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Dealmakers are focusing their takeover efforts on the UK’s middle-market companies this year, attracted by lower prices that can make those transactions easier to stomach in a bumpy and unstable market.
At the same time, massive transactions have fallen domestically to a near halt, as persistent domestic inflation and rising interest rates make such deals more costly to finance. Antitrust regulators are also more aggressively challenging big acquisitions.
The shift towards smaller deals marks the latest way in which this year’s macroeconomic and regulatory uncertainty are affecting company and investor strategy. It also adds to the challenges facing London’s smaller listed companies amid a lack of initial public offerings and investment.
“You’ll continue to see the de-equitization of the UK market in that mid-market, £500mn to £5bn, range because those are still really good companies that frustratingly trade at this massive discount,” said Philip Noblet, head of UK investment banking for Jefferies.
Mergers and acquisitions announced this year involving a UK company as buyer or seller have fallen by half compared to last year, according to data from the London Stock Exchange Group.
While the number of those deals worth less than $2bn has fallen about 23 per cent this year, transactions above that threshold have had an outsized 48 per cent drop, the data shows.
There’s been only one such “mega-deal” worth more than $5bn involving a UK target — the Swedish private equity group EQT’s takeover of veterinary pharmaceuticals company Dechra — compared to four during the first half of 2022.
“Where we are off is those elephant-type deals,” said one senior UK banker. “It’s not like we’ve gone out to target smaller deals but that’s where the opportunities are.”
Companies and private equity groups are now focused on more manageable transactions. In one such recent deal, Lookers, one of the few remaining listed car dealership groups in the UK, agreed last month to be bought in a £465mn deal by Canada’s Alpha Auto.
“People are more focused on strategic low-risk, more bolt-on, ‘right down the middle of the fairway’ type deals,” added one UK M&A banker.
So far this year, 85 per cent of firm takeover offers for UK listed companies, or 23 deals in total, have been worth less than £500mn in equity value, according to data compiled by the investment bank Peel Hunt.
That is the highest ratio since the start of 2020 and a significant increase from last year, when about 55 per cent of takeovers were in that lower range.
While global M&A activity is down in 2023 across the world, the UK faces unique challenges including persistent inflation that is challenging consumers and the real estate market.
“All of those macro influences make the UK look relatively cheap,” said Michael Nicholson, Peel Hunt’s head of M&A. “There are still lots of really good-quality smaller UK companies that are listed and struggling to see the merits of being listed.”
In order to get larger acquisitions done, dealmakers have sought to avoid exposure to tumultuous markets. That includes using tactics such as corporate spin-offs, or in the case of the UK telecommunication merger between Vodafone and Three, a transaction that avoids cash.
Advisers are optimistic that next year could see a return to larger deals when there may be more stability in markets and the macroeconomic outlook settles.
“Into ‘24 we should see larger deals start to re-emerge,” added another top UK banker. “When it comes back, it’s going to come back with velocity.”
