Price Bailey
Last year was a mixed year for the UK M&A and private equity markets. With the announcement of the first lockdown in the spring of 2020, the country and all its dealmakers held their breath, and acquirers stepped back to see how the market and opportunities would develop.
Consequently, deal volumes and values dropped as some decided to wait, while others accepted a lower price. Yet, adapt is what we did and come the second half of 2020, the M&A and private equity market made moves back toward recovery, as news of the vaccine and the temporary easing of lockdown measures bought with it some renewed confidence. Now, in the early stages of 2021 and living in reintroduced lockdown measures, we look at the lay of the transactional landscape and notice, among other trends, the increasing interest of overseas buyers on the UK horizon. In this article, we look at the growing trend in overseas investment in and out of the UK and provide our thoughts on what to do if you are the object of overseas interest.
According to a recent LexisNexis report on UK Public M&A in 2020, of the 42 firm offers announced, 62% involved overseas bidders, including 8 of the ten deals that were valued at over £1bn each. We have observed that this growing trend in the public markets is also being mirrored in the private mid-market with a growing number of overseas to UK deals vs UK to UK.
Interest from Euro and Dollar corporate buyers and funds is due to various reasons, including Brexit and the continued impact of the COVID pandemic. We look at some of these in further detail here:
- Playing to our strengths – it is unsurprising that both the impact of Brexit and COVID are dominating UK business news; however, it is also important to keep in mind the reasons the UK has been and continues to be an attractive place to do business.
- • A top European economy – despite the noise surrounding Brexit, the UK is still one of the biggest economies in Europe, second to Germany. The UK continues to provide a key gateway to Europe for US and Asian purchasers. For US purchasers, there can also sometimes be an easier language and cultural fit with businesses in the UK than in other parts of Europe, increasing the attractiveness of UK businesses.
- • Growth industries – whilst some markets are experiencing challenging and uncertain conditions; many sectors continue to experience growth that is likely to be sustainable. To take full advantage of this, companies need a physical presence in the UK, and overseas buyers need to acquire established local businesses to increase their footprint to benefit from that growth.
- • Intellectual property (IP) – the UK is one of the major global creators of IP. In a global market, being the cheapest supplier is not sustainable in the long term. We have seen overseas buyers, particularly those from low-cost markets, look to acquire UK businesses to gain control of IP to safeguard the longevity of their own business.
- Capitalising on uncertainty – we cannot ignore the turbulence caused by both the ongoing COVID restrictions, particularly in the UK, and the final severing of ties with the EU. From a UK business perspective, there have been significant winners and losers over the last 12 months. Across every sector, the focus has been on how business owners adapted their business models, cut discretionary spending and preserve profits. For acquirers, market conditions over the past couple of years have resulted in the weakened pound making UK assets more attractive to overseas buyers. COVID has led to expectations on values reducing in some situations. What this creates for strategic buyers looking to enter the UK market or expand their existing presence is an opportunity to do so at a lower cost.
- Continuation of UK trade – in other instances, the UK’s departure from the EU at the end of last year has caused some overseas corporates to acquire in the UK to continue trading here with fewer restrictions. Interestingly, we are observing the reverse being true with UK businesses acquiring businesses in Europe to enable the continuation of Eurozone trade post Brexit.
- Availability of cash and lower borrowing costs – the cost of debt globally is at an all-time low at present, and there is plenty of cash in financial institutions that need to be deployed. Access to cheap cash is helping to fuel acquisitions.
- New work practices removing barriers – as in other sectors, technology is making the transaction easier to manage remotely and, thus, cross-border deals easier. With travel restrictions across the world, it’s now common to buy a business without visiting the site or meeting the management team face to face. In the longer term, this raises challenges for physical and cultural integration.
Interest from overseas buyers and funds has been steadily increasing since 2016’s referendum result, and we believe we can expect to see continued interest for the next 12 months. Where acquisitions are strategic and not hostile, this may provide a much-needed boost to the UK economy. Nevertheless, every potential opportunity to sell (whether to an overseas and domestic bidder) should be assessed on its individual merits. Below, we provide some of our thoughts on what business owners should consider when considering selling to an overseas buyer.
What to consider if an overseas buyer approaches your business
Businesses can often be subject to unprovoked interest from acquirers. Whether a business is actively looking to sell or not, an approach, particularly one from an overseas buyer, can often incite more questions about the future of the business than it does answers. As Corporate Finance advisors, we advise businesses looking to acquire on or off-market opportunities and businesses looking to sell. We have provided below our top 5 tips for what business owners should consider if an overseas buyer approaches them:
- Understand what you want from the deal – First and foremost, it is important to have a clear idea of what is important to you and the business’ shareholders both in the deal and for the continuation of the business. This is not necessarily just about the offer price; in fact, sometimes money is of lower importance relative to other things, such as exciting growth prospects, continued employment for loyal staff or maintenance of the family name. However, the point here is that having a clear idea of what is important to you and the business in a sale will help you to identify the right offer, aid in negotiations and avoid you being blind-sided by an attractive price when there are more important things at stake.
