The Scottish deals market was rather subdued in the first quarter of 2012 though the headline value figures were given a welcome boost by two multi-billion pound deals
The Scottish deals market was rather subdued in the first quarter of 2012 though the headline value figures were given a welcome boost by two multi-billion pound deals.
The total value of Scottish deals for the first three months of the year was £9.32bn, a massive leap on the same quarter a year ago when Insider's survey revealed a deals value of £3.22 bn. Meanwhile, the value of non-Scottish but UK deals fell from £4.33bn in Q1 last year to £534.23m in this quarter, with the number of deals also falling from 32 to 23. overseas company deals totals were also on the slide from £620.4m in Q1 last year to £47m in the first three months of 2012, and that came from just one transaction as opposed to 11 at the same point last year.
Topping the first quarter deals in transaction value was RBS's £4.7bn (US$7.3bn) sale of RBS Aviation capital to Japan's second largest bank, Sumitomo Mitsui Financial Group. The deal, RBS's largest single disposal since the bank's 2008 state-backed bailout, came two years after RBS put the division on the market.
RBS Aviation was set up in 2001 after the bank acquired international Aviation Management Group, formally Lombard Aviation capital. The company had more than 200 jets under management or on order at the time of sale for a total fleet of 466 aircraft. The division was moved into RBS's massive non-core division in 2009, which at that time housed £285bn in assets earmarked for disposal.
Around a fifth of the purchase price went towards buying RBS Aviation's equity with the remainder going towards taking on the debt. The sale is reported to have realised a profit of £185.4m (US$300m) for RBS for its 10 years of investment.
Another sizeable deal concluded in the first quarter was the £2.33bn (US$3.5bn) cash return to shareholders by Cairn Energy.
Cairn also topped the Q4 deals chart in value terms with its £2.7bn sale of a 30 per cent stake in Cairn India to India-focused mining giant Vedanta Resources.
In comparison to the last quarter, overall Scottish deal value was also well ahead in the first quarter from the £4.7bn posted at the year end. But overseas deals fared less well, with the sole transaction in the first quarter comparing to 15 deals worth £1.01bn in the busier last three months of 2011.
There was little to cheer about for those seeking signs of a recovery in terms of activity in Q1, and stripping out a few sizeable transactions, the headline figure value-wise was largely in line with last year, though total deals concluded was 117 compared with 125 last year.
As David McCorquodale, head of corporate finance at KPMG in Scotland, points out a general shortage of available finance means it's the corporates with strong balance sheets who are most active in the market. He says: "To date in 2012, as was the case last year, the recurring theme we are seeing is one of predominantly strategic acquisitions, with a strong element of cross-border transactions.
"There have been a number of deals involving international acquisitions of Scottish companies, epitomised by Mueller AG's purchase of Robert Wiseman Dairies, and domestic businesses expanding overseas into new markets.
"Predominantly, deals are being conducted by trade acquirers as opposed to private equity houses as there is still reluctance amongst debt providers to offer the leverage necessary for private equity deals to compete. The trend of acquisitions by companies that strengthened their balance sheets post-Lehmans is one which we expect to continue."
Julian Voge, head of corporate and commercial at Brodies, believes much of the transaction activity in the coming year will centre around trade acquisitions. He says: "Banks will say they have funds available and they are ready to lend but we still aren't seeing many examples of the bank representative at a deal completion meeting ready to lend the money to complete the acquisition.
"We have to accept the banks are willing to lend, but we're just not seeing much evidence of that in the deals being done, and I'm not sure whether that is to do with the processes, given the banks are now more risk aware, or simply the cost of borrowing.
"The companies who have managed their costs over the years and are not currently over-leveraged and have cash to spend have the luxury of being able to pick and choose from a wide choice of potential acquisitions, and what we are seeing at the moment is a very cautious approach by buyers who want to make sure these acquisitions will add value."
Peter Lawson, partner and head of the corporate finance unit at Burness, explains further: "The Q1 deal market was pretty slow, with the double-hit of cautious corporates and the lack of debt finance. Private equity continues to be a primary driver of deals and our Q1 deals had a strong private equity focus.
"M&C Energy's acquisition of US energy consultancy Coleman Hines is a fantastic example of a private equity-backed Scottish business expanding internationally. Closer to home it is extremely encouraging to see the all-Scottish Panoramic Growth Equity's investment in Glasgow-based online design agency Dog Digital.
"Even with all the shake-up and uncertainty in the healthcare market following the woes of Southern Cross, very good healthcare businesses will attract interest, and the sale of Housecall Care and Support to Bridgepoint-backed Care UK is a good example. The healthcare sector seems ripe for further consolidation.
