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Rise in cross border M&A shifts the emphasis on larger strategic deals rather than high deal volumes 08/03/2006. Source: Grant Thornton Corporate Finance .
 According to statistics published by the Office of National Statistics and analysed by Grant Thornton Corporate Finance, the value of UK acquisitions by foreign companies has increased by almost 40 per cent during the third quarter of 2005 (compared to Q2), with the average deal now valued at around £220m compared to £159m in the previous quarter.
UK buyers are also scouring foreign markets for targeted acquisitions with such deals also rising 15% and values increasing marginally by 4%. By comparison, the volume and value of UK M&A dropped by almost 21% and 28% respectively compared to the previous quarter and by 22% and 13% compared to the same period last year. Average deal values in the UK remained mostly consistent (£41m in Q3 2005 and £44m in Q2 2005).
'Cross border M&A is becoming a much more regular feature of M&A involving UK companies, now accounting* for 41% of all deal numbers and 72% of all deal values. Yesterday's raft of M&A deals and potential deals involving foreign bidders (Telefonica and O2; DP Wolrd and P&O, etc.) is a clear sign that foreign investors and UK corporates alike are looking at bigger deals and are considering serious transformational moves, not tinkering with small bolt on acquisitions but defining their businesses with bold strategic moves. The effects are creating a ripple effect across the whole market and are likely to continue', argues David Brooks, head of M&A at Grant Thornton Corporate Finance.
Acknowledging a slowdown in deal volumes in UK M&A during the third quarter, Brooks pointed to average deal values remaining fairly consistent and suggested that the trend towards larger deals that is being witnessed in cross-border M&A is set become a more permanent feature within UK deals.
'More cross border deals do not necessarily mean fewer UK deals. The UK market remains an open and vibrant environment for deals to be made. Private Equity investors in particular are chasing high value rather than high volume deals. The ongoing availability of relatively cheap bank debt is helping them carry out more radical and ambitious deals, creating a competitive market and a pricing tension with the corporates whom have not been as willingly minded to be so radical', said Brooks.
Looking ahead, Brooks identified a number of sectors which are likely to become the focus of increased M&A activity. 'The government's plans to allow the private sector as well as wealthy investors and parents to play a greater role in the nation's education set up may do for education what we have already witnessed in the healthcare sector', said Brooks.
'Private Equity investors who in recent years have made some excellent returns from investing in sectors such as care homes and dental practices are likely to be lured by similar opportunities within education. Investors may bid to run a group of schools attracted by their strong property assets, or set up networks for the provision of a wide range of clerical services. If at present, to name but one example, each school has to make its own arrangement to buy new books for its library, there is clearly a massive market for this and other services to be outsourced. It's about making efficiency gains and giving the government more value for its spending. These are the sort of market gaps the private sector will fill', continued Brooks.
'The media and entertainment sector is currently witnessing a particularly strong increase in transaction levels. Many media companies got their fingers burned during the dotcom boom but have since restructured, and with healthier balance sheets are now in a better position to fund acquisitions.'
'In particular, internet-based media deals are proving to be a new hotspot for corporate finance activity. Traditional advertising revenues have been under pressure over the past few years and so established media businesses are now moving quickly to secure their share of internet based advertising. We are seeing a good number of media companies acquiring internet portal businesses with NewsCorp, Trinity Mirror and CMP all doing deals of this nature in the past few months.'
'Looking ahead, I anticipate that the food sector will also be in line for increased consolidation over the next six months or so, and in particular, the meat, fish and poultry industry. These sectors are to varying degrees struggling with reduced margins from the pricing pressures imposed by the major multiples and as a result of cheaper overseas imports. Commodity price pressures have impacted heavily on this sector in recent years, a factor which has resulted in large numbers of company failures and in a significant number of takeovers. A fragmented market and competition from foreign suppliers is likely to lead to further consolidation in this sector over the coming months.'
Grant Thornton Corporate Finance is a provider of advisory, transaction services, capital markets and operations and post-deal services to transactions in the £5 million to £100 million range. During 2004 they advised on 136 deals with a value of almost £1.6bn. More details over at www.grantthornton.co.uk
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