- Tax planning – almost as a natural progression from knowing what you want from the sale, it is also important to ensure you are in the best possible position from a tax perspective before sale and that you also understand the tax implications of different deal structures (e.g., assets vs share deals). If you haven’t sought advice from a tax advisor, it is recommended that you do so as there may be an opportunity to improve the tax position. They can ensure that consideration has been given to the tax implications in the sale. Any required clearances with HMRC are factored into the sale process to avoid any unnecessary hold-ups.
- Are you ready to go through the process? – This may seem like an obvious question. Still, particularly in situations where you are the party being approached to sell, it can often be tempting to get swept up in considering the offer and finding out more detail before considering whether the business and you as owners are ready to enter into the process. The sales process can be lengthy, and for a prolonged period of time, both you, your fellow stakeholders and the business are under the microscope. Therefore, it is important first to consider whether you are mentally prepared to undertake the process and, secondly, if the business is in the best position to sustain detailed examination. For example, are all your records, processes and procedures up to date? Do you have a relevant and up to date financial forecast? Are there any skeletons in the closet, e.g., outstanding disputes or litigation? The level of detail an acquirer will require to complete due diligence is more than owners typically use to manage their business. Ensure that you are on the front foot when the acquirer and their advisors scratch below the surface. This is particularly relevant if you are in talks with US acquirers as their due diligence procedures are notoriously detailed.
- Think twice, strike once – Building further on the point above; it is vital to ensure that the information you share with prospective buyers shows the business in the best light, is correct, accurate and up to date. Once a buyer sees it, it’s difficult for them to un-see it. Sending information that is out of date, incorrect, or overly negative or optimistic could be detrimental to the continued interest of the purchaser or your negotiating position. It is also wise to be thorough and provide both numbers and words. When preparing information, always consider:
- a. What message do you want to convey? Sharing information during due diligence is still part of the sales ‘pitch’; therefore, ensure that everything you share fits into the story, e.g., if you are sharing financial information and forecasts, it can be helpful to provide supporting commentary that explains any unusual items, or assumptions made so that they can follow the narrative told by the numbers.
- b. Don’t assume the purchaser has pre-existing knowledge of your business or that what is publically available is suitable.
- Are they right for you? – You will spend a lot of time providing information to the potential buyer. Before you engage too deeply, you need to confirm:
- a. Does their offer meet our objectives for a deal?
- b. Do they have the capability and resources to deliver it?
- c. Does their business fit, strategically, with ours?
- d. Is the person we are speaking to the key decision-makers, or have they got delegated responsibility to deliver the deal?
This list is by no means exhaustive, and the last question may seem strange, but we have seen several situations where division heads have not got the group’s authority to act.
We also suggest that you speak with your financial advisors, who will be able to assess the approach to appropriately support and advise on how to proceed.
A recent example
We recently advised Cambridgeshire-based Comtec on their sale to French-based Euro Techno Com Group (ETC Group).
Founded in 1978, Comtec Group is one of the UK’s largest value-added distributors of telecom and IP equipment to both the carrier and enterprise markets, and a specialist in supply chain management for telecoms operators and systems vendors. It serves most major telecom operators and installers in the UK and the Middle East, including BT, Virgin Media, Sky and Ooredoo. Since its inception, the company has experienced continuous growth and has scaled through targeted acquisitions and sustained international growth. Comtec has seven offices across the UK, Oman, Qatar, the UAE and Hong Kong.
Since completing a management buy-out, the business has continued to develop. Revenues have more than doubled over the past five years to over £70m.
The acquirer, ETC Group, has operations across six countries in Europe and North America. It is regarded as a global leader in product design, procurement, supply chain management and the distribution of passive and active telecom equipment and materials with best-in-class technical and logistics solutions for communications service providers’ network deployment and maintenance. Its 2,000+ customers include major American and European cable operators and telecoms service providers, as well as large and small independent installers and sub-contractors.
The transaction provides ETC Group, which Carlyle acquired last year, a strong foothold in the fast-growing UK market. All major telecom operators and alternative networks have started a long-term deployment phase of fibre across the country to support the ever-increasing demand for high-speed connectivity. The acquisition also allows ETC Group to serve the growing IP infrastructure market for enterprise customers and further expand its offerings and expertise in data centre supply and maintenance.
You can read more detail in our press release here.
This article was written by Phil Sharpe, Corporate Finance Partner at Price Bailey. If you have been approached and would like to speak to our specialist Corporate Finance team, please contact us on the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide, and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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