April 2019

In 2016, we wrote “uncertainty regarding when and how the UK actually leaves the EU is very real and will continue, probably until 2018”.  We are now in April 2019 and the situation remains much the same.  The European Union (EU) has extended the UK’s Brexit deadline to 31 October 2019, narrowly avoiding a “no deal Brexit”.  We discuss how M&A activity has fared amongst Brexit uncertainty over the last couple of years, over the first quarter (Q1) of 2019 and the outlook thereafter.

2017 and 2018

Despite the political uncertainty since the Brexit referendum in 2016, total UK and Continental European M&A activity has remained robust at over 10,000 deals each year in 2017 and 2018, similar to 2014 and 2015, driven by:

  • Corporate cash piles, worth $7tn globally, chasing growth opportunities
  • Pressure to deploy €250bn of uninvested private equity (PE) capital in Europe
  • Debt market liquidity, supported by low interest rates and strong appetite from banks and debt funds

These factors have helped to prolong the current M&A cycle that has been strong for over five years.  In the middle-market, European M&A supply has been supported by PE firms bringing their portfolio companies to market.  On the demand side, we have seen a recent “flight to quality” as PE firms increasingly focus on targets with downside protection and upside potential.  Valuations for leveraged buyouts (LBOs) across Europe were at record levels in 2017 and 2018.

European PE Exit Activity

Average LBO Valuation in Europe

Q1 2019

In Q1 2019, UK M&A activity fared better than Continental Europe.  Total UK M&A deal count reduced 15% year-over-year in Q1 2019 while Continental Europe was down 31%.  Many UK M&A processes that launched in H2 2018 completed in Q1 2019 despite the possibility of a “no deal Brexit” in March.  The UK continues to be an attractive M&A region with:

  • Economic growth of 1.2% forecast in 2019 compared to 0.5% in Germany and 0.1% in Italy
  • Unemployment rate of 3.9% in the three months to February 2019, the lowest rate since 1975
  • Over 2,000 PE and venture capital (VC) backed companies, driving a long pipeline of exit opportunities

The UK remains the most active private equity market in Europe with over 40 majority stake buyout deals in Q1 2019, ahead of France with 26 deals.  The UK hosts thousands of high growth SMEs (small and medium sized enterprises) with attractive business model characteristics, including proven success at exporting products, services and brands in a globalised economy.  For many companies, secular growth themes, particularly in the technology & services sector, represent larger opportunities than Brexit related threats.

UK PE M&A Outlook

UK focused, Pan-European and Transatlantic private equity firms have seen relatively thin deal pipelines for UK headquartered targets in Q1 2019.  We expect limited impact from any ongoing Brexit discussions / negotiations in Q2 2019 as the uncertain political environment will likely continue.  Most acquirers are taking a cautious approach and conduct Brexit related due diligence to understand its implications on UK acquisition targets.

However, given that we are likely in the later stages of the global economic and M&A cycle, evaluating the defensiveness of a target’s business model becomes more important.  While the number of UK PE deals worth over £100m might decrease in 2019, we expect strong valuation levels for the highest quality businesses to continue as competition intensifies.

For more information, contact a member of our Global Mergers & Acquisitions team.