Foreign Buyers Deterred by Sluggish UK Economy, Leading to Stagnant Deals
Bankers have cautioned that takeover activity in the UK is expected to stagnate in the second half of the year, as foreign buyers grow wary of the country's gloomy economic prospects. Peel Hunt, a London-listed investment bank, conducted a half-year review of takeover activity in the UK and noted a rebound in dealmaking to some extent. However, the interest of private equity firms in listed companies has not materialized as strongly as anticipated.
Peel Hunt's analysis reveals that the value of take-private deals proposed by buyers in the first six months of the year amounted to just £12 billion, a 45% decline compared to the second half of the previous year. Several high-value bids launched during this period have also been rejected by company executives, such as Apollo's attempts on THG and Wood Group.
This subdued trend in 2023 defies earlier predictions of a surge in take-private deals led by well-funded foreign private equity firms. Michael Nicholson, Head of M&A at Peel Hunt, stated that expectations of a significant acceleration in the third quarter have diminished across the board, with the sluggish performance of the UK economy being one of the factors dampening demand.
Nicholson shared that while private equity firms continue to actively assess UK companies, he expects take-private activity to remain at current levels given the prevailing financing environment. Concerns about the UK macroeconomy are also expected to dampen interest from overseas corporates. However, the liquidity needs of UK fund managers could drive the availability of potential targets at attractive valuations, particularly within the small and mid-cap segments.
The rise in interest rates this year has increased the cost of fresh debt financing for deals. Nevertheless, Nicholson mentioned that larger UK firms with existing debt facilities and the option to issue shares as part of a deal may find a "window of opportunity" to acquire smaller competitors.
The slowdown in deals has impacted firms like Peel Hunt, whose fees have declined. The bank reported a loss of £1.5 million in its most recent full-year results, describing it as the "most challenging year" since its establishment.
These predictions of a sluggish deals environment in the UK align with a broader global decline in M&A activity this year. LSEG Deals Intelligence reports that global deal value for the year so far stands at approximately $1.3 trillion, a 38% decrease compared to the same period last year. M&A involving the UK, encompassing both public and private firms, has reached $111.8 billion, down 51% from last year and representing the lowest level since 2016.