So, a (small) majority of the British people voted to leave the EU. That came as a bit of surprise, both to us here at BHP Corporate Finance and clearly also to those elected to lead our great country. The political turmoil the outcome of the vote has caused has been like nothing before seen in modern British politics. But what does it mean for the UK economy and more locally, for corporate finance and M&A?
Confidence
The first thing worth noting is the narrative from some parts of the media. From what I have seen and read, the national press has really gone to town with their dramatic headlines, reporting falls in the stock market and our currency with terms like ‘plunging’, ‘shocks’, ‘turmoil’ etc… This narrative is unhelpful and only serves to create fear, scepticism and an underlying sense of nervousness, which is a far cry from the growing strength and confidence that the UK economy was quietly building in the period up to a few days previous. In fairness to them, the local business press appears to have been a lot more matter of fact about it and adopted a ‘business as usual’ type approach, which is credit to them.
Confidence is an important underlying factor in decision making, especially when considering large or transformational projects such as M&A. Many of the business owners we talk to remain optimistic for the outlook for their sectors and believe that continuing with strategic plans, with a degree of caution, remains the right approach.
Strategic rationale
The early signs for the M&A market post the vote, both on a local and national level, seem to have been very encouraging. We have seen a number of corporate deals complete (for example Indutrade’s acquisition of Vacuum Engineering) as well as transactions completing using private equity funding (Cairngorm Capital’s majority investment in Polyframe). Clearly these deals were extremely well progressed and close to completion prior to the vote, but the key aspect is that the investor’s confidence in their strategic rationale and the robustness of the target company, meant that they could see past any potential short term weakness in the macro economic climate.
This is an extremely important point and one which demonstrates the calculated approach taken to M&A since the financial crisis. It is often said that it is very easy to make a bad acquisition, but if the strategy is well considered, you have carried out a robust due diligence process and the price is sensible then you have the core ingredients of a very successful, value enhancing transaction.
Inevitably some M&A transactions will have slowed down or may have even fallen over in the last couple of weeks, however, this is not uncommon due to the complex nature of the process involved. Some of these are likely to have been blamed on Brexit, regardless of whether this was actually the case!
Ability to fund
The ability to fund a transaction often relies on an external provider of finance, be that a bank or source of equity funding. We have historically seen contraction in the availability of funding during times of economic uncertainty/recession, usually as a result of either a lack of confidence in the prospects of businesses during these times, or an over correction as a result of having completed deals at over-inflated valuations.
The Brexit issue is a completely different situation to certainly the latter point. Valuations have been based on sound strategic rationale and the gearing ratio’s/funding structures we have seen on M&A transactions have all been appropriate and provided contingency in the event of short term uncertainty. As such funding institutions have a platform to continue to focus on finding suitable causes to which to deploy their capital and without exception, this is the message we are receiving in the funding market.
There is a risk that the reduction in the banks’ equity values impacts their ability to increase lending in the medium term, however, politically this is not where there will want to be and hence you may find that the Bank of England steps in with measures to ensure there is no reduction in the flow of funding.
Conclusion
We are not naïve enough to think that the UK will not be impacted by Brexit. The fall in the strength in the pound is certainly going to concern businesses in the region, as outsourced production and imported materials become more expensive, those companies will be keeping a close eye on their profit margins. However, we do believe that the corporate community is built on strong foundations and there will continue to be funding available for strategically sound transactions. This should underpin bold decision makers who remain confident despite the political turmoil in Westminster. Who knows, we may also see an influx of US and European capital and buyers as a result of the undervalued pound.
