City hopes Covid to spark merger mania deals rush

CITY bankers are readying for a wave of corporate takeovers as companies take advantage of the Covid carnage to make opportunistic swoops on rivals.

Since the onset of the crisis in March, London’s army of bankers and brokers have been largely focused on helping companies shore up their balance sheets through emergency fundraisers. Some £15.69 billion has been raised on London’s markets since March, peaking at £6.3 billion in May.

However, City sources said listed companies’ attentions are now turning to raising funds for acquisitions.

Carlton Nelson, co-head of Investec’s corporate broking business, said “We are expecting an increase in M&A in the later part of the year. We are also expecting more fundraisings done on the front foot — companies raising money to aid growth or to fund bolt on deals.

“What you may see is private or family-owned businesses now put in a difficult position by Covid, that means they are forced into an earlier than previously anticipated exit.”

Blue-chip companies including IWG, Ocado and Segro have all tapped the markets for cash to fund growth while appetite for corporate fundraisers has been strong with a temporary lifting of pre-emption limits to 20% of a company’s share capital in place.

Numis co-chief executive Ross Mitchinson said: “We will see more M&A activity generally. It stands to reason that buyers put their plans on hold to see how Covid pans out, and some of those plans will be revived as business confidence starts to return. “Logically, you will likely also see some defensive mergers where companies get together to take cost out and gain efficiencies in industries which have been hit particularly hard.”

Bosses are also expecting the return to private equity deal-making. Nelson added: “People are gearing up for a busy end of summer and autumn. That market hasn’t been as active as the public market during the lockdown but it’s clear there’s a groundswell of deals waiting to happen.”

There is also hope for London’s paralysed IPO markets — just two companies have floated since March. Nelson expects floats to return at the end of this year or start of 2021. “A lot of people have seen how well the public markets have worked with the capital raisings and will now think an IPO is right for their business,” he said.

But Ivan Sedgwick, investment director at mid-cap corporate advisor LGB & Co, sounded a note of caution: “For the rest of the year, the queue of companies shoring up their balance sheets may eventually soak up demand; we’ve been told about the huge dry powder available to private equity funds, but this is not money in the bank, and there’s no certainty as to when they’ll commit it.”

Mitchinson expects the fundraising rush to continue, despite a quieter July. “There’s no doubt we still have a way to go with the equity raises,” he said. “I think what we’ll see now is more complicated raises that require a balance sheet restructuring or a rights issue with a prospectus if companies want to raise more than 20% their share capital. So far we have mostly seen accelerated bookbuilds.”

He pointed out that, excluding banks, UK companies raised £60 billion amid the financial crisis so, using that as a benchmark, it is likely there will be plenty more raises.