Sophie Rogers, Analyst at Bracebridge Corporate Finance comments on the roller-coaster ride of M&A activity in the first half of 2020 and the implications for business owners considering a sale
M&A activity was showing an upward trend in the early part of 2020, particularly as the uncertainty around Brexit started to lift and we left the EU on 31 January. However, by the end of March, most deals had been put on hold or aborted.
In the first half of 2020, 1747 deals involving a UK target company were announced, compared to 2258 in the second half of 2019 (Source: Zephyr, published by Bureau van Dijk, based on the sale of 20% or more in a UK company), a reduction of 23%. This is the lowest volume of deals in the UK in the first half of the year for several years. Research by Experian showed a reduction of 36%.
Many industry sectors, such as travel, tourism, hospitality, non-essential retail, automotive, to mention a few, will have been severely impacted by Covid-19 and this will have had a direct impact on M&A activity in those sectors. Just a few days ago we saw the purchase of Drayton Manor Park out of administration by Looping Parks UK, which already owns West Midlands Safari Park. In February, Storm Dennis forced the Park to close unexpectedly, whilst its planned reopening in March was delayed due to Covid-19. These factors combined exacerbated cash flow pressures on the group.
On the other hand, on-line / e-commerce, technology, healthcare, hygiene products, and pharmaceuticals will have seen a significant upturn in business and have been the subject of some interesting transactions in the first half.
The sale of Wellbeing Software to Australian group, Citadel for £103m. Wellbeing is a market leading provider of radiology and maternity software solutions that manage patient workflow and data. It generated revenues of £16.6m and £6.5m EBITDA in the year to 31 December 2019 and is forecast to generate £18m revenue in this calendar year. This is a good example of a strategic acquisition, driven by high levels of recurring revenues, a strong pipeline and visibility on current year revenues, access to immediate market share in the UK, opportunities to broaden the product suite and customer base and opportunities for cross-selling.
In the business services sector, Marlowe plc were particularly active in the first half, announcing 5 transactions involving consultancy / HR / occupational health related businesses and also software businesses. It has acquired Elogbooks, a leading provider of contractor management software and services, for an enterprise value of up to £14.05 million. The acquisition represents the next step in Marlowe’s strategy to deliver integrated technology and services to enhance the compliance, safety & upkeep of its clients’ premises.
In the healthcare sector, it was interesting to see the acquisition by H.I.G Capital of Vernacare, providing an exit for Palatine Private Equity. Vernacare is an industry-leading manufacturer of infection control systems. Since the acquisition, Vernacare has also announced it has acquired the Infection Prevention business of Frontier Medical. The deal includes the brands Sharpsafe®, Clinisafe® and eXchange™. Terms of the transaction were not disclosed.
In the pharmaceutical sector, Rosemont Pharmaceuticals was acquired by Inflexion Private Equity in a £156m carve out deal from Perrigo. Rosemont has a portfolio of more than 130 oral liquid medicines including 70 licensed products, which are sold into the UK as well as the US, Continental Europe and the Middle East.
Cazoo, one of the UK’s leading new tech businesses for selling cars on-line, announced that it has raised a further £100m of funding as it seeks to accelerate the UK’s shift to online car buying. Cazoo is the latest venture from Alex Chesterman, who previously founded LoveFilm and Zoopla. Cazoo has raised a total of over £180m since being founded less than 18 months ago, a record for any UK start up in its first year of operation. This latest funding round was led by DMG Ventures alongside other investors including General Catalyst, CNP (Groupe Frère), Mubadala Capital, Octopus Ventures, Eight Roads Ventures and Stride.VC.
As we can see, strategic deals and fund raisings are still happening in the midst of the global pandemic. But interestingly, these deals are in sectors that have performed well.
For sellers, getting a deal done before Covid-19 hit the UK would have been perfect timing, not to mention getting it done before the Entrepreneur’s Relief (now called Business Asset Disposal Relief) lifetime limit was reduced from £10m to £1m with effect from 11 March. Sellers should also keep in mind potential future changes to capital gains tax.
Andy Moore, Managing Director of Bracebridge Corporate Finance commented:
“We expect to see a significant upturn in M&A activity later this year, as many deals that were put on hold are resurrected and buyers start to feel more confident about acquisitions. Buyers will be looking for opportunities to reduce valuations, so if you are looking to get your sale process back on track, or if you are thinking about a sale in the next couple of years, now is the time to prepare and reassess your exit plan. Sellers ideally need a business plan showing what the next 3 years look like from a profitability and cash flow perspective. It will be important to assess the direct impact of Covid-19 (positive or negative) as buyers will be looking at this as part of their due diligence.”
Businesses that can demonstrate a clear growth strategy and are well organised will attract higher valuations. As things start to return to normal, there will be an opportunity for businesses to secure a successful exit, but this is will require advance planning more than ever”.