How do you expect the corporate deals market to perform in 2018 vs 2017?
Last year was busy for us with the number of deals being slightly up on the year before. A key feature of the last 12-18 months has been the return of the management buy out; our pipeline suggests that this structure will increase in popularity with Vendors forming a key funding role and high street banks looking on the structure more favourably.
We saw fewer cross border transactions in 2017 than the year before, but whether this was a result of economic uncertainty or just a factor of timing will become clearer as 2018 progresses. We also expect consolidation to continue in certain sectors where trading conditions have been more challenging.
What external factors will affect the M&A market in 2018?
Good opportunities for growth through acquisition remain, although the trading pressure in some sectors means that transactions in the SME market have been more of a challenge in the last year as acquirers seek to carefully manage the risk. In the right sector, the continued low level of Sterling broadens the potential acquirer pool to international markets in key sectors, particularly where there are key skills such as advanced materials and manufacturing.
Do you think the Brexit threat is exaggerated?
Very few businesses operate in a completely isolated domestic environment in terms of their supply chain and customer base. Therefore all businesses are open to the risks, to a greater or lesser extent. However, it also provides opportunities for some businesses e.g. to export more while Sterling is at a lower level. In any event, businesses have always needed to adapt to changing circumstances in order to survive and grow and the current situation is no different.
What does the current funding landscape look like for the year ahead?
There is much discussion around the potential for increasing interest rates in the coming months. Current weak consumer demand and economic uncertainty is likely to keep rates generally low.
We have seen an increase in the amount of cashflow lending undertaken by high street banks, which has enabled transactions in the most recent year, however the situation is still not easy. There are a number of new funders entering the market, including Shawbrook Bank, Thin Cats and others, that potentially consider transactions in a more open way to find solutions and it will be interesting to see them operating in practice.
In Wales we have the Development Bank of Wales, formerly Finance Wales, and their expansion will broaden their reach and increase the number, value and type of deals they fund. I expect this to facilitate more transactions and is to be encouraged.
Are deals being done in a different way now to the way there where a few years ago? If so, why is this?
We have seen an increase in the number of management buy outs, particularly those funded by the Vendor through higher amounts of deferred consideration. This reduces or eliminates the role of the external funder and can provide more control over the completion of the transaction by removing intercreditor agreements and can enable the Vendor to achieve the value they seek, without putting too much cashflow pressure on the business post transaction.
We have also seen the Locked Box completion mechanism increasing in popularity as it provides the seller with certainty and avoids the completion accounts requirement enabling the purchaser to focus on integration. Historically this has been used in larger transactions, but we are seeing it gaining traction in the SME market.
What’s your advice to those looking to do deals in 2018?
For sellers, I would advise that they keep an open mind as to possible structures for transactions and be clear with your advisers as to your negotiation boundaries as this will enable them to be strong and work on your behalf with purchasers.
For purchasers, I would advise that they secure an acquisition fund from their funder, or at the very least, obtain outline permission up to a certain value and potentially secure a better value as a result of their ability to move quickly.