2021: A great deal of uncertainty

As 2021 gets underway, the direction that UK plc is heading is far from clear. The pandemic continues to do its worst as the country adjusts to its new relationship with Europe.

However, M&A experts believe that despite all the uncertainty, the appetite for deals witnessed throughout the worst months of Covid-19 will remain strong with some even predicting record activity in the months ahead.

Lancashire-based accountancy and business advisory firm MHA Moore and Smalley advised on corporate transactions and fundraising deals with a value of more than £200m in the 10 months to October 2020.

Andrew Feeke, its head of corporate finance, believes widely anticipated changes to the capital gains tax regime next year, together with strong liquidity among funders, could lead to a record volume of deals between January 1 and April 5.

He says: “We mustn’t forget that this has been a very challenging time for many people and communities, as well as for businesses and their owners.

At the same time, it’s also been encouraging to see many businesses are still growing, creating jobs, and attracting investment.

The deals the firm advised on in 2020 included the management buy-out of Chorley based automotive parts specialist for an undisclosed sum.

Those tech firms which are serving the healthcare sector are very sought after

Andrew says: “Our deal activity has remained strong throughout the pandemic period with our team kept busy on deals spanning different sectors, including cross border deals. Many of the legal advisors and private equity contacts I speak to are witnessing a recent increase in activity levels.

“Our short-term pipeline of deals remains incredibly strong and a key driver of this is the possible increase in capital gains tax rates, likely to be introduced from April next year.

We’re looking at a lot of MBO activity and Employer Ownership Trust transactions as owners, particularly those with cash on the balance sheet, look to accelerate transactions to realise value from the business before any potential changes come in.

It is thought chancellor Rishi Sunak could implement some changes to the tax rates in relation to individuals and small businesses as part of his next Budget.

Andrew says the uncertainty over capital gains tax after April will probably weight the majority of next year’s deal activity in quarter one.

However, he adds: I’m confident that even if we see a dip in activity for a few months, it will stabilise in the second half of next year and we’ll still see a similar amount of deal activity overall.”

Andrew says the ongoing support provided by the governments Coronavirus Business Interruption Loan Scheme (CBILS) will see plenty of liquidity remaining in the market in the coming months.

He says: We may then see a pregnant pause in transactions after quarter one, which will coincide with funders reviewing the market and their own balance sheets, perhaps assessing where they may be overexposed and reviewing their target sectors.”

And even after some of the government loan schemes come to an end, he believes good levels of finance will still be available with alternative funders keen to continue their growth and enhance their client base.

Andrew predicts that in the near term, there will remain a strong appetite from private equity funders for well-managed businesses in the tech and healthcare sectors.

He goes on: “Both prior to and throughout the pandemic we’ve seen an ever-increasing drive towards business models that offer software as a service, with long-term secured recurring revenues driving higher multiples.

Those tech firms that are serving the healthcare sector are very sought after, with the health sector showing consistent growth and limited exposure to negative market factors.

However, it is not all good news. Andrew says: “On a more concerning note, I suspect there will also be an increase in business turnaround transactions when some of the pandemic support, such as Time to Pay arrangements come to an end and we may well see a number of pre-pack deals going through.

David Filmer, partner in Forbes Solicitors corporate team also believes M&A activity will rise as restrictions begin to ease and the post-pandemic world comes into sight.

He adds: The buy-side will become more assertive - for businesses that have managed to maintain a strong balance sheet and cash flow position - and will emerge strongly to take advantage of opportunistic and strategic acquisitions.

It's also been encouraging to see many businesses are still growing, creating jobs and attracting investment.

He adds: Private Equity houses remain highly liquid and have money to invest. Many PE firms are remaining resilient and actively seeking new opportunities.

It is likely that PE funded deals will continue to look for new platforms as well as an upward rise in bolt on acquisitions for their portfolio companies.

Looking ahead to possible high-profile deals in 2012, Accrington-based catalogue and ecommerce retailer Studio is looking to put itself up for sale after hiring a specialist advisor.

The business provides a personal shopping service to around 1.8 million customers each year through a combination of direct marketing and online.

The company is owned by Frasers Group, which holds a 37 per cent stake, and Schroder Investment Management, which holds a 19 per cent stake.

Options for sale are being explored after Studio produced bumper sales figures during the lockdown. In the six months to September 25, revenues increased by 17 per cent to £268m and pre-tax profit increased 52 per cent to £17.7m.

Studio says figures have continued trending upwards since, and it has now enlisted the services of Stifel, a financial advisor which will be able to conduct a formal sale process.

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