John Stephan, a corporate finance partner at BDO, talks about a strong and stable M&A market that is defying political uncertainty
Earlier this year, we discussed Theresa May’s decision for a snap General Election, how uncertainty was the new normal and how we should expect the unexpected when it comes to Brexit. We also talked about the cool heads of business; those that, despite all the political uncertainty both at home and abroad, were ploughing ahead with growth plans.
Fast forward six months and little has changed. Yesterday’s Autumn Budget provided nominal relief to those hoping for a pro-business speech that put the focus on growth and investment.
We knew Hammond had a difficult task ahead of him. Not only are his hands tied by Brexit but he was delivering a speech against a backdrop of low growth forecasts, inflationary concerns and a wafer thin majority in Parliament. Unfortunately, with no real message of intent from the Chancellor about tax simplification or business incentives, firms will continue to navigate their own paths to growth and find a way out of the productivity crisis, which is at a level not seen since World War II.
There are some positives for the construction sector with £44bn pledged for new housing, discounted loans for local authorities to invest in infrastructure and investment in skills.
All that said, businesses are proving as resilient as ever. They are still rolling up their sleeves and pressing ahead with growth strategies, albeit with a little bit more due diligence along the way.
Looking at the UK, the M&A market remains strong and stable and we’re on course for another good year of deals despite Brexit jitters. In the last quarter, there were 580 completions – down slightly on Q2’s figure of 600 but higher than at the beginning of the year. Pricing is holding up too. The average multiples paid in trade deals came in at 10.2x in Q3 and at 11.1x for private equity deals.
Appetite for quality assets remains fierce, with most buyers’ biggest issue being in finding the right business to buy in the face of strong competition. It remains a sellers’ market and we are seeing many owners exploring their M&A options that are genuinely surprised by the values available and levels of interest in their business.
Businesses across the UK are also continuing to review the potential impact of Brexit on their operations and this is likely to result in more M&A activity as they look to build market share and economies of scale. The availability of debt and equity funding will drive M&A activity for 2018, however due diligence will continue to be extensive as buyers seek to assess and mitigate potential risks.
With another Budget behind us and despite all the uncertainty, the UK’s economic health looks relatively robust. Mid-sized businesses are continuing to thrive as the engine of UK growth and private equity war chests are ready to be deployed. Deal flow looks positive and the low value of sterling means there are attractive deals to be done.
John Stephan is a corporate finance partner at BDO.