Scotland’s deals market failed to recover any ground in the third quarter

Scotland’s deals market failed to recover any ground in the third quarter.

Scanning down the total deals value table Q3 came in much as the professionals predicted – a virtual flatline in terms of overall value at £3.75bn, down from £3.78bn last quarter, with oil and gas once again rescuing wider deals market activity. There were 110 deals in total completed in the third quarter of 2012, down from 160 reported in the third quarter last year. The overall total value of deals dropped from £8.42bn last year to £3.75bn this year. It’s important to bear in mind that in 2010 Insider began including deals valued at less than £500,000.

Looking down the list of annual comparisons shows a downward spiral in deals activity on a year-onyear basis. There were 89 Scottish company deals reported in the third quarter of 2012 with a value of £1.92bn, down from 119 deals in the third quarter of 2011 worth £4.85bn. Non-Scottish but UK company deals dropped from 33 last year to 19, and in value terms from £2.4bn to £1.54bn. Overseas company deals fell from eight last year to just two, and from £1.17bn in value terms last year to £286.5m this year.

On a quarter-to-quarter comparison, the experts who commented in the last round-up were proven right in their predictions the market would be flat, with 89 Scottish deals reported, matching the previous quarter total, though down in value from £2.32bn to £1.92bn. And there were 19 ‘rest of the UK’ company deals in the third quarter of 2012 compared with 21 the previous quarter, though values were up slightly from £1.46bn to £1.54bn. There were just two overseas deals, matching the last quarter figure, for a total deal value of £286.5m whereas deals value in the previous quarter were not disclosed.

Activity in the oil and gas industry continues to dominate the wider deals market and recent tax incentives announced by the Chancellor appear to have kickstarted a resurgence in deals activity in the sector. In his 2012 Budget the Chancellor announced two massive tax breaks for the oil and gas industry, which were expected to stimulate £50bn of new investment. These included a £3bn tax break to encourage development of massive oil finds off the coast of Shetland as well as improvements in small field allowances. The Chancellor also announced changes in tax treatment to “end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach”.

And there was more good news for the offshore industry in September when the Chancellor announced a partial U-turn on the £2bn windfall tax on North Sea oil and gas firms he announced in the 2011 Budget. The series of incentives were introduced after figures in 2011 revealed the biggest ever fall in production output, down 19 per cent. In addition, half as many exploration wells were drilled in 2011 compared with 2010. This was followed by a 15 per cent year-on-year drop in production in the first half of 2012. The message from the industry was clear – an uncertain tax regime is not a favourable market in which to do business, and the Chancellor has ended up having to concede more incentives to entice the oil firms back. And back they have come.

Jason McBurnie, director in corporate finance at PwC in Scotland, says foreign buyers in particular are now looking to pick up North Sea assets. “Foreign buyers are certainly seeing value in making acquisitions for Scottish assets, particularly in technology and oil and gas. My sense is, overall, the market is pretty flat, oil and gas consistently being the stand-out performer.

“In the last 12 months we have seen the Chinese coming from having no interest in the North Sea to now having a fairly sizeable interest through a couple of deals they have done with Nexen and Talisman.”

The Department of Energy and Climate Change (DECC ) received a record 224 applications in the most recent licensing round for oil and gas projects in UK waters and awarded 167 new licences covering 330 North Sea blocks. A further 61 blocks have also been referred by the Department of Energy and Climate Change (DECC ) for environmental assessment in the 27th licensing round. Applications for this latest licensing round surpassed the record set in the previous round by 37.

That surge in activity is reflected in the most recent deals quarter, with 15 Scottish deals linked to the oil and gas sector generating deal values adding up to £1.4bn. Nine of the top 10 deals in the quarter are also linked to activity in the oil and gas sector.

Sonia Love, a partner and oil and gas specialist at law firm Brodies’ Aberdeen office, says funding issues for developers appear to now be easing. “We have a number of clients who were awarded licensing blocks in the latest licensing round. The tax incentives announced by the UK Government will make a huge difference, and we are also now seeing our clients being able to secure financing – which has been difficult until recently and still is to some degree – from a variety of sources including private equity and to smaller independents as well.

“There is a fair bit of activity in the North Sea just now and I think activity will remain buoyant over the next 12 months. There is a lot more field development going on, appetite for asset deals from overseas companies is very strong just now, and the tax incentives are definitely linked to that rise in activity. “In the last three months we have seen two flotations in oil and gas and I don’t think those would have necessarily happened even 12 months ago.”

