M&A advisers await Brexit clarity

IFR 2298 31 August to 6 Septembert 2019
4 min read
Americas, EMEA, Asia
Christopher Spink

With two months left until the UK is scheduled to leave the European Union, dealmakers are unsure whether this will cause a hiatus in the pipeline of proposed transactions or spark a swathe of bids for sterling assets trading at a depressed level.

Nigel Wellings, partner and joint head of corporate at UK law firm Clifford Chance, said the situation could be similar to what was seen at the start of the year ahead of the previous Brexit deadline of the end of March.

“Most people had a quiet January and first half of February then people decided they needed to get active and tried to ignore Brexit,” Wellings said.

“We could have a similar situation when people get back from holidays in September and decide to wait until after October for a clearer picture of Brexit.”

The total value of deals announced this year targeting UK companies is US$134.5bn, down 24% from the same stage of last year, according to Refinitiv data.

That is a far steeper drop than for global M&A activity, where the value of deals is down 13% from a year ago to US$2.55trn.

That does not include the potential US$200bn all-share merger between tobacco companies Philip Morris and Altria, who announced last week they were in talks.

If the deal is agreed it would be one of the largest ever M&A transactions, just behind Vodafone’s US$202.8bn purchase of Mannesmann in 1999.

Neither side named advisers who might be assisting them in negotiations. JP Morgan has regularly advised Altria, including on its last significant deal in December when it acquired a 35% stake in e-cigarette maker Juul Labs for US$12.8bn. Perella Weinberg also advised Altria.

CURRENCY VOLATILITY

Wellings said such significant strategic transactions would take place regardless of geopolitical concerns, or temporary pricing volatility.

“People who want to do acquisitions for strategic purposes have tended to ignore Brexit, but the price they have had to pay has been affected,” he said.

That could partly explain the bigger drop in UK M&A activity, as all the rankings are by dollar value, against which sterling has depreciated.

That temporary dislocation has flushed out some opportunistic bidders too, however.

“In the UK and Europe over the last five months we have seen more public-to-private deals by private equity companies,” said Wellings. “Rock-bottom financing has helped this.”

In late July Advent International made a £3.95bn bid for defence manufacturer Cobham, for instance.

The end of August saw a £3.3bn bid for Peppa Pig creator Entertainment One from US media rival Hasbro, and a £2.7bn bid for brewer Greene King from CK Asset, the vehicle of Hong Kong billionaire Li Ka-shing.

“We believe the increase in takeovers of UK assets in recent months highlights the valuation discrepancies available,” said analysts at Berenberg in a report.

They cited the Greene King offer as showing that “asset-backed companies in the UK that are relatively stable and relatively cheap can be attractive to international buyers, particularly given the depressed level of sterling.”

Wellings backed this thesis. “We could see a lot of investment in infrastructure assets post Brexit.”

BAML analysts said the current record-low financing by investment grade corporates could spark deals more widely for smaller companies.

“IG companies have a once in a lifetime opportunity: raise negative-yielding debt (and get paid by investors) to acquire cheap high-yield assets. We thus see more IG into HY M&A ahead,” the analysts said.