What future M&A?

The recent announcement of a proposed £760m merger between Carlsberg UK and Marston Breweries is a sign of encouragement for those concerned about the health of the M&A market in the wake of Covid-19.

By coincidence Quercus have also just completed a deal in the drinks sector; helping premium wine merchant Flint Wines acquire a major competitor, Domaine Direct. Whilst the prospect of a surge in deal activity involving drinks companies is worth reflecting on (and perhaps whether its source is the impact of the lockdown?) the more interesting question is perhaps why are deals being done at all?

The pessimist will argue that the loss of business confidence will see corporates hoarding cash and private equity investors looking inward, supporting their portfolio. The market will be short of buyers and value multiples will naturally fall. Deal activity will dry up.

In reality, markets do not stop whatever the macro backdrop and as we start to emerge from lockdown, we think there are five different types of transaction that are going to make headlines throughout 2020.

First, the orphan children. These are the processes which were at an advanced stage at the start of lockdown and which remain stuck in purgatory with due diligence nearly done and legals not far behind. One suspects the Carlsberg UK / Marston deal is in this category. Whilst some of these deals may eventually succumb to deal fatigue all parties will have invested plenty of treasure and time to get to this point and when opportunity cost is taken into account our guess is that many of these deals will still complete. This is especially so for buyers with seasoned management who have the confidence and conviction to continue pursuing their strategic imperatives, the ability to recognise the underlying value of the target and to take a pragmatic view about the impact of Covid-19.

Second, the accelerated sales. It will be no surprise that we suspect a lot of these will be in retail, travel and casual dining. Many will be high profile and arranged through administrators like the recent sale of part of the Carluccio’s empire to the Boparan Restaurant Group. The retail sector in particular has been struggling with structural change led by changing consumer behaviour, over-expansion and high fixed property costs for some time and, like many, we think Covid-19 has accelerated the necessary changes and we are going to see the sector transformed.

Third, the non-core disposals. We have seen evidence of an uptick in this type of activity for the past 12 months or so and many large groups will be revisiting strategic reviews to identify which divisions no longer fit and could be sold to raise cash to support core operations. In our experience these businesses are often well run with good quality management and so will remain attractive opportunities for the right buyer.

Fourth, the opportunistic deals. In the entrepreneurial arena, owner-managers with no succession plans are still dying, divorcing or struggling with high levels of debt and Covid-19 is unlikely to stop a regular pipeline of these businesses finding their way to the market.

Finally, the new winners. With Covid-19 in mind (healthcare, technology, transportation, logistics) or Brexit (remember that?) bright people will be looking far beyond the murky horizon and acting out Warren Buffet’s maxim ‘to be greedy only when others are fearful’. In discrete sectors there will be activity spikes as players seek to gain competitive advantage in both home and overseas markets. For us, this is a very exciting arena where we anticipate working ever closer with the other 15 member firms of the Terra Alliance M&A network on cross-border deal activity.

So what does all this mean? No one should pretend that the world is in rude health at the moment but that does not mean that M&A no longer has a role to play in seeing us through this challenging period and helping businesses to emerge stronger than before. Processes will undoubtedly adapt (fewer auctions, more bilaterals), pricing and structures will be more cautious (less debt, more contingent elements linked to performance, use of vendor loan instruments, particularly for large corporates) and in many cases timetables will lengthen to accomodate more due diligence. However, for the right asset in the right sector, a deal can still be done.

The twin swallows of Marston / Carlsberg UK and Flint Wines are unlikely to signal a new M&A Spring but equally, as Mark Twain might have said, rumours of M&A’s death are much exaggerated. I’ll drink to that.