Valuations Sharpen
U.S. Private Equity
Appetite for UK
Companies

U.S. private equity appetite for UK companies has intensified since the start of the year. Large firms with sizeable funds to deploy have been looking for value in increasingly heated global markets. The UK, hit by the twin impacts of COVID-19 and Brexit, presents private equity with opportunities to buy assets at attractive valuations and tap into strong companies, often with international footprints and promising prospects.

The attention of large U.S. sponsors is not without controversy, however. Approaches for large, listed companies have also drawn media attention, with questions asked about job security for UK employees, the use of leverage, asset sales to pay down acquisition debt, export of technology and national security. There is also growing competition, putting upward pressure on prices, and a partial recovery of sterling, eroding some of the U.S. dollar currency advantage. Private equity firms are faced with the prospect of having to move quickly, but also tread carefully.

Valuations Rise but Remain Relatively Attractive to U.S. Buyers

Inbound UK M&A deals took off in the second quarter as international buyers focused on British businesses. Inward investment jumped to £27.7 billion from £8.3 billion in the first quarter, far outstripping domestic M&A which hit £10.6 billion, according to Office for National Statistics Data1.   

The principal attraction of UK companies is the low valuations compared with international peers. In early September, the FTSE 100 still languished 7.5% below its early 2020 high, in stark contrast to the S&P 500, which was more than 33% higher than its pre-pandemic level. While not in the same league as their U.S. counterparts, continental European stocks are also at record levels – the Stoxx 600 is some 9% above its pre-pandemic position. On relative terms, UK listed companies therefore appear attractive to buyers, who may also be encouraged to carry the same valuation expectations into the market for unlisted companies.

For U.S. firms, the dollar has multiplied the attraction of the UK. While sterling has recovered substantially over the past year, it is still some 7% below the immediate pre-Brexit vote level of 2016, and even further below its post-financial crisis range of the early 2010s. At the same time, the euro is about 7% stronger than it was in mid-2016, meaning that US dollars go further in the UK today than they do in the eurozone.

International Optimism in the UK Strengthens

While domestic valuations remain depressed, international confidence in the UK has strengthened, thanks in part to the success of the vaccination programme, steady reopening, and its favourable business environment. A survey of some of the largest U.S. corporations by association BritishAmerican Business and consultancy firm Bain found that one-third rated business confidence at the highest level, while some 60% planned to increase investments in the UK2. Some concerns about the impact of Brexit remain, however, with 17% of companies surveyed saying they had relocated staff to the EU. 

Private equity confidence in the UK market has also increased, reflected in one of the strongest ever starts to the year for private equity deals. According to KPMG data, 785 UK deals were completed for a combined value of £73.7 billion in the first half of 2021, a 48% increase in value on the previous year3.

While a number of large deals have been concluded, including Blackstone’s purchase of property company St. Modwen, and KKR’s purchase of infrastructure group John Laing, others remain under consideration as they generate competition. In September, British supermarket chain Morrisons called on the UK’s Takeover Panel to run a formal auction for the business after more than three months of offers and approaches from Clayton Dubilier & Rice and a Fortress-led consortium. It follows an auction process between the Carlyle Group and Philip Morris for health company Vectura in August, highlighting the growing trend for competing bids for public companies as multiple sponsors home in on attractively valued businesses.

Regulation and Foreign Direct Investment Scrutiny Increases

International investors and businesses have long considered the UK to be an open and flexible business environment. Recent bids for high-profile businesses have drawn public interest and government scrutiny, however. The British business minister Kwasi Kwarteng sought assurances from Morrisons' management about future jobs, pensions and operations in light of private equity bids. In August, he also referred the planned takeover of UK-listed defence technology group Ultra Electronics by Advent-owned Cobham to the Competition and Markets Authority under the Enterprise Act.

It is not only private equity-backed buyouts that are under scrutiny. The UK government has said it is taking an active interest the proposed takeover of aerospace and defence company Meggitt, which is still in the sights of U.S. rival Parker Hannifin after fellow suitor TransDigm pulled out.

Powers to investigate mergers and acquisitions are set to increase with the new National Security and Investment Act. Under the new regime, which will come into force in January 2022, the government will have significantly enhanced powers with the ability to impose conditions on deals, or potentially unwind and block investments. The Act also encompasses a five-year retrospective power to call in acquisitions which were not notified but may raise national security concerns. International buyers, including private equity firms, should expect more regulatory involvement in deals. However, an important mitigating factor will be the UK’s desire to retain its status as a leading destination for international investment, especially as it builds alliances and trade routes in the post-Brexit world.

Michael J. Preston
Partner

London
T: +44 20 7614 2255
mpreston@cgsh.com
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Gabriele Antonazzo
Partner

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Michael James
Partner

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T: +44 20 7614 2219
mjames@cgsh.com
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Michael J. Preston
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David J. Billington
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Michael James
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Lawale Ladapo
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Marijke Spooren
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Michael J. Ulmer
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Mirko von Bieberstein
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Roberto Bonsignore
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David Singer
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