Topping the list of the quarter’s deals in value terms was the sale of a majority shareholding in Wood Mackenzie by Charterhouse to private equity rival Hellman and Friedman in a deal that valued the business at £1.1bn. Wood Mackenzie branched out in 1974 to compiling specialist reports for the North Sea oil and gas sector. The company has since grown to operate 20 offices globally covering 93 countries, providing information and analysis to more than 800 companies in the energy, mining and metals industries.

For Charterhouse, which bought Wood Mackenzie for £553m in 2009, the deal represents a sizeable return. Hellman & Friedman has secured a 63 per cent stake in Wood Mac, and Charterhouse reinvested to retain a 13 per cent share, with the remaining 24 per cent stake in the business retained by Wood Mac’s management and staff.

Cahal Dowds, head of private markets and corporate finance advisory UK at Deloitte, describes the Wood Mackenzie deal as a “flagship” transaction. “We were delighted to have advised on this latest transaction with Hellman & Friedman. It was a fantastic deal that happened at pace and demonstrates that even in today’s challenging markets there is certainly debt and equity capital available for the right quality of business.”

The next notable deal in the third quarter was Cairn Energy’s £414m acquisition of London-based Nautical Petroleum, which has most of its operations in waters west of Shetland. Cairn said the acquisition would give it assets for near-term production following a fruitless two-year drilling campaign offshore Greenland which has cost the company around £500m.

The next largest deal of the quarter was a new listing on AIM for West African-focused Eland Oil and Gas, raising £118m from its share placing.

The only non-oil and gas deal of the top ten was the £58m sale of Islay-based Bruichladdich Distillery Company to French drinks giant Remy Cointreau, which also saw Remy assume £10m of the company’s debt. The deal is thought to be the highest price ever paid for a distillery. Mark Reynier, former chief executive of Bruichladdich, who led the group who bought the distillery in a £6.5m deal in 2000, announced in October he was leaving the company “to find a new challenge”.

PwC’s McBurnie, who recently returned to Scotland after spending two years in China, says large deals in the whisky sector are largely being driven by demand from economies like China, which have a large emerging middle class quickly developing a taste for Scotch whisky. “Bruichladdich is an interesting deal in that the bulk of whisky distilleries now sit within conglomerates or in international hands, and Remy Cointreau has obviously seen a bit of scarcity value on that asset as it is a very attractive brand,” he says. “However, there can’t be that many sizeable deals left in that space unless of course some of the bigger family-owned distillers can be tempted to sell.

“The whisky industry has been quite sensitive to tariffs in the past, but from my time in China there is no doubt the Chinese are fast developing a passion for whisky, and there is now a huge scramble out there to access middle-class wealth. It is branded firms from around the world who are fighting for that newfound wealth.”

Pinsent Masons was involved in a number of stand-out deals in the technology sector in the third quarter. Barry McCaig, partner and corporate finance specialist with the firm, says: “Most of the deals activity we have been involved in has been in oil and gas, but we have also been involved in a few technology deals for a couple of longstanding clients.

“We worked with Cupid on the acquisition of Uniform Dating, which was funded through a placing. And Iomart picked up a good deal in the quarter, buying Manchester-based Melbourne Server Hosting Ltd to expand into the north of England.”

Looking ahead, PwC’s McBurnie says clients are still choosing their targets carefully, and he sees no immediate change in that sentiment going forward. “We know clients who want to find an exit at some point, maybe not in the next six months, but certainly at some point.

“If you look back even five years ago we would have kicked off a sales process almost right away and there would have been a competitive auction with private equity generally scrambling for a good opportunity along with strategic trade buyers, who were in many cases priced out by what was then a very buoyant private equity industry which had access to bank leverage.

“I still think there is a shakeout yet to come, and whether that comes in a glut or that shakeout is more measured remains to be seen. But we will see a shakeout of businesses which maybe have been struggling along and the banks have been kicking the can down the road a little bit while they deal with the headaches in their own portfolio.

“What is interesting in the current market is it has levelled the playing field for the corporates, and I wonder if we will see some of those bigger family-owned companies or Scottish listed companies doing deals with cash reserves because there isn’t the competition from private equity in many sectors that there used to be. But there is also a wall of private equity money still out there raised from investors which they have to spend before they end up with problems on their hands.”

Pinsent Masons’ McCaig says “barring oil and gas and, to a lesser extent, technology there really isn’t a lot of deals work going around at the moment”. He adds: “There is just not enough liquidity around and no appetite for risk taking. The banks can’t get rid of their non-core assets in a concerted rush because they would just flood the market and that would affect pricing.

“That has left the distressed market in a bit of a bind because you have a perfect storm of conservative sentiment, lack of funding and an unwillingness to put assets on the market with the attendant worries of depressing the price. The banks insist they have money to lend, but their customers are reluctant to borrow because the sentiment is still very much conservative in approach.”