By Jonathan Klonowski
As the U.K. government begins to lock horns with their E.U. counterparts, businesses in the United Kingdom have been determining how best to prepare for Brexit. And an initial look at the data indicate that the U.S. has become increasingly important for U.K. companies looking to expand abroad in 2017.
The United Kingdom’s David Davis commenced negotiations Monday with Michel Barnier, and early reports show a long road ahead for the continental divorce.
Former ‘remainer’ and now Prime Minister, Theresa May, has turned toward a ‘hard Brexit,’ giving more clarity to the country in a speech in January. May announced that the U.K. would be leaving the single market and the customs union, which allow the free movement of goods and services, in the hope of establishing a new relationship which would allow the country to better forge ties with those outside the European bloc.
Based on business M&A in 2017, one of the strongest new ties may come with the United States.
In the U.K., this year’s three largest outbound deals have targeted the U.S., including takeovers of Reynolds American (£49.8 billion) and Mead Johnson & Company (£14.3 billion). So far this year, there have been 66 deals worth a combined £68.6 billion over the Atlantic – 28.9% of all U.K. outbound activity by deal count. This compares to 23.8% throughout 2016.
Hogan Lovells’ Head of London Corporate Practice Ben Higson noted that “While the U.S. market remains expensive for U.K. firms and investors, there are a number of avenues for firms looking to U.K. outbound activity.”
Using equity as currency is another way U.K. buyers could bridge any potential issues related to a weakening pound, Higson added.
Ross Allardice, Partner at Dechert said the weakening pound has “led to increased competition for assets and an increase in valuations for the assets which are available.”
Liam Beere, Managing Director at Moelis suggested that “uncertainty around Brexit may well affect cross-border activity into the U.K. in the short to medium term, as buyers wait to see the outcome of trade negotiations.” He added that looking long-term, “Brexit is unlikely to have a major impact, assuming negotiations provide clarity.”
This year has also seen U.K. firms adopt a defensive approach, with an increase in domestic consolidation. There have been 305 deals worth £23.3 billion take place between U.K. companies thus far this year – just 1.5% behind the value seen during the entire 2016 when £23.6 billion changed hands.
Overall, U.K. M&A has enjoyed a strong start to the year with this year’s value, at £66 billion, currently 105.2% higher than at this point last year (£32.2 billion), when the country was coming toward the closing stages of its referendum campaign. This comes despite 113 fewer deals in comparison to the equivalent period in 2016.
Allardice commented that: “Given increasing competition and prices for higher-value assets, strategic corporates appear to be looking at organic growth and overall M&A volumes are lower as a result than in prior years.”
U.K. firms will have to continue adapting to ever-changing situations politically. The country’s recent election provided even greater uncertainty as May’s gamble of gaining a greater majority failed to pay off against a resurgent opposition. Politicians have now appealed for greater cooperation across party lines, with many calling for a ‘softer’ Brexit. A lot is still to be decided.
Jonathan Klonowski reports on M&A trends in EMEA. He is based in London, UK and can be reached at Jonathan.Klonowski@mergermarket.com
