As is often the case and due to the unique nature of the mid-market, it [the M&A market] behaves differently than publicly traded bonds, currency or stock markets. Sentiment is very important and public markets are sometimes critical influencers. However, most of the transactions in this market are private, cover a very broad range of opportunities and happen for a wide variety of reasons, strategic or otherwise.
The number of deals completed in the UK with a transaction value of under £500m has reduced by around 12% in the year-to-date 2018, when compared to the same period in the prior year, however the cumulative value of these deals is only down by around 2%.1 In contrast, the Office for National Statistics (ONS) reported that there were no transactions with a value of more than £1bn completed between July and September of 20182.
In addition to top line numbers, there are always winners and losers in any of the mid-market sectors.
While statistics will never tell the whole story, our experiences of 2018 in the mid-market have seen many happy sellers, buyers paying full prices, strong transaction multiples sand international buyers remaining very interested in UK businesses. Brexit, and the political and economic uncertainty it brings, has been one of the biggest macro diligence issues of 2018, but buyers and sellers alike seem to be more focused on the micro impacts, investigating the components of the potential Brexit threat on a business-by-business basis.
In addition to top line numbers, there are always winners and losers in any of the mid-market sectors. For example, the divergence of success in retail between those in bricks-and-mortar, those that have moved to ‘clicks-and-mortar’ and e-commerce retailers is much more pronounced than some of the general gloom around consumer sentiment. Equally, in the industrial and business services sectors, the gap between winners and losers is widening, with technology often at the centre of some part of the manufacturing, supply or distribution chain process.
So, will 2019 be better or worse than 2018? Much may depend on what happens in Westminster between the time of writing this article and publication, but from an adviser’s perspective, it feels like it will likely be a tougher environment, but equally interesting. We sense there may be a widening of the gap between buyer and seller expectations, which means adviser’s may need to be smarter about how transactions are structed and executed. There may also be a tightening in the debt markets, although the flexibility of approach from the increasingly varied lender community continues to grow. The private equity investor community may become more conservative in deploying capital, but given there is more dry powder in the UK private equity community than ever before, there is a pressure to invest.
While 2018 cannot necessarily be any guide for 2019, the themes of Brexit, business investment confidence and consumer confidence will continue to dominate the minds of buyers and sellers, and the mid-market in 2019 could be a good place to be, while all around looks uncertain.
Sources: 1. Capital IQ data, deals that include a UK target and transaction value < £500M, between January 1, 2017 and December 13, 2017 and 2018.
2: ONS data – https://www.telegraph.co.uk/business/2018/12/04/overseas-firms-making-fewer-ma-deals-uk-british-firms-still/
Written by Henry Wells, Managing Director and Head of UK Mergers and Acquisitions at Duff & Phelps
