Last year (2015) was a remarkably strong one for M&A. The headlines, of course, focused on the mega-market where records have been smashed: nine deals have been struck with values in excess of $50bn. Several corporate titans got even more, well, titanic, as huge industry consolidating deals were agreed; Royal Dutch Shell bought BG Group, Anheuser-Busch InBev bought SAB Miller.
This pace and intensity of deal-making has been mirrored in the UK mid-market. It has been an exceptional 12 months and with a few caveats (of course), this will continue through 2016. M&A is a confidence game – and right now, confidence is high.
One sign of this confidence is the speed with which deals are being done. A classic barometer for the health of mid-market M&A is the period of time between heads of agreement and the actual conclusion of the deal. During the recession, that period would stretch out to 14 or 16 weeks; today, it’s usually four or six. Buyers and sellers just want to crack on.
Another sign of market confidence is deal values. Over 2015, the average EBITDA multiple across all the businesses that we have bought and sold stood close to nine times. That’s a punchy average across our five sectors.
So why will this momentum continue?
First of all, the economic fundamentals are sound. The economy of the UK is relatively healthy. While its forecast rate of growth has been dialled back recently, the UK remains a benign and attractive environment into which to invest. Interest rates and inflation are at historical lows. Foreign capital looking for growth – and there is a lot of such capital – will continue to focus on the UK.
Private equity funds have amassed considerable fresh powder to invest. They are now supported by a re-energised debt market, as the arrival of alternative credit funds is providing both competition and partnership for the leveraged finance units of the banks.
It is worth noting that despite the availability of credit, we are seeing leverage being used judiciously. There hasn’t been a return to the heady pre-2007 multiples – yet. Both private equity funds and management teams are taking a prudent view of the debt markets. This desire to maintain sustainable debt structures in transactions is perhaps a lasting impact of the financial crisis.
The strong balance sheets of corporate buyers are also being put to work. This year, we have sold businesses to blue-chip corporations such as Ab Inbev, ITV and Accenture. Rather than sitting on their cash reserves, which have been gathering precious little interest, corporates have started to look seriously at M&A. The corporate acquirer returned in earnest to the mid market at the end of last year. There is a briskness and efficiency about many of today’s corporate development teams; they have an appetite to get deals done, move on and find the next.
So valuations are relatively high, the funding environment is strong, and buyers are hungry for quality assets. What could possibly go wrong?
Particular sectors may be hit by external factors. Right now, the oil and gas, and natural resources sectors are in the doldrums. Among sectors such as care homes, retail and hospitality, and “soft” business services such as cleaning, catering, and facilities maintenance, the introduction of the new living wage is creating uncertainty as it will nudge labour costs upwards.
There are some fears that valuations will become unsustainable. They may not yet have peaked – but a levelling off may be welcome in order for the current cycle to remain sustainable.
Macro-economic or global political shocks have the potential to prick the bubble of confidence – from the rolling crisis in the Middle East to the outcome of the American presidential election to the slowdown of the Chinese economy, which saw global stocks tumble on the first days of trading of 2016.
One notable cloud is the UK referendum on EU membership. While this may not be decided until 2017, the intensifying debate may well lead to business decisions being deferred. We saw this effect in the run-up to the Scottish independence referendum.
The UK has been the launchpad into Europe for many global corporations for many reasons – its financial markets, its open economy, the English language and (not to be under-estimated) its golf. Over the decades, the UK has been a disproportionate beneficiary of foreign direct investment. If investors perceive as a risk that the UK will leave the EU, the aura of uncertainty will delay investment and acquisition decisions.
However, the positives do outweigh the negatives. Our view at Livingstone is that we are two years into the M&A cycle, which typically last four to five years. And that means for an entrepreneur thinking of realising value through a potential sale of their business, 2016 has much to recommend it.