FOLLOWING the post financial crisis lull in 2009, North East deal activity remained weak throughout 2010. Despite some trepidation following the new coalition government's VAT increase and 2011 being the first year of tightening public budgets, local deal activity increased during the first half of 2011 and the momentum was maintained throughout the year as private equity buyers as well as strategic buyers returned to the market.
172 transactions were completed in the region during the year with disclosed deal values reaching over £4.38bn. These figures show an increase in deal volumes of more than 20 per cent and deal values doubled compared to the previous year. Although the total deal value figure has been distorted by the £2.4bn acquisition of Northumbrian Water, which completed in November, the underlying figures provide grounds for cautious optimism.
In contrast to the North East deals market Dealogic reported UK deal volumes down 9% on 2010. Global deal volumes did show a small increase of 3%. Although the acquisition of Northumbrian Water was by far the largest transaction of the year, there were five further deals with disclosed values greater than £100m and a further five between £10m and £100m.
Two North East PLCs were acquired during the first half of the year; US business GE acquired Wellstream for £800m in February and in April Eaga was sold to Carillion for over £300m. By the end of the year the number of PLCs in the region had reduced by five leaving fewer than 25 North East companies with a stock market listing.
The energy and resources industry is expected to be the most active in 2012 as this continues to be a key market for consolidation as evidenced by the Wellstream deal. Other regional deals in the sector last year included the management buyouts of International Pipeline Products and Tekmar Energy.
Cross border M&A continues to play an important role in driving deal activity in the region. Companies use acquisitions to enter faster growing markets, increase market share and broaden geographic footprints, achieve economies of scale and capture international innovation. In addition to Wellstream, Metal Spinners Group was sold to a US business as was the engineering test business of SGW Construction. North East based businesses also made cross border acquisitions including Aesica’s purchase of three manufacturing sites in continental Europe from UCB and Nomad Digital acquiring in Germany and Austria.
Figures from the Centre for Management Buyout Research report a decrease of over one-third in private equity buyout activity nationally in 2011. In contrast private equity houses made a number of significant investments in the region after a prolonged absence including Marlow Foods, Kitwave, Onyx and Aesica Pharmaceuticals.
Despite the continuing global economic turmoil, there remains optimism for market activity for 2012 when opportunities are linked to strong growth stories and consolidation in key industry sectors. Trade buyers in particular, with available cash reserves, could move quickly to catch bargains in the current uncertain market conditions.
However, credit markets remain a critical wild card factor for M&A in 2012. The macroeconomic and financial sector uncertainty which continues to grip markets makes predicting the likely course over the next six months difficult. Macro issues will continue to weigh heavily on financing markets in 2012 with comparisons with the issues banks were grappling with in 2008 being hard to ignore.
There is however a significant difference in market conditions between the middle market (debt deals up to £200m) and the larger deals market. In the larger market space, the lack of fund liquidity makes banks unwilling to underwrite new deals. The characteristics of the middle market, which are often financed through a club of banks drawn together by an adviser, mean that for the right credits, the debt element of the funding package can be put in place and therefore deals can still get done. So whilst the debt market is tough, most regional deals can still get funded if they are sensibly structured.
Although the global economic environment for 2012 may be impossible to predict we can take some comfort in the North East from the level of activity in the local deals market during the previous year which has bucked the national trend. Whether this momentum can be maintained will be seen in the coming months – watch this space!
:: Paul Mankin is corporate finance partner at PwC in the North East, tel: 0191 269 4318 or email: paul.mankin@uk.pwc.com