on inbound deals), other published reports regarding announced deals are indicating that following a record year of inbound activity to the UK in 2015, Q116 is showing a fall of 38% in deal value and 25% fall in volume versus Q115, citing EU referendum issues. We expect this trend to continue at least up until the referendum in June.

UK Inbound versus Outbound deal activity

It is clear that the inbound activity is under the closest scrutiny for the UK deals market at the moment, historically this has typically only reflected approximately a third of total M&A volume of activity in the UK, with outbound and UK to UK also representing another third each.

Looking at the UK to UK market, value is up 50%, with volume only slightly down at 6%. This reflects the 2015 megadeal activity that we discussed in our 2015 Deals Index, as well as the completion of BT’s acquisition of EE in Q116 (4 deals greater than £1bn, with a value of £21bn in 4 quarters to Q116, versus 2 deals and £3bn value in the prior period).

On the other hand the outbound activity is markedly down - 23% by value and 15% by volume, which is primarily driven by the lack of megadeals in Europe (particularly in Germany and Spain), with value down 64% in Europe alone. Such a trend is not unexpected given the overall global cooling off, and a significant weakening of the GBP to the EUR in the last 6 months. With our Deals Index data being based on completed deals, it shows some interesting trends driving the significant value growth of inbound activity, with particular growth coming from ASPAC, notably Japan and Australia; China is actually holding at a consistent level, probably a reflection of a softening of their own growth rates. Increased activity from Japan is not a new theme to the global M&A market, driven by domestic corporates having to diversify from their own declining domestic market, however, we are now starting to see this activity move to the UK shores, particularly in the FS, H&P and TMT sectors. We don’t think that there is a trend in new activity from Australia, but more opportunistic, AMP Capital increasing its stake in Angel Trains, for example.

Private Equity versus Corporate Activity

The emergence of uncertainty created from the EU referendum issue is not expected to improve the downward trend that we’ve previously discussed of Private Equity v. Corporate activity, which has now moved to 19% v. 81% through Q116, versus 30% v. 70% for the prior period (in volume terms).

 

 Sector Summary

 In respect of sector activity, Financial Services (FS) has been hot, both in terms of volume & value (+108% and +93%, respectively), while sectors such as Technology Media & Entertainment (TMT) and Industrial Products (IP) were coming off of a strong period (down 3% and 10%, respectively). Retail & Consumer has also seen strong growth, driven by a number of upper- and mid-market inbound/outbound deals (eg. Betfair, Centre Parcs, Petco). Energy, Utilities, Mining and Infrastructure (EUMI) is down on volume (37%) due to the continued dampening of oil prices, but value is actually up (+7%), supported by 4 megadeals in the 4 quarters to Q116 versus 3 in the prior period, although the actual results were significantly higher as previously mentioned we’ve excluded the £54bn Shell / BG deal. Health & Pharma (H&P) was one of the only 2 sectors showing volume growth (+20%), showing its underlying strength, however, values are down (14%) with the decline in megadeals.

 

Overall, we expect uncertainty (including its knock on impact of a weakening GBP) caused by the EU referendum issue to cause a softening in the inbound (uncertainty) and outbound (weak GBP) M&A market in the short term. However, given our data is driven by completions, this softening is likely to be masked by the already announced megadeals pending completion, such as:

• Anheuser-Busch (US) / SABMiller (UK): c.£70bn
• Visa (US) / Visa Europe (UK): up to c.£15bn
• Deutsche Boerse AG (DE) / London Stock Exchange (LSE) Plc (UK): £10.5bn
• IHS Inc (US) / Markit Group Limited (UK): £4.3bn
• Sysco Corporation (US) / Brakes Group (UK): £2.2bn

 

Full infographic 

For the full infographic click here.

 

* 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 31 March 2016, for completed deals with a disclosed value greater or equal to £25 million, and an equity stake greater than or equal to 25%.