M&A in Scotland

Dealmakers in Scotland are continuing to go through an exceptionally lean period. 

Dealmakers in Scotland are continuing to go through an exceptionally lean period. 

Dealmakers in Scotland are continuing to go through an exceptionally lean period.

In the first half of this year M&A transactions north of the border totalled £1.8 billion. That’s down from £32.8 billion for the same period in 2009.

Bruce Walker, director of corporate finance at KPMG Scotland, confirms that M&A activity has been scarce across the central belt from Glasgow to Edinburgh, either from corporate or private equity acquirers. He says: ‘The major activity in the market is restructuring because there are still a lot of businesses in financial difficulty. Restructuring does give opportunities for M&A because of potential disposals at attractive prices for corporates, but I think it’s going to be next year before we see any upturn.’

Walker says that the house building industry has undergone the largest restructuring in the past 12 months, which has also affected related businesses including building suppliers and architects. He says that two of the most active sectors are finance and life assurance, adding that there were only one or two private equity deals across the central belt in the whole of the past 12 months.

Bright spots  

Over the past year there have been strategic acquisitions of Scottish companies from buyers outside the region, including the purchase of communications company Nessco by SpiriTel in March. The deal represents the first step in a move to expand its presence across the country, says SpiriTel’s chief executive, Alastair Mills: ‘In Scotland I’ve spoken to five out of the 37 companies on my list at the moment that I’m having a serious look at.’

Graham Cunning, regional director for acquisition finance at Clydesdale Bank, has noticed signs of confidence returning to the Scottish transactional market. ‘I think the market has come back to more sensible banking,’ he says. ‘Most businesses aren’t over-leveraging themselves and there’s certainly private equity money out there for the right opportunities, but people are just being very cautious and wanting to check things through before they invest.’

Happily, Cunning says that Clydesdale’s lending pipeline comprises bigger and better quality deals. He adds: ‘We’re seeing a mixture of new buy-ins and some follow-on acquisitions from companies that see an opportunity in the marketplace for some sector consolidation.

‘The main thing is that people are being more sensible with their debt-equity ratios. If they can get funding they’re not too precious about the type and the nature of it.’

Big guns

Private equity firms have been playing a bigger role in the oil and gas sector in Aberdeen, according to KPMG’s oil and gas corporate finance director, James Robinson: ‘The [private equity] sector specialists have been active in putting minority stake and growth capital into businesses. Oil and gas companies want to invest capital in equipment now because they can see an upturn coming.’

This year the Scottish law firm Burness advised the Dunfermline-based energy consultancy McKinnon & Clarke on its £22 million MBO in January and subsequent acquisition of Encore for £6.25 million in June. Burness’ head of corporate finance, Peter Lawson, comments: ‘The biggest obstacles to dealmaking are the lack of availability of debt combined with the lack of willingness of businesses to extend themselves by taking on new debt, and that’s quite a lethal combination.’

Lawson acknowledges that there has been an increase in international buyers for Scottish companies. ‘Scotland has historically been a fertile source of deals for international buyers,’ he says. ‘There tends to be a bit of a funding gap for Scottish businesses, especially in the technology sector when they get to around the £10 million deal size and they don’t have the capital to carry on themselves. So quite often a US or Canadian business will come in and snap them up.’

The recession has caused most companies to take stock of their business and in some cases to sell off less profitable divisions. In April this year Scottish broadcaster STV sold cinema advertising company Pearl & Dean to
the director of Empire Cinemas, Thomas Anderson.

‘In 2007 the strategic decision was made to divest some acquisitions and focus more on the broadcasting core here in Scotland,’ explains George Watt, the CFO of STV. ‘We sold Virgin Radio in 2008 and Pearl & Dean went this year.’
The latter was sold for the nominal sum of £1, as the £20 million turnover company was losing between £8 million and £10 million a year. Watt explains that the losses were due to an onerous contract that was coming to an end, which was why STV chose to sell at that point.

‘We’ve finished off our divestment process now,’ Watt adds. ‘I think in the longer term we’d always be looking out for acquisitions that can bulk up the group and bring us some value, but it’s not our focus right now. The capital constraints that we operate under are such that we’re more focused on paying off debts and organic growth over the next 12 months.’

For the meantime, many companies in Scotland will have a similar strategy.

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

Related Topics