Rosalie Chadwick: M&A activity in rude health

Rosalie Chadwick

The Private Equity (PE) funds are keen to deploy capital, but there is a mismatch in terms of the large amounts of cash they have available and the number of assets on the markets into which they can invest.

Large corporates who have historically been very busy in M&A, but who battened down the hatches during the lean years in their particular sectors, are now back in the fray and looking to do deals. Clydesdale Bank’s £1.7bn takeover of Virgin Money is illustrative of this trend and it encouraging to see they are now using their 2016 listing as a springboard to drive the business to the next level.

The identity of debt providers has changed quite considerably, with traditional lenders facing stiff competition from debt funds, providing a greater pool of debt capital on a supply and demand basis, meaning capital is more readily available on much better terms. This is also attractive to corporates who are looking to grow as they are able to expand by making use of well-priced debt rather than having to cede additional control, as they would have to through the equity route.

The challenge for corporates and PE active in this space will be pricing. PE houses are very keen to deploy capital and they can move at a pace that not all corporates can match. PE are also known to offer pricing that some corporates are not willing to entertain, however, by the same token corporates can sometimes price in synergies that sets them apart from PE buyers.

In Scotland, we have seen a growing trend over the last 18 months to make greater use of the capital markets, with higher levels of IPO activity than we have seen in the last five to ten years. In fact, Stock Exchange statistics show that over the last decade Scotland has been quiet from an IPO perspective compared to other UK regions.

However, sentiment seems to have shifted back and more businesses are now seriously considering an IPO. We are having lots of discussions with clients on this and the more they find out about it, the more they seem to favour the IPO route. This could be reflective of a greater degree of confidence in “Business Scotland”.

It is encouraging that companies which have come on to the market in the last year, such as Springfield Properties and Beeks Financial, for whom we acted for, are seeing a sizable uplift to their original IPO share price. It demonstrates the IPO was the right decision for these businesses and will give food for thought for others thinking of taking the same route.

In the last year or so receptiveness of the listed markets to oil and gas stocks has changed quite considerably. Our corporate finance team have completed over half a dozen fundraises on the stock market for listed oil and gas companies this year alone, and it has been the busiest spell we have seen in this space for the last five years. The stabilisation of oil and gas commodity prices – the oil price reached a four year high this week at $81 a barrel - is naturally a factor. Expect more deals in the energy space due to so much pent-up demand after a fairly benign period, now combining with a convergence of realistic price expectations which gives people the confidence to transact.

Fundraises on both markets are up quite significantly on last year, both in terms of number and quantum, but there is a question mark over whether that will continue through to the end of 2018 with increasing levels of uncertainty over Brexit. While there may be a cooling off in the last quarter of this year in the capital markets, we expect that PE will remain strong and the availability of cheap debt will continue in the near term. The major PE funds have all carried out significant fundraises, which does not start generating returns until it the capital is deployed, so they are eager to invest.

Rosalie Chadwick is a partner at Pinsent Masons. This article first appeared in The Scotsman.