International M&A Review: August 2017

United Kingdom

In what is traditionally a slower month in terms of M&A activity in the UK, August saw transaction volumes fall again month on month. There were 422 deals in total, representing a decline of just under 10% from the 468 transactions recorded in July, and by 24% on August 2016’s total of 554. The decline in activity was evident across all value segments but was particularly striking at the top end, with a 32% fall in the number of large deals and the number of mega-deals down to two (from seven last month).

Meanwhile the combined value of transactions reached just £12.6bn, down from £32bn last month and amounting to just over half of 2017’s monthly UK deal average of £25bn, as UK Plcs largely held their fire. Instead, the month’s top three deals each stemmed from private

equity investment. In the largest, Pi UK Bidco Ltd, London, England, a buy-out vehicle led by Blackstone and CVC, agreed to acquire Paysafe Group Plc, Douglas, Isle of Man, provides payment and money transfer services. The deal follows numerous transactions in the increasingly fertile digital payments space, one of which was US transaction processing firm Vantiv’s £7.7bn purchase of UK rival Worldpay last month. Consolidation in the sector 800 looks set to continue.

Elsewhere, US private equity house Leonard, agreed terms on the £2.4bn acquisition of intellectual property services business CPA Global from London-headquartered Cinven. Cinven originally took control of CP in 2012 for just £950m, growing the business through a series of acquisitions in the US and Europe. Next, Bridgepoint inked a deal to acquire Miller Homes, described as the biggest privately-owned housebuilder in the UK, for £665m.

The deal, Bridgepoint’s second of the year following its £750m purchase of fleet management business Zenith Group Holdings in January, sees the private equity

house attempt to capitalise on future growth in the UK’s burgeoning house building boom, with the number of new homes being built sitting at its highest level for ten years, according to recent figures released from the Department of Communities and Local Government.

Drilling down to the facts and figures of August’s M&A landscape, deals in the financial services and insurance sector continued to dominate, accounting for 35% of all transactions by value and more than half of their total value. Infocomms and professional services were next most active, with 23% and 19%, respectively, but activity in the manufacturing sector, traditionally a key driver of deal volumes in the UK, fell off sharply month on month (from 121 deals last month to just 70 in August). Trade acquisitions remained the most common deal type despite a 16.5% drop off in volume. Meanwhile the number of early stage venture capital deals was down by 43% on July’s total of 92 deals, although MBOs and private equity-backed buy-outs were on the up (by 72% and 6%, respectively). Around a fifth of deals contained a cross border element, with more than half of these transactions involving a company based in the United States – German (12 deals), Irish (eight) and Australian (seven) businesses were also frequently involved in UK tieups.

Shoosmiths was the UK’s busiest legal adviser by deal volume in August, with a role in 13 deals, closely followed by Gateley (nine deals), Addleshaw Goddard and Ashfords (seven apiece). AIM adviser Cenkos headed the financial table with 14 deals.

UK consumer prices

September 2017 release

Consumer price inflation (CPI) rose to 2.9% in August, from 2.6% in July. This is in line with the four-year high struck in May.

In July it looked as if the pace in which the weakness in sterling, and the associated increase in import costs were working themselves out of the annual inflation comparison was picking-up. However, pressures intensified once more last month, with the euro hitting

an eight-year high against the pound. The annual rate of inflation for goods leaving the factory gate also rose for the first time in six months, increasing by 3.4%. Similarly, price rises for materials and fuels (input prices) accelerated to 7.6%, up from 6.2% in July.

Rising prices for clothing were the largest contributor to the increase in CPI between July and August, with inflation rising from 3.2%, to a record 4.6%. Price growth for clothing bought by consumers has remained relatively flat or negative since 2014, but has been on an upward trend since early 2017. There has been a very close relationship between import costs for clothing

manufacturers and the inverted sterling effective exchange rate since 2012. Clothing is a heavily imported good, and the increase in price inflation in the category may be partly associated with a lagged response to the depreciation of sterling during 2016.

An increase in motor fuel prices was the other major contributor to the rise in inflation in August. As with clothing, sterling’s weakness has driven up the cost of fuel over the past year, as the majority of the demand is filled by imports. However, over the past month the global oil price has risen by almost 10 dollars a barrel. Weather disruptions on the Gulf of Mexico and geopolitical tensions on the Korean peninsula could see prices rise further in the coming months.

Inflationary pressures also persist amongst the other components of CPI. Core inflation, which strips out the volatile energy, food, alcohol and tobacco components, accelerated to 2.7%, a six year high, and in the goods and services aggregations, inflation rose to 3.1% and 2.7% respectively.

In the coming months we expect the remaining import cost pressures linked to sterling’s slide to push inflation up to around 3%, before it slowly falls back through 2018. A further increase in the global oil price, or a prolonged weakness in sterling present key risks to the upside. In the meantime, with employee pay growing by 2.1%, real incomes continue to fall, constraining consumer spending and output gains.

Source: Experian Business Research: August 2017

James Ison Senior Economist