UK domestic M&A slows, but race for resources drives
offshore acquisitions
Merger and acquisition (M&A) activity in the UK has slowed
dramatically in the first quarter of the year, with the number of
announced domestic deals dropping to their lowest level in more
than a decade, according to new analysis by leading business and
financial adviser Grant Thornton.
There were just £7.01 billion in announced UK domestic deals in
Q1, a drop of more than 40 percent on the same period in 2007
(£12.53 billion) and the lowest quarterly value in more than four
years. It was also the first quarter that domestic deal numbers
fell below 400 for more than a decade, with just 377 M&A deals
announced in this period.
David Brooks, Head of M&A at Grant Thornton Corporate
Finance, said the weakness in announced M&A numbers in the
first part of 2008 was an inevitable consequence of a protracted
credit squeeze, as the lending environment for all but the most
risk-light deals became a much more convoluted environment.
"Analysing announced deals allows us gain a strong indication of
the year ahead, and unfortunately it is a far more subdued M&A
environment than the past three, bullish years.
"After a small M&A bump caused by the change in capital
gains tax, it seems the companies that have in the recent past
pursued an aggressive acquisition strategy have become much more
circumspect, while those companies that had been toying with the
idea of acquisition for expansion are now shelving plans,
particularly in those sectors that are struggling."
However, Brooks said in times of downturn there would be
bargains, and several sectors have seen increased activity as
consolidation plays are set in motion, with cash-rich trade buyers
snapping up undervalued targets.
Sectors including food and beverage retailing, healthcare
and professional services have all seen strong activity in
Q1, while the banking sector, which saw a high level of domestic
activity in 2007, has yet to register this year.
Offshore Acquisitions
While the value of announced offshore acquisitions, £20.4
billion, was a significant drop on Q1 2007 (£37.19 billion), it
remained slightly up on Q4 2007 (£19.71 billion). In total 309
businesses in 59 countries were targeted by UK companies in the
first quarter of 2008.
Although the US remains the number one target nation for UK
firms on the international acquisition trail, there is now a marked
move towards more adventurous targets this quarter, with Brazil
(2nd), Turkey (6th), Kazakhstan (8th) and Russia (10th) all
featuring in the top ten offshore acquisition destinations.
Mining and extraction companies featured highly on the list of
the quarter's largest announced deals, including the quarter's
largest offshore deal by a UK firm; Anglo American's acquisition of
all the outstanding stock of an undisclosed new company holding
assets of MMX Mineracao e Metalicos (MM), a Brazilian mineral
mining company. Companies extracting fossil fuels made up a
significant proportion of offshore deals, including targets in
Kazakhstan, the Philippines and Australia.
"The competitive economic growth rates of most of the top 20
nations that UK companies are targeting reveal one of the drivers
of international acquisitions, another is the race to secure
natural resources as prices continue to rise. This process of
acquiring these offshore assets is fundamentally positive for the
UK economy and should be more actively encouraged by central
government and business support agencies," Brooks said.
Foreign Acquisitions in the UK
The volume and value of foreign acquisitions have fluctuated
substantially over the past four years, and the previous quarter
was no exception, dropping from a record of £125.69 billion in
announced M&A deals in Q4 2007 to just £19.16 billion in Q1
2008.
The number of deals remained more consistent, however, rising
from 249 in both Q1 and Q4 2007 to 268 in Q1 2008. Overall, there
was a more predictable list of buyers in the top ten acquirer
nations in the UK, including India, Italy, Canada and the
Netherlands.
China trumped the US as number one acquirer of UK companies with
one deal, as a consortium led by Aluminum Corp of China acquired a
12% stake in Rio Tinto PLC for £7.18 billion, while US firm
JC Flowers & Co launched an unsolicited tender offer to acquire
the remaining 97.3% interest of insurer Friends Provident PLC for
£3.42 billion, in a leveraged buyout.
Brooks said it was often the high profile UK brands that
attracted foreign buyers, a good example being Tata's recent
finalised purchase of Jaguar and Rover.
"While many people would struggle to name a famous Chinese
brand, for example, the UK has a wealth of brands built up over
decades or even centuries. It is these brands that are of extremely
high value to many businesspeople in emerging markets, and it is
likely we will see more such companies targeted in the year to
come, credit crunch or not," Brooks concluded.
*Statistics sourced from Thomson Financial, based on deals
announced 1 January - 31 March 2008. Data current as of 7 April
2008.