M&A monitor 2019 Q3
The Brexit effect
Uncertainty about when (or even if) the UK will leave the EU is continuing to affect the deal scene.
London-listed companies are in foreign buyers’ crosshairs, the sterling component of leveraged loans is shrinking and, if we get a no-deal Brexit, merger control could get even more complicated.
Sometimes a spike in M&A activity is a sign of a healthy economy. But sometimes it’s simply because market conditions throw off opportunities that are too good to ignore. So it is in the UK, where the pound’s Brexit-driven collapse has had dealmakers raiding the public markets for bargains.
The main beneficiaries have been non-UK financial sponsors, whose acquisitions of UK-listed companies have accounted for a staggering $23.5bn-worth of M&A this year. To put this in context, over the past decade the previous high was $6.79bn (and that was for a full year). Overall, foreign buyers are behind seven of the 10 biggest bids for companies with a primary listing in London in 2019, six of which were announced in just eight weeks from the end of June.
The pan-European leveraged debt market has remained supportive of large cap buy-out activity despite the continuing uncertainty around Brexit. Financial sponsors have been able to announce substantial underwritten LBO debt packages to support the take-private activity outlined above, including over £3.5bn for Kirkbi, Blackstone and CPPIB’s consortium bid for Merlin, and £2.5bn each for Advent’s bid for Cobham and the Apax Partners/Warburg Pincus offer for Inmarsat.
It is a notable feature of these financings however that they are not available to be drawn in sterling, which reflects a wider move towards euros and dollars as the ‘reserve currencies’ for funding large-cap LBO deals across Europe. While there are exceptions – over 50 per cent of the £1.25bn term debt supporting TDR Capital’s bid for BCA Marketplace was raised in sterling – the UK’s decision to leave the EU is hardly likely to reverse the trend.
Finally, a no-deal exit has the potential to add a fresh layer of complexity to the merger control landscape. Any transactions that currently fall under the exclusive jurisdiction of the European Commission could face a parallel investigation in the UK if no final decision has been issued at the point the UK leaves.
After exit day, we can expect more transactions to be called in as the Competition and Markets Authority (CMA) flexes its muscles, particularly if those deals could affect UK consumers or involve key industries. The CMA has already shown its willingness to intervene in acquisitions involving tech and other strategic assets, while the difference in approach to merger reviews between London and Brussels will need to be carefully managed.