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UK M&A activity rebounds17/01/2006. Source: Grant Thornton.
 The volume and value of UK M&A deals has rebounded during the second quarter of 2005 with the value of deals increasing by 154 per cent and the number of deals rising by 7 per cent says Grant Thornton Corporate Finance.
The volume and value of UK M&A deals has rebounded during the second quarter of 2005 with the value of deals increasing by 154% (from £3.5bn in Q1 2005 to £8.9bn in Q2 2005) and the number of deals rising marginally by 7% (from 164 in Q1 2005 to 175 in Q2 2005), according to statistics published by the British Office of National Statistics and analysed by Grant Thornton Corporate Finance.
Cross-border mergers and acquisitions present a mixed picture. For the first time ever, the number of acquisitions abroad by UK companies during the second quarter of the year (48) is less than the number of acquisitions in the UK by foreign companies (53).
The 48 acquisitions abroad by UK companies during Q2 2005 represent a drop of 70% compared to the previous quarter. The amount is also 70% lower than the corresponding quarter in 2004. Whilst the value of such acquisitions has rocketed by almost 100% (from £3.5bn during Q1 2005 to £6.9bn during Q2 2005), this is largely due to a handful of large transactions*.
"Accounting for over £5.8bn of deal value, these substantial deals hide what appears to be a worsening performance in the average deal value performed abroad by UK companies compared to the previous four quarters which were largely free of megadeals. Broadly, with deal numbers and average values per deal reducing, foreign acquisitions appear to be less appealing to UK buyers", said David Brooks, head of M&A at Grant Thornton Corporate Finance.
During Q2 2005 there were 53 foreign acquisitions of UK companies. This represents an increase of 10% on the previous quarter (48). The value of such deals during the quarter (£7.9bn) represents a drop of 50% on the previous three months but maintains a trend, now lasting three successive quarters, where the overall value of foreign acquisitions in the UK has been substantially higher than the values of the acquisitions performed by UK buyers abroad.
"Overall, UK M&A activity has been very resilient during the second quarter of 2005" said David Brooks. "Despite a small rise in the number of UK M&A deals, the value of UK deals has gone through the roof. This can partly be explained by a couple of large scale transactions, such as Aviva Plc's £1.1 bn acquisition of RAC Plc., but moreover it emphasises the fact that UK buyers will still pay good money for quality businesses", he continued.
"In terms of cross-boarder M&A, it is clear that the UK is still an attractive place for foreign companies to buy, however, the market is pointing to the fact that a smaller number of UK companies are willing to make the quantum leap and invest abroad, but when they do, the transactions are considered and significant and aimed at adding real strategic value", continued Brooks.
Looking ahead, Brooks believes that the real estate and construction sectors will continue to prove hotspots for acquirers: "British Land's acquisition of Tops Estates is one example of a flurry of activity in the property sector as investors continue to profit from the ongoing demand for housing in the UK. Likewise, we are also seeing strong signs of a revival in the media and IT sectors," he continued.
"On the flip side of the coin, in my view there will be decreasing levels of buyside M&A in the retail sector, which continues to suffer from low consumer confidence and high levels of consumer debt. However, the growing power of the supermarkets is likely to have a substantial impact further down the food chain. As a result, many suppliers will be looking to consolidate to maximise their competitiveness in terms of price, innovation and reach."
"Private equity continues to play a major role in sustaining current levels of deal flow," continued Brooks. Successfully predicting that the effects of an aging population would make the healthcare sector a prime area for investment, and having since made excellent returns though their involvement in the industry, private equity is now challenged with having to identify similar macro changes in the economy and apply them to micro deals", said Brooks.
"The supply chain to the sports industry, security services and the clean technology sector are all industries likely to be shaped by macro events and to be considered as potential areas of investment in the future", he continued. "The interaction of sport, health and education in the fight to avoid an unhealthy nation may lead to investment in leisure facilities in years to come. Likewise, the efforts to reduce greenhouse gases as part of Kyoto agreements, and the need to improve recycling levels are likely to see greater interest develop around clean technologies", continued Brooks.
"One sector which may also offer interesting investment opportunities is security services. The heightened risk of terrorism and substantial developments such as the government's proposed introduction of identity cards, may offer rich investment potential for security services' firms and associated sectors", he concluded.
Grant Thornton UK LLP is a financial and business adviser to mid-corporate businesses and their advisers with 33 local offices. They are the UK member firm of Grant Thornton International, the global accounting and consulting firm.
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