Addleshaw Goddard has acted on one third of all firmly announced UK takeovers this year. Deal volumes are broadly the same as 2022 with approximately 50 bids; most of the activity has been in the £100-£500m mid market range. This concentration of deals at the mid-market level has been driven by a combination the accelerative effect of the pandemic generating M&A deals, the availability and price of debt and the current debate about London's status as an international listed market.
Amid all the soul searching about London’s place and future as an international listing venue, public companies continue quietly to leave the market in takeover transactions.
After a subdued H2 2022 which coincided with the Truss/Kwarteng mini-budget and related interest rate spike, private equity has returned to the takeover landscape in 2023, being involved in over 75% of all firmly announced bids. But private equity has not been the only story, as substantial corporates have also sought strategic bolt-ons to their businesses.
AG has acted on one third of all firmly announced takeovers this year. That prompted a closer look: while deal volumes are broadly the same as last year with approximately 50 bids, most of the activity has been in the £100-£500m mid market range of deals.
So we thought we’d try to divine the reasons for that:
Big PE buy outs are out
Deal sizes are down. Average deal size this year was £350m compared to £900m in 2022, with far fewer billion pound "megadeals". That is against a backdrop of more depressed global M&A with US buyers particularly less active – the prime cause being the rising cost of debt. But interest rates are now at the level that they were in in 2007 – and any private equity practitioner with a long enough memory will remember that year as being a particularly frenetic one. So this pause in big ticket PE buyouts seems temporary while the necessary adjustments to expectations on pricing and returns are made.
Small PE buy outs are in
As the numbers above show, there has been pronounced PE interest in the mid market. The deals are more digestible; private equity's famed “dry powder” endures and debt funds are also sitting on a similar wall of money. These debt funds have been prevalent in funding mid-market takeovers, and for them, the lower quantum of debt is easier to swallow than for a megadeal (but has still proved a challenge to obtain for some). This dynamic seems set to stay in 2024.
The accelerative effect of the pandemic
Macro world events cast a long shadow, and we are only starting to get to grips with the legacy of Covid-19. The pandemic had an accelerative effect on the need to adapt, and the world continues to spin ever more quickly: digitalisation, AI, the energy transition and a war for talent all themselves necessitate evolution and acquisition. In this state of flux, private equity will spot value opportunities – but equally big corporates will spot strategic ones. This bolt-on of scale, brands, talent or new markets will continue to be a feature in 2024.
London's market illiquidity
The travails of the London listed markets have been well documented – de-equitisation, and low liquidity leading to a lack of investment, depressed share prices and undervalued easy pickings for private equity. Institutions have faced redemptions from investors, meaning it has been harder for them to oppose cash deals – although there are signs that resistance has hardened in recent months. While the FCA's upcoming changes to the UK's public market regime will be welcome, AIM-listed companies in particular will continue to consider the merits of a listing. This dynamic will throw off opportunities – M&A and otherwise – until the sentiment for listed markets in the UK changes.
The mid-market is where all of these deal drivers coalesce
Sub-£500m companies are more sensitive to the upheaval from the pandemic and other disruptive factors. They are less diversified but more nimble businesses, still on the growth curve but without the market-support to fund the necessary changes. The ‘K’-shaped impact of the pandemic in particular means there are clearly defined winners and losers within this group, both of which are potential takeover targets. The financial climate of dry powder, debt availability and reduced risk appetite means that deal doing in 2023 has been tempered into something more sustainable and deliverable that what we have seen in recent years.
