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M&A momentum returns as UK businesses look to 2021

Keely Woodley Keely Woodley

What are the current M&A trends in the private equity and public markets, including the practical considerations of completing a deal in the current climate? Keely Woodley, Andrew Frame, Hemal Shah and Samantha Harrison look at where we are now and make their predictions for 2021.

After a summer of depressed activity, M&A momentum is beginning to return to the UK market. Many trade and private equity groups have begun to refocus their acquisition strategies on businesses that have been resilient throughout 2020 or those that could benefit from strategic realignment.

Since the beginning of September, several key themes have emerged. We take a closer look at some of these trends below, particularly focusing on the practical implications of completing a deal in the current climate, how private equity and public markets have performed during lockdown and what we predict market activity will look like in 2021.

Practical considerations for M&A

There's no doubt that a reduction in face-to-face meetings has impacted the deals community, whether at the outset or in completing deals in the current environment. Buyers, sellers and advisers have all had to adapt to new ways of doing things.

Recent experience shows that online management presentations can be as efficient and effective as face-to-face meetings with more attendees able to join. Remote access benefits international buyers and brings active participation in opportunities. Site tours can be carried out earlier through pre-recorded videos and virtual data-rooms have already shown that the bulk of transaction due diligence can be done remotely.

Beyond these impacts, COVID-19 has also brought some specific challenges to due diligence, with an increased focus on its impact on trading in the short and long term. Dealmakers have accepted coronavirus trading adjustments, so long as a clear explanation can also be backed up by empirical evidence.

For businesses where a long-term impact is expected, the prevalence of earn-outs has increased to help address any uncertainty around future performance. Investors are also spending more time understanding management responses to the business interruption, how prepared they were, how they communicated with clients and staff, and how they pivoted the business to any market changes.

The deals community will keep adapting with the best practices of virtual deal-making likely to become standard. It has never been more important to engage with advisers early to plan and prepare appropriately for the ongoing uncertainty.

Shift in focus for private equity

Private equity shows no signs of slowing down despite the current climate and the industry has shown itself to be robust and capable of adapting to a changing world.

After the spring lockdown was announced, the initial focus of private equity shifted to portfolio management and supporting existing investee companies with short-term funding, managing communication with lenders; and execution of change plans aimed at cost control and maintaining top-line results.

More recently, there has been a flurry of activity across bolt-on deals, exits and new investments as private equity has started to actively deploy capital with a significant shift in focus to sectors such as technology, financial services, healthcare and education.

The flexibility of private equity structures has enabled businesses to secure investment where:

  • potential capital gains tax changes have led owners to accelerate partial exits to crystallise tax-efficient gains within the tax year  
  • the sustainability of strong performance during this year's disruption is to be proven over the coming months
  • businesses have stabilised performance in difficult conditions, but the delivery of their business plans is dependent on a return to more ‘normal’ conditions.

Public markets continue to stabilise

Over Q3, UK equity capital markets continued to stabilise. This is particularly true in the SME sector where the AIM 100 closed on 30 September down less than 1% from the start of the year and up 7.9% in the quarter.

Not unsurprisingly, the healthcare sector has been the strongest performer over Q1-Q3 showing 114% increase (using the FTSE ICB super sector classification) with basic resources the next strongest at 33.1%, bolstered by a gold rally that has seen the gold price exceed US$2,000 per oz.

Index performance


Source: Capital IQ

This performance has been supported by both robust performance in equity issuances during the whole of 2020, outperforming other European exchanges with a total of £32.7 billion in IPO and follow-on funding, as well as the continued liquidity where the London Stock Exchange has seen a daily average of £5 billion of trades over Q1-Q3 (Source: London Stock Exchange).

Total capital raised on London Stock Exchange


Source: Dealogic

Support for existing issuers has been a large part of the resilience of the UK capital market, demonstrating the strength of a London quotation and the benefits of choosing London as a listing venue. The LSE quotes that it has accounted for 34% of total capital raised across Europe for the YTD with the average price performance for follow-on funding (above £5 million) since 1 March being +10.6%. 

Companies have also looked at their business models to assist them with addressing their ongoing funding. For example, in the high-profile Class 1 disposal and £95 million equity fundraising for Ted Baker plc, the transaction allowed the business to recapitalise through a combination of raising cash to repay debt, as well as providing funds to support the transformation strategy and to mitigate the impact of the pandemic.

As noted, appetite for IPOs has continued throughout the year with seven IPOs on AIM Q1-Q3 and nine on the Main Market. While these numbers are lower than in prior years, the appetite from institutions to invest in new opportunities has remained strong. Of note during the recent quarter was the IPO of The Hut Group (THG) on the main market (standard segment) in September, which is the largest ever e-commerce listing in Europe attracting £1.9 billion in money raised and a market capitalisation of £5.4 billion at IPO.

We have been actively supporting clients accessing the public markets and have worked with several new AIM issuers. We worked with Kooth plc on its IPO raising £26 million at a market capitalisation of £66 million. We also worked with Trident Royalties plc, a new growth-focused mining royalty and streaming company, on its admission to AIM and £16 million fund raise.

Restructuring and debt availability

During the initial lockdown period there was a large shift in activity of lenders of all types focusing on supporting existing clients.

Due to the sheer number of clients that high street lenders have, this activity lasted for several months with some government schemes remaining open until the end of January 2021. Debt funds and alternative lenders with a smaller client base were able to put support plans in place and look at new business earlier, and we have seen a return to new lending activity sooner. Banks are now beginning to issue terms again for new businesses, but we expect caution to be the theme over the coming months with increased pricing and decreased leverage multiples being commonplace.

In a tiered system where more companies can stay open, we expect deal activity to continue, although some may be indirectly impacted leading to longer lead times in their recovery.

A key challenge facing many borrowers (and lenders) will be when government intervention methods cease and businesses need to repay ‘debt’ in the form of things like deferred VAT and deferred rent on premises. It will be important to engage regularly and proactively with your lenders and have a rolling plan in place.

2021: our predictions

With 2021 fast approaching there is a general sense of renewed optimism as the anticipated availability of a vaccine promises a gradual return to normality. However, Brexit, potential tax policy changes in response to unprecedented government spending and the timing of easing of restrictions will continue to loom on UK business. Uncertainty is set to remain and so businesses will need to remain agile and keep close control on costs.

From an M&A perspective, we believe the following themes will take precedence in 2021:

  • An increase in volume of non-core carve-outs from large corporates in response to pressure on boards to rationalise their footprint and focus on 
  • A strengthening pipeline for IPOs across both the main market and AIM, so 2021 may finally buck the trend of falling IPO volumes since 2018
  • Regulatory changes and the continuing pace of technological change will lead to further consolidation
  • Increase in special situation fund activity in stressed sectors such as transportation, and retail and leisure

For more information on corporate finance and transaction services, contact Keely Woodley or Mo Merali.

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