Prior to the global lockdown restrictions being imposed in March 2020, appreciating it is difficult to recall those days, deal flow was relatively strong with the momentum seen in the second half of 2019 translating into the successful completion of a number of high-profile transactions in Q1 2020. Examples of this including the acquisition of Rowan Manufacturing and Smith & Frater from Rowan Group by leading timber specialist James Donaldson Group and Hunting Plc’s acquisition of subsea production enhancing specialist Enpro Subsea for £28m.
Then M&A activity faltered from March to June, the economic standstill leading to caution with a number of proposed deals delayed, postponed or cancelled. Business owners and investors quickly turned their attention to business resilience, cash flow management and adapting to rapidly changing market conditions. Although, in June, Motorola Solutions completed its strategic acquisition of Edinburgh based video security solutions provider, IndigoVision for £30m. Noteworthy, as the transaction had been announced pre lockdown restrictions and its completion emphasising the longer-term view taken by the acquirer.
Ultimately, Scottish deal volumes in 2020 will be the low with Experian commenting on a 50% reduction to 2019 and the lowest since they started maintaining records in 2011. However, 2020 has highlighted the resilience and innovation of Scottish businesses with many showing tenacity to take risks to achieve their objectives. Encouragingly there were promising signs of confidence and positive momentum returning on the back of market stability which resulted in M&A deal flow increasing with some businesses committing from crisis management to a planning ahead mindset.
There are still challenges with capital investment under intense scrutiny, however, our experience is that acquirers have a renewed focus on the longer term strategic value that a target would bring with many being more transparent with their acquisition criteria and often looking to pursue off market opportunities.
Generally, with reduced trading performances across most sectors, organic growth was considered to be challenging for most to achieve in the 6-12 months that would follow. Therefore, M&A opportunities have presented opportunities for businesses looking to get their medium to longer term objectives back on track. A notable example of this being the case with Highland headquartered Global Highland’s acquisition of Aberdeen recruitment agency Cammach Bryant.
For some, opportunistic M&A was seen as softening the blow to their own financial performance, whereas for others, it has been a viable option for improving business reliance to the market conditions. This being the case in the merger of Fircroft and NES Global Talent to create NES Fircroft which was announced in September 2020 and the recently announced acquisition of Aberdeen based Rever Offshore’s subsea services business by Dutch dredging and heavy lift vessel firm Boskalis.
An important factor that has contributed towards the positive shift in momentum of deal activity has been the anticipated, potential, changes in Capital Gains Tax. When it was announced on 23 September that there would be no Autumn Statement, and therefore no changes to CGT (or any other tax rates) until Spring 2021, many vendors have sought to accelerate their plans to take advantage of this new window of opportunity. Whilst it can be said that the Government are currently in a spending ‘mode’ rather than a collection one, we will find out on March 3rd what changes will be made as the Chancellor seeks to recoup the cost of bailing out businesses and jobs.
Turning attentions to specific sector activity across Scotland, a focus on accelerating ‘all things digital’ has underpinned an increase in the level of M&A and fundraising activity in the technology space as has been widely reported. Hutch Games, developer of mobile racing games with offices in Dundee, Scotland, continuing its growth ambitions in acquiring Modern Times Group, a Swedish digital entertainment company for $375m.
Notably, in October, Calnex Solutions plc, an established provider of test and measurement solutions for the global telecommunications sector, was admitted to trading on AIM in October 2020 with the IPO raising £22.5m and laser specialist M Squared Lasers receiving £12.5m backing from the Scottish National Investment Bank.
In the energy sector, energy sustainability continues to be high if not top on the agenda, and there is clear intent from traditional Oil & Gas operators to embrace the challenge of achieving affordable, reliable low carbon energy and assisting in meeting Government and, in some cases, their own emissions targets.
During the year there has been a succession of announcements regarding investment in low carbon energy projects including SSE who in June disposed of a 51% stake in the £3bn Seagreen offshore wind farm project to Total then subsequently selling a 49% stake in the Walney offshore project to Greencoat Capital for £350m in September.
From discussions with clients, prospects and fellow advisors we are optimistic that transaction activity levels will continue to improve throughout 2021 with the current, busy pipeline being replenished by new opportunities with the roll out of the vaccines bringing stability to the majority of sectors. We're already seeing greater activity from private equity and growth funds with many having dry powder available to deploy after sitting on funds during 2020. In addition, we anticipate more ‘off market’ deals to take place as businesses proactively pursue growth and opportunistic deals.
If you have any further questions, please contact Callum Gray or your usual AAB contact.
You can find out more about AAB's Corporate Finance team here.