Deals Index* – Q216 Update: The UK M&A market post the EU Referendum result
August 18, 2016
The impact of the result of the referendum on deals is still being debated hotly and, while there are many viewpoints, there is of course no clear answer.
What we do see based on our Deals Index data through Q216 is that deals have still been completing in the run up to the vote and immediately thereafter. On a rolling four quarters basis, deal value is up 21% on the prior year**, and deal volume is up 2%. Even looking at Q2’16 itself by we see the second largest quarter of post-recession deal completions by value (the largest being Q1’16).
In the context of the global deal environment, the UK deals market is also holding up reasonably well. As we’ve previously noted, FY15 was a record breaking year, so it is no surprise that overall global deal activity has come off in H1’16. The US for example saw a 13% decrease in volume and 31% decrease in value when comparing H1’16 to H1’15.
While our data isn’t showing a negative impact from the UK referendum, certainly not to the extent that others are reporting in the market for the UK, this doesn’t tell the full story. Due to the record FY15 year which continued into Q1’16, with significant numbers of mega deals greater than £10bn, some slow-down was already expected. We are now expecting to see a continuing softening in volume and value of completed deals through to the end of the year and into early 2017 that we think if as the “Brexit hiatus”.
How deep is the impact of the referendum result anticipated to be?
Our data is based on completed deals, as such it is likely reflecting deal sentiment up to 6 or even 12 months ago, and so it is not capturing the full impact of the referendum result. However, the results are encouraging, suggesting that completions are continuing and the UK deal market did not shut up shop in early 2016 as some had feared.
This is perhaps even more encouraging when we break down the activity, with inbound deals (perhaps those most likely to have been impacted by the decision) being the strongest; increasing 38% in value and 2% in volume in the last 4 quarters to Q2’16.
There is no doubt that this decision has disrupted the deals market; but we are currently seeing this as a short term impact – the underlying fundamentals of deal making remain.
- Summer is typically a quiet period for deal activity both in the UK and in Europe, and as such the timing of this result might be advantageous in the short term while buyers and sellers pause for breath to consider the impact.
- Our clients are telling us that there is still strong appetite to invest in new deals. We are hearing that North American and Asian buyers are seeing the UK market as an opportunity; certainly with Sterling weak, but also potentially undervalued good quality assets. The Chinese acquisition of Odeon Cinemas and the Japanese acquisition of ARM exemplify this trend.
- Private Equity (PE) funds currently have record levels of dry powder which needs to be spent, and are mostly denominated in $ or €.
- Debt remains freely available, particularly in the alternative lender market outside of the traditional senior lending banks.
UK Inbound activity up
It is clear that the inbound activity is under the closest scrutiny for the UK deals market at the moment as potential buyers wonder about macro risks associated with buying into the UK. Historically inbound 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.
However, inbound activity continues to show consistent trends as reported in Deals Index at Q1’16 with 2% growth in volume and 38% value (rolling 4 quarters to Q2’16 versus prior year). The growth is particularly in ASPAC which is showing good momentum, notably Japan and Australia. China is still holding at a consistent level, but we expect this to increase in the coming quarters; not only reflecting a weak Sterling, but also with the Chinese government relaxing their regulations to allow multiple bidders for foreign companies worth more than $2bn.
Looking at the UK to UK market, value is up 62%, with volume only slightly down at 3%, which is primarily reflecting megadeal activity such as the completion of BT’s acquisition of EE in Q116. In the 4 quarters to Q2’16 5 deals greater than £1bn, with a value of £25bn, were completed, versus 2 deals and £7bn value in the prior period.
UK Outbound activity more muted
Outbound activity is also up in terms of volume, at 6%, although down 9% in value terms, with growth coming from deals in the US, and value decline primarily driven by the lack of megadeals in Europe (particularly in Germany and Spain). 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 3 months.
Private Equity activity anticipated to increase in H216
While Brexit is causing a pause for breath, PE’s still have a lot of capital that needs to be put to work, so while the PE vs corporate activity measure continues to swing towards corporate, we think that in the second half of the year this will start to come back
In respect of sector activity:
- Financial Services (FS) has been hot, both in terms of volume & value (+143% and +67%, respectively).
- Sectors such as technology media & entertainment (TMT) and industrial products (IP) were softer, coming off of a strong period (down 16% and 34%, respectively).
- Energy, Utilities, Mining and Infrastructure (EUMI) continues to be down on volume (16%) due to the continued dampening impact of weak oil prices, but the downward curve is declining.
In addition to FS, two other sectors were showing growth:
- Health & pharma (H&P) continues a positive trend (volume growth +15%), showing its long term underlying strength.
- Retail and Consumer (R&C) showed 3% volume growth, which is an improving trend, perhaps reflecting that consumer sentiment is holding up post Brexit. This is slightly unexpected as we see this sector at most risk to Brexit and other economic concerns regarding the UK – this might start to unfold in H2’16.
What lies ahead?
Overall, we expect uncertainty caused by the Brexit issue to cause a softening in the inbound (uncertainty, potentially offset by
weaker Sterling) and outbound (weaker Sterling) M&A markets in the short term. Despite this, the underlying fundamentals of the deals market in the UK are still apparent as well as the readiness of the debt market.
So, our view on the medium term is more moderate at this stage with, we hope, a Brexit hiatus being just that, a hiatus. The proof of the impact will start to emerge in H2’16, however, Brexit will be a long road. In some ways we see that long road as being a salvation in that, once buyers and sellers acclimatise to the unexpected referendum result, they will survey a landscape that looks largely unchanged in macro terms and no likelihood of major change or clarity on change for some years.
With that backdrop we think deal doers will just choose to get back to business as usual (we hope!).
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 30 June 2016, for completed deals with a disclosed value greater or equal to £25 million, and an equity stake greater than or equal to 25%.
**As noted in our Q116 Deals Index, the Shell / BG deal (£54bn) completed in Q116, which significantly impacts the trends, such that the rolling 4 quarters value at Q216 is up 60% rather than 21% when this deal is included, therefore, our all data presented excludes this deal in order to see the underlying trends.