It has been the year of the “unprecedented”, the “extraordinary” and the “exceptional”. Roadshow jet-setting became Zoom-jockeying, drones filled in for a kick at the tyres and, for some, “overworked” took on a meaning of its own. 

And not without reason, new Mergermarket data shows: the number of deals involving UK targets this year slumped to its lowest sum (966) since 2010, when just 949 transactions were booked in the fallout from the financial crisis. 

“2020 was an extraordinary year, but 2021 should see a different set of dynamics on the back of an unprecedented crisis that has forced our clients to look at the world differently,” says Philipp Beck, EMEA Head of M&A at UBS. 

For many corporates, looking “differently” has meant looking opportunistically – especially for those seeking to exploit dampened trading valuations amongst UK quoted companies. 

Toscafund’s 97p per share offer for broadband provider TalkTalk [LON:TALK] and an ongoing hostile bidding war between BC Partners-backed GardaWorld and Allied Universal for G4S [LON:GFS] mirrored approaches from across the continent, where a GBP 1.87bn take-private bid for Altice Europe by founder Patrick Drahi and a GBP 2.82bn offer for Metro AG [ETR:B4B] by Daniel Kretinsky’s EP Global Commerce led the charge. 

Emboldened opportunism looks to be going nowhere fast, according to a new study by Peel Hunt, which notes that “UK markets continue to look relatively cheap, with COVID-19, Brexit and economic uncertainty weighing on valuations.” 

So what can we expect? More take-privates, says Beck: “This year, several large shareholders took companies private opportunistically. As we move into a more normalised 2021, you can expect to see more ‘vanilla’ take-privates.” 

Technology treasure 

Much of that which has been promising about dealmaking during the time of a pandemic has come at the hands of aggressive consolidators in the financial services, business services and technology sectors, which together account for 60% of all UK activity. 

Eyes will remain fixed in the coming months on the likes of BT Group [LON:BT.A], for which a decision to push ahead with the potential sale of a minority stake in infrastructure arm Openreach at a rumoured GBP 20bn valuation would only cement the continuation of a wider pandemic playbook that has prized utility and data. 

Marrying utility and data at a time when business was forced to pull down office shutters and mandate remote working also brought a test of demand. All signs now point to a wave of consolidation in the cloud hosting and managed services segments that will sweep the UK mid-market in the coming 12 months, according to Alexander Luycx, Managing Director on DC Advisory’s TMT team. 

Private equity-backed players in the space with EBITDA in the region of GBP 20m-GBP 30m are primed for a consolidation effort driven by a desire to create “value through scale”, Luycx said. For many sponsor-backed targets like Pulsant and Node4, there is no obvious strategic acquirer, which only underscores the importance of forthcoming consolidation in the sector, he added. 

The willingness of investors to front up punchy premiums for technology – or technology-adjacent – assets is borne out by a deal league table that looks decisively lopsided. Nvidia’s [NASDAQ:NVDA] bid for British chipmaker ARM, for instance, accounted for approximately GBP 30bn of a total GBP 80.6bn spend within the technology and financial services sectors in 2020. 

Even in the equity capital markets, the blowout flotations of e-commerce platform The Hut Group [LON:THG] and Kazakh fintech group Kaspi.kz [LON:KSPI] on the London Stock Exchange offered a lesson in what it takes to print large deals during a market downturn. Among the biggest European IPOs of the year according to Dealogic, both offerings were able to rely on strong margins, high-growth equity stories, a perceived scarcity value and, of course, a technology bent. 

Carveout conundrum 

But what of those for whom success is closely correlated with consumer spending, which has overall remained a brighter beacon for UK economic performance throughout the pandemic? 

The value of consumer and consumer-related M&A surged by 32% year-on-year for a total spend of GBP 13.4bn across 90 deals, according to Mergermarket data, buoyed by large-cap deals including a GBP 6.8bn swoop for British supermarket group ASDA by the Issa Brothers and TDR Capital. 

Yet for some FTSE 100 stalwarts, the issue of unlocking value from non-core assets remains at the top of the boardroom agenda. Mergermarket reported in November that Reckitt Benckiser [LON:RB] shelved plans to offload a package of personal care brands including Veet, Scholl, E45 and Clearasil after receiving offers “well below” 10x EBITDA, considered to be the bottom of the sellside’s price expectations. 

According to UBS’s Beck, valuation multiples “have made it difficult for dealmakers to transact”, but “better visibility on future earnings should alleviate some of this pressure.” 

Among some of the UK’s most anticipated corporate carve-outs within and without the consumer sector next year include Unilever’s [LON:ULVR] disposal of its circa EUR 400m EBITDA teas unit and Vodafone’s [LON:VOD] spin-off of its European infrastructure business Vantage Towers, which is expected to raise proceeds of approximately EUR 4bn at a EUR 20bn valuation through a Frankfurt flotation. 

Carveouts, then, are set to continue as “companies act on strategic thinking that, in some cases, has been altered through the effects of the pandemic,” Beck said. 

Any mention of that B word, you ask? “Corporates have been preparing for Brexit for a while,” he noted, adding that “once the political uncertainty is clear, dealmaking with a UK counterparty will become easier to assess”. 

There’s perhaps no surprise that the mood of crossborder investment into and out of the UK remains … moody. Inbound and outbound M&A both fell by more than 30% year-on-year, but there is cause for some hope: the total value of foreign investment into the UK rose by 63.6% largely driven by IHS Markit's [NYSE:INFO] USD 44bn merger with S&P Global [NYSE:SPGI]. 

While Prime Minister Boris Johnson may have been chided for trumpeting the UK’s stuttering COVID-19 track and trace system as “world-beating”, the UK did steal a march on the rest of Europe in the sphere of primary equity issuance, accounting for 31% of the continent’s total volumes. 

The Green Green Grass 

Despite so much written about “record sums” of dry powder waiting to be deployed by private equity, the number of buyouts of UK targets (222) – again – slid to its lowest sum since 2013 (219). The number of exits continued to trend downwards, with 37 fewer exits year-on-year, though the value of such trades enjoyed one of the best moments in the past five years as sponsors cashed in on investments to the tune of GBP 41.5bn. 

But COVID-19 has represented a different sort of crisis, imposed on the economy rather than resulting from the fears or failures of market actors. 

The recovery, at least as far as M&A is concerned, appears more bullish – undoubtedly aided by a vaccine-propelled rebound from the fastest fall in equity history. Are corporates and sponsors ready to throw caution to the wind? 

“M&A into 2021 is bound to be cautious, but it will be driven by pent-up demand and sustained optimism around a comprehensive vaccination plan for COVID-19,” says Glenn Hall, Partner and Head of Government Relations & Public Policy at Norton Rose Fulbright. “Should the programme go to plan, there should be a significant rebound in UK M&A by the end of 1H21.” 

Many of those opportunities, Hall suggested, will be ones that have come out as a result of the pandemic. 

“We are in a better place now,” said UBS’s Beck. “Should the patterns and types of activity we’ve witnessed since September continue as conditions begin to normalise, M&A will be in a better place that lends itself to more consolidation.” 

by Ryan Gould and Charlie Taylor-Kroll in London, with data by Jonathan Klonowski