In 2020 it’s undeniably particularly significant. In the last week Yorkshire’s school children are (finally) back in the classroom, Premier League football is back on the pitch and, in my world, deals are back on the table.
Uncertainty during recent months saw a degree of hiatus in the deals market but in the last couple of weeks, as the weather turned autumnal, we started to see a substantial uplift in transaction preparation activity.
Of course, lockdown didn’t spell a complete M&A shutdown. Deals in some sectors continued throughout -in e-commerce, for example, and fundamental goods and services such as energy, food and drink. Processes involving such businesses proved to be quite resilient but now we are seeing a notable step change with a far broader range of businesses start to mobilise, from business services to healthcare, ed tech and beyond.
It’s not just a more lively market in the private capital space, but also in the institutional capital market, with IPOs and rights issues back on the agenda. We are also seeing a good deal of overseas private equity and corporate interest in UK businesses. I suspect this reflects to some extent the fact that a number of overseas markets came out of lockdown earlier than us and so got to work on their new strategic agenda ahead our domestic market.
It’s going to be an interesting run into Christmas and Q1 though. Government support packages are unwinding, fears of a second wave of the virus remain real and Brexit uncertainty will increasingly inject more stress into the system.
At the same time, however, PE and institutional investors have so much dry powder, they will be eagerly looking for homes for their capital, as GDP and organic growth won’t see them reach their strategic ambitions.
This, plus concerns around the tax agenda, specifically of capital gains tax equalisation with income tax, is driving deal momentum.
An outcome of this agenda, rife with tensions, is that investors will be more thoughtful than ever, asking a lot of the management of their potential acquisitions: They will need a fundamental understanding of the invincibility of the business model; they’ll be examining the track record of management through Covid, looking for a stable team; they’ll be considering their speed of response to the situation and the resulting market shifts and asking them to outline how they pivoted. More detail might be analysed than normal, from changes in buying patterns and service levels to workforce location and routines. Of course, investors will also interrogate business plans, looking for realism.
We’re also going to see derisking as a theme. Some owners who have weathered the storm are now looking to share the risk of recovery and investment in the next chapter of their business. There will be a rise in transactions aiming to facilitate this through alternative deal structures for example employee ownership trusts, debt only MBOs and minority interest cash out deals. Local examples include Rotherham’s Planet X tackling the new reality as an Employee Ownership Trust and private equity firm Clayton, Dubilier & Rice (CD&R) minority investment in SIG plc.
I wrote about the 4 Rs in my previous article. Now the majority of those in the region's boardrooms (virtually or otherwise) have progressed through reaction and resilience and are in recovery or new reality territory. Many feel that while they are not out of the woods yet - with JRS still active - they do need to take action to put their business on the best footing for the future. Given it might be a quite different future to that they anticipated at the start of the year, doing this will require some strategic change in many cases as business models are revisited.
This will mean a number of businesses doubling down on the core operations and lopping off the non-core such as Dart Group’s sale of its distribution and logistics division, Fowler Welch to Culina. Of course this spells opportunity as one business’ distress or divestment is another’s route to their own new reality.