"Our outlook for 2012 is for private equity and overseas buyers to drive the deal market, with cash-rich corporates having an increasing, but very selective, appetite for acquisition as confidence in the market starts to grow bit by bit."
Lawson's sentiments that private equity will drive the market this year is rather at odds with the conclusions from a recent survey of general partners of UK private equity firms conducted by Investec Fund Finance.
Its study results, gathered from senior practitioners in small, midsized and large UK private equity firms, found just 57 per cent expect to see an improvement in the UK economy this year. The fall in market sentiment was most strongly reflected in fundraising ambitions, with just 31 per cent predicting their next fund will be larger than their current fund compared with 43 per cent last year.
Of these, 70 per cent said their next fund will be no more than 20 per cent larger compared with 85 per cent last year, though just 10 per cent believe their next fund will be smaller and the majority - 54 per cent - predict the next fund will be about the same size as the current one.
So what does that mean for the Scottish deals market? Well, if the bulk of fund managers are predicting their next fund will be similar or lower than their current fund, we can expect to see deals activity from that sector to be largely on a par with current activity levels.
Do the banks agree with the consensus access to finance remains one of the greatest obstacles in facilitating deals? Alasdair Gardner, head of corporate finance at Lloyds Banking Group in Scotland, certainly doesn't. He reports a rise in the number of enquiries from across a broad range of sectors in the past three months from companies who are now actively looking to do deals.
However, as Gardner also points out, the all-important "confidence" remains in short supply. He says: "Again, the big word is 'confidence', and we are having a lot more discussions about transactions, but people are still quite cautious about taking risks with one wary eye on the macro-economic picture; that means deals are taking a lot longer to conclude and we are seeing a lot more deals entering into the initial stages and not completing than we may have seen in the past.
"But we are seeing a pick-up in the number of discussions we are having with clients looking to put funding packages in place to go after deals, as opposed to six months ago when most of the discussions were asking if funding was available."
Brodie's Voge believes the overall pace of the deals market has slowed from the frenetic levels witnessed in the boom years between 2005 and 2008, and that concluding deals is a far lengthier process. He says: "Deals are taking quite a bit longer to conclude, which reflects the more cautious approach being taken by purchasers to ensure the deal is absolutely the right fit before they proceed. There was a lot of acquisition activity at the height of the market where businesses diversified into all kinds of things they had very little expertise in, and what we are seeing now is the contraction through restructuring and consolidation, and trade buyers with cash are in no hurry to conclude a deal."
David Leslie, head of corporate finance in Scotland with PwC, suggests some new trends are appearing in the deals market, particularly in refinancing. "The M&A market is proving tough, though certain sectors remain active, namely energy and industrial," he says. "There are also signs of more restructuring and creditor-driven deals, especially in retail and consumer, particularly businesses that require a lot of cash generation and face problems when they reach the end of their cash flow streams and the banks are nudging them over. I think we will see a lot more of that going forward.
"Another area of activity going forward will be debt packages being sold, or being refinanced, almost like a secondary market for debt."
One refinancing deal which completed in Q1 saw construction giant Miller Group agree a major debt restructuring. The transaction saw the company transfer ownership of 50 per cent of its stock in a s160m debt-for-equity swap agreed with its lenders and some senior executives within the company.
Another multi-million pound Q1 transaction was the Scottish Futures Trust-led financing deal, valued at £500m, for East Central Hub Scotland, which will deliver community construction projects across 17 Scottish public sector bodies over the next 10 years and create hundreds of jobs.
Hardly a deals quarter goes by in which Jim McColl doesn't warrant a mention, and the first quarter of 2012 was no exception. Clyde Blowers Capital, McColl's industry-focused investment vehicle, closed a £420m industrial investment – £70m ahead of the target fund size due to being "significantly oversubscribed".
Another notable deal valued in the hundreds of million in the first quarter saw the loss of yet another Scottish-based PLC. East Kilbridebased dairy giant Wiseman was bought out by German firm Muller Dairy in a £279.5m cash deal offer for the company. The offer price of 390 pence a share represented a 60 per cent premium on the quoted price when the offer was tabled, meaning shareholder approval was a mere formality.
Despite losing control of the company, which had been built up by three generations of the Wiseman family, their 35 per cent shareholding generated a comforting windfall of s98.1m.
Quoted Scotland managed to keep its numbers up, however, with the flotation of Livingston-based Energy Assets Group. The company, which is the UK's largest independent provider of commercial and industrial gas meters, launched on the London Stock Exchange with a market capitalisation of £57m on March 22.