Drew Stevenson, head of transaction services in Scotland at PricewaterhouseCoopers, looks at whether there is more activity in the sector
After the deep freeze across the UK that resulted in the coldest December since records began, temperatures have crept back up, the ice is melting and the country is getting back to normal. The big freeze in merger and acquisition activity in Scotland has lasted considerably longer.
However, with a number of significant Scottish transactions announcing in the final quarter of 2010, there are indications that the deal market is beginning to thaw and the levels of activity are, at long last, starting to heat up.
Acquisitions by Scottish corporates led the way in the second half of 2010, particularly involving acquirers with strong balance sheets and those businesses that tightened their belts during the recession taking advantage of opportunities to both expand their reach and consolidate in their sectors.
The $955m acquisition of PSN by Wood Group, three acquisitions by Weir Group (Linatex Group, American Hydro Corporation and Ynfiniti Engineering Services SL), the £42m acquisition of Focus Solutions Group by Standard Life and the $26m acquisition of Northland Power Services in the US by Aggreko are all prominent transactions that demonstrate the appetite and ability of large Scottish corporates to successfully undertake sizeable, high quality transactions, in what is still seen as a recovering market.
International interest in Scottish based assets has also continued to fuel activity marked by the $2.6bn takeover of Dana Petroleum by the Korean National Oil Company, the £33m prospective sale of Clyde Process Solutions to Schenck Process of Germany and most recently the sale of BCW Group, the credit management and debt recovery specialist, to Gothia of Norway.
While it is encouraging to note that recent M&A has been driven by a number of sectors, the energy sector continues to be central to deal activity in Scotland and will be an active sector for a number of Scotland’s deal teams going into 2011. A key factor of many of the above deals has been the international dimension. There is little doubt that this will remain a central theme for corporate deals in 2011.
While corporate activity has been the main driver of deal completions in 2010, private equity deals, few and far between in recent years, are showing some signs of recovery. Return to pre-credit crunch levels of activity remains a distant prospect, but there is evidence of an increased appetite for and ability to fund leveraged transactions, particularly at the top end of the market.
The £150m sale of the Office shoe chain in December to a management team backed by Silverfleet Capital provides a quality example of the type of leveraged deal that can succeed in the current market. Increasing private vendor appetite to release their investments and secondary private equity deals in the face of some improvement in deal multiples will be key to continuing to drive this activity.
Refinancing has been at the heart of many transactions during 2010, driven mainly out of the necessity to restructure certain facilities and the significant levels of debt coming to maturity in the short to medium term. While progress has been made in tackling the loans maturing in 2011 and 2012, the bulk of the 2013 maturities remain untouched.
In addition, the majority of 2014 and 2015 maturities, a significant component of the refinancing bubble, have also still to be addressed. It is therefore clear that going into 2011, such refinancing transactions will continue. While this may continue to be a challenging process, there are signs that banking liquidity and appetite are continuing to improve particularly for stronger borrowers, which will hopefully result in a number of successful refinancing transactions during 2011.
For certain strong performing businesses, a potential by product of such refinancings will be the possibility of increasing debt levels to pursue growth strategies, which in turn would bring a welcome boost to M&A activity in Scotland.
There is little doubt that in the face of a public sector spending squeeze, continuing challenging conditions for leverage into deals and a backdrop of slow macro-economic growth, the deal marketplace remains fragile. Nevertheless, the ambition and level of deal activity in recent months, particularly the final quarter of 2010 has given the Scottish deal community the boost of cautious optimism it really needed. Let’s hope that this thawing of the deal market in Scotland continues through 2011 so that we can finally put talk of the M&A deep freeze behind us.