According to figures from data specialist Experian, corporate deals involving Welsh companies hit a three-year low in 2018. Katherine Broadhurst, from accountants and business advisers Baldwins, looks at the economic and political drivers behind the figur
WALES witnessed a subdued year for corporate deal-making in 2018, with Welsh firms involved in 203 deals worth £700m, according to figures compiled by Experian as part of its MarketIQ report. This means that Welsh firms were involved in less than 3% of all UK deals, contributing just 0.2% to their total value.
MarketIQ figures just published for the first half of 2019 make for similar reading, with Welsh deal volumes and transaction figures falling by 11% and 10% year on year, against figures that were already historically low.
Although deals need to meet specific criteria to make it into the Experian report and the financial information declared can be limited, it is generally held up as an accurate barometer for the corporate finance sector and an indicator of the confidence of business owners and investors in the UK economy.
The picture at UK level looked very different in 2018, with the total volume inching up by 2.3% (compared to a 13% fall in Wales) but the combined value reaching £372bn – a 38% increase on 2017 and only the second time this figure has risen above £300bn in the last decade. So, why are deals involving Welsh companies stalling?
Looking into the detail, it is clear 2018 figures were skewed by a series of ‘mega-deals’, particularly involving London-based firms in the telecoms and pharmaceutical sectors. Comcast’s £31bn acquisition of Sky and the acquisition of several of Liberty Global’s European operations by Vodafone for a combined total of £16bn are two prime examples. However, these mega-deals have been relatively thin on the ground in 2019, with Liberty Global’s £4.9bn sale of its Swiss unit UPC Switzerland to Sunrise Communications Group remaining the biggest transaction of the year to date.
Welsh companies are far less likely to be involved in such ‘mega deals’. Linc Cymru’s £95m development capital deal topped the 2018 charts, while just one deal has topped £50m so far this year; the acquisition of the Bridgendbased Gaming Technology Group of Novomatic UK Ltd by US-based Inspired Entertainment for £94m. It is therefore more helpful to look outside London at comparisons with other UK regions, where nine out of 11 regions saw a fall in deal volumes in the first half of 2019 compared to the same period last year, with eight also witnessing a decline in transaction values over the same period. Wales’ 10% fall in transaction value made the principality the fourth-best-performing region, in relative terms.
As a corporate finance team, we were involved in 18 accredited transactions ‘announced’ in 2018, making us the most active financial adviser in Wales. However, several transactions that we would have expected to complete in normal times ended up rolling over into 2019, with uncertainty around Brexit and the ‘on-off’ departure deadline of March 29 being a key factor in this.
Transactions are taking longer than expected as investors carry out extended research into market potential and tighten up their due diligence exercises. In some cases, parties are entering into re-negotiations as the political landscape continues to shift, and even in cases where investors have cash to spend, many of them are choosing to bide their time while the UK’s Brexit negotiations rumble on.
Funding sources are changing too. Of the transactions that funding was disclosed, bank debt accounted for 23%, compared to 20% in the first half of 2018, while private equity investment accounted for 25%, down from 28% last year. In Wales, we have also seen a rise in business owners opting for management buy-outs (MBOs) as a preferred exit option. Given the uncertainty in the market, owners are increasingly considering a partial exit to de-risk their overall investment in the company by realising some cash, with the added benefit of supporting the incoming management team and making for a smoother transition. Improved access to finance for MBOs, from banks or alternative finance providers such as the Development Bank of Wales, has been an important catalyst for this.
In Wales particularly, which saw the highest drop in 2018 transaction values and the second-highest fall in volumes (behind the East of England), our reliance on the manufacturing sector as a source of corporate deals is another factor in the slowdown. Manufacturing accounted for almost a third of all 2018 transactions in Wales, as well as topping the list in the first half of 2019, but overall volumes and values fell in both periods.
Looking forward, there is an expectation that deal volumes and values could well catch up the slower start in the latter part of the year. An extension of the Brexit deadline to the end of October should allow sufficient time for deals that would have gone through in the last six to 12 months to build up a head of steam. Activity in the entertainment sector, where deal values rose by 120m in the first half of the year, has been another positive development, alongside education and the arts, which has seen an increase of £50m.
The impact of Brexit will almost certainly continue to weigh on the minds of deal-makers as the Hallowe’en deadline approaches, but there are signs that there are still deals to be done for owners who are prepared to be flexible and investors who can think outside the box.
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