The expected continued decline in the volume and value, which started back in Q1 2020, continued in Q3 2022. However, there are some nuggets of good news and a potentially brighter future for the UK&I M&A market. Our Corporate Finance team at PKF Smith Cooper take a closer look at dealmaking activity during Q3 2022 and the positives that can be taken from it.

Given the uncertain economic landscapes in UK&I, the wider EMEA region, and a good deal of the rest of the World, UK&I deal activity was expected to slow down in 2022.

A recent analysis from Datasuite showed UK&I M&A deal value in Q3 remained broadly the same as the last 3 quarters – at €65.2bn. However, despite the dampened deal activity, the UK remained the leading EMEA country for deals in Q3, with 396 transactions.

Some of the main features of the UK M&A market in Q3 2022, highlighted by the Datasuite report, include:

TMT drives volume

Telecoms, media and technology (TMT) remained the UK’s best-performing sector by volume in Q3, with 107 deals. However, it fell into second place in terms of aggregate deal value, coming in at just over £16bn.

TMT’s unseating from the top spot could be regarded as anomalous, being caused by an arguably exceptional high-value deal in the Consumer section.

TMT has continued to be a strong sector throughout 2022. Even as the pandemic impact dwindles in the UK, the significant shift towards digital solutions has endured. With many sectors impacted more acutely by economic headwinds or structural issues, the TMT industry could prove to be a pillar of strength for the UK&I M&A market in 2023.

James Ward, Corporate Finance Director at PKF Smith Cooper, commented: “When assessing the overall M&A market, sector matters. Some sectors, like retail and leisure, have additional structural issues (online competition, staffing, property costs, etc) to contend with and M&A activity is likely to be subdued.

“However, other sectors enjoy tailwinds and so activity is significantly higher. An example is the fire and security sector which has seen increasing activity since Grenfell resulting in an increased awareness of legislation that obliges property owners to protect human life. At PKF Smith Cooper, we have a specialism in this market and have assisted on a number of sector deals that are spawned by the consolidation of this highly fragmented market.”

David Crump, also Corporate Finance Director at PKF Smith Cooper, added: “Even within a sector there can be winners and losers. Take the restaurant sector, a specialism we’re known for on a UK-wide basis. During the pandemic, the fast-food operators that were already focused on delivery, or that could quickly embrace delivery, click-and-collect, and drive-thru performed fantastically – Domino’s and KFC, for example. Conversely, casual, and formal dining restaurants, coffee shops, and similar operations which involve much more human contact and had to close, struggled even when regulations were relaxed.”

 The consumer sector surprises on value

One of the most surprising standouts of Q3 was the UK&I consumer sector, scoring the largest aggregate deal value. This was mainly caused by GSK’s landmark €30.5bn deal to spin off its Consumer Health division, Haleon, which accounted for over 90% of the total £32.3m deal value for the consumer sector.

James Ward commented: “The consumer sector topping the charts is probably a one-off. In UK&I we expect TMT, business services, and financial services to dominate deal volumes going forward – as they have done in recent years.

“In terms of values though, we expect to see another trending sector, such as energy and mining, joining the three above. Despite commodity prices having slumped from their August 2022 highs recently, commodities remain at relatively high levels, and some are driven by climate concerns and the shift from fossil fuels.”

 Sterling’s weakness attracts US buyers

The sterling has been falling against the US dollar since mid-2021. But, following Liz Truss’ September mini-budget, it fell to a record all-time low.

As might be expected, this has bolstered US buyers’ interest in UK M&A opportunities, as US buyers acquired 74 businesses in Q3. This is significantly greater than Canada in second place with just 19 deals, although the aggregate value was relatively modest at £6.4bn.

David Crump commented “In our view, that’s surprising given the extent of the pound/US dollar exchange arbitrage. For illustration, the £6.4bn compares with acquisitions by French buyers, the leading inward investors in Q3, of £10.8bn.

“Notwithstanding this, in 2023, we believe it’s possible that US buyers could become a major element of inward investment, both in volume and value – if the Sterling doesn’t recover against the US dollar. That opportunity could be relatively short-lived. However, at least one High Street bank’s economists think there’s a chance that the pound could recover significant ground against the US dollar by the end of 2024.”

The prognosis?

Darren Hodson, PKF Smith Cooper’s Corporate Finance Partner, sums up by saying: “There are glints of light looking forward, despite the UK and Germany forecasting negative growth in 2023. The UK&I recession could, according to some leading economists, be quite short and not too deep – although the Ukraine impact will likely act as a drag on recovery if the war continues.

“Inflation forecasts show a potential reduction to around 3% in 2024, albeit going higher before reducing. That reduction depends on food inflation easing now that global supplies have stabilised, and energy costs continuing to fall gently. US inflation is generally seen as having peaked now, and that augers well for us.

“Pundits say that providing the Bank of England manages rates well, interest rates could stabilise at around 4% in the long term. The jury is out on that one.

“Nevertheless, the PKF Smith Cooper Corporate Finance activity, which is in the SME market, remains at high levels and the pipeline of enquiries is as strong as ever. We think some sectors will show particularly high activity, driven by consolidation caused by legislation or key trends such as energy efficiency and the desire to reduce dependence on overseas supplies. We’re optimistic for a good 2023.”

How PKF Smith Cooper can help

Whilst the changing economic, political, and fiscal climate creates complexity, it also yields opportunities for both investors and sellers. By working in collaboration with you, PKF Smith Cooper can help you to unlock them.

Our highly accredited and award-winning team of corporate finance specialists provide informed financial advice tailored to the needs of your business. Whether you’re buying or selling, together we can ensure that your financial strategy is a success.

For further advice and guidance on how we can support you, get in touch with us today. Our Corporate Finance team has extensive experience in helping businesses like yours achieve financial stability.