Dealsuite UK monitor H2-2020

English
February 27, 2021
Floyd Plettenberg
CEO (and co-founder) of Dealsuite.com

Introduction

Thank you for taking the time to read this H2-2020 version of the UK M&A Monitor. This report consolidates research performed by Dealsuite, the leading UK and international platform for M&A transactions. It contains statistics and trends for the UK M&A Mid-market (enterprises with a revenue between £1 million and £200 million) over the second half of 2020.

Dealsuite surveyed 314 M&A advisory firms operating in the UK M&A mid-market.The aim of this study is to create periodic insights that improve the UK market’s transparency and can serve as a benchmark for M&A professionals. We are convinced that sharing information within our network leads to an improved quality and volume of deals.

Floyd Plettenberg MSc. EMFC
CEO Dealsuite

I Transactions
THE UK M&A MID-MARKET PROVES RESILIENT IN H2-2020. DEALVOLUME HAS BOTTOMED OUT.

The advisors that took part in this research were involved in the following numbers of transactions:

Figure 1 Number of transactions covered in H1-2020

Transactions may be reflected in both numbers stated above when both the buy- and sell-side advisors took part in the survey. The total number of transactions therefore can not be derived from the sum of both numbers.

Our research in April 2020 (“Impact of the corona outbreak on the UK Mergers & Acquisitions mid-market”) showed that the vast majority of the advisory firms surveyed (88%) put on hold at least one of their sell-side projects. However, this ‘freeze’ was short-lived. Whereas in other Western-European markets the deal flow picked back up in May 2020, it was around that time that a lot of UK M&A advisors started to (partly) return to work from their furlough schemes. As of June 2020, an upward trend was already visible in the UK market and in September and October of 2020, the M&A market picked up firmly. New deals were started and transactions that had been put on hold in H1-2020 were continued.

In H2-2020, the number of transactions initiated increased significantly. The market seems to have bottomed out yet it’s not back at pre-covid level. However, the sentiment, the filled pipelines and the expectations in the market are good.

Online, Dealsuite also observed a rapid recovery. In H2-2020, the number of website visits on Dealsuite.com increased by 41% compared to H1-2020. The M&A market proves resilient and manages to adapt well to the digital way of working. In H2 we even observed a few ‘contactless transactions’.

Figure 2 Transactions per sector

Half of all transactions accompanied by an advisor during H2-2020 had a sales price above € 2.5 million (47%). A sales price of € 10 million was exceeded in 26% of the cases.

Figure 3 Transactions per deal size

II Assignments
HALF OF THE RESPONDENTS REPORT AN INCREASE IN THEIR ASSIGNMENTS OF MORE THAN 10%. ONE IN THREE REPORT A FURTHER DECREASE.

In H1-2020 approximately half of the respondents (52%) reported a decline in the number of active assignments. In H2-2020 this number decreased to 32%. Half of the respondents (50%) experienced an increase of at least 10% in their active assignments during H2-2020.

It can thus be concluded that the inflow of new projects in H2 was stronger than the inflow in H1. Moreover, this effect may be stronger than represented in the numbers since this monitor reports on a half-year basis, while during 2020 the market dip occured in Q2 and the rise in Q4. We can conclude that we are currently back in an upward trend.

The total number of projects does not inform us about the type of projects (buy-side, sell-side, due diligence, valuation, restructuring, etc.), which may vary in terms of work intensity.

Figure 4  Development of number of assignments compared to H1-2020

III Sector Multiples
CLEAR K-SHAPED RECOVERY. INCREASES IN IT, HEALTHCARE AND E-COMMERCE. STRONG DECREASE IN HOSPITALITY & TOURISM.

Our respondents provided us with their view on the current EBITDA multiples across business sectors. The average EBITDA multiple in the UK mid-market in H2-2020 was 5.4.The sector-specific outcomes vary between 3.65 (Wholesale Trade) and 8.35 (IT Services & Software Development).

A clear split is visible between sectors that are performing better compared to H1-2020 and those that continue to decline. This so-called “K-shaped recovery” continues with increases in industries which profit from the Covid-crisis being IT Services & Software Development, Healthcare & Pharmaceuticals and E-commerce. All these industry multiples increased in H2-2020.

The multiple of Hospitality & Tourism fell most from 4.1 in H1-2020 to 3.7 in H2-2020 (a decrease of 9.8%). The sector Retail Trade also noted a significant decrease from 4.65 in H1-2020 to 4.3 in H2-2020.

On the other hand, there are sectors which benefit from the effects of the covid outbreak and show increases in the average EBITDA multiples. The E-commerce sector rises to 7.3 and both the sector IT Services & Software Development and Healthcare & Pharmaceutics show a slight increase of 0.05.

The results from this research are a baseline for comparison between the applicable multiples per sector, providing guidance when cross-checking company valuations in the future.

Figure 5 Average EBITDA multiple per sector (EV/EBITDA)The average EBITDA multiple for the UK M&A mid-market

IV Financing
SLIGHT DECREASE IN THE AVAILABILITY OF M&A FINANCING. NO EASING OF FINANCING CONDITIONS AND NO INCREASE IN INTEREST RATES EXPECTED.

One out of six advisors (17%) noted a decrease in availability of M&A financing compared to the pre-covid situation. The majority of the respondents (81%) did not experience a change compared to pre-covid.

Most advisors (83%) also did not notice a further increase or decrease in H2-2020 versus H1-2020. Some (9%) note an increase in availability, 8% reported a decrease compared to H1-2020v. The decrease of availability compared to pre-covid thus seems to be wearing off in H2-2020.

Figure 6 Availability of M&A financing

In general, the respondents do not experience easing of financing conditions. Halfof the advisors (56%) indicate that the requirements for personal guarantees bybusiness owners have become more strict. Advisors also experience a stricter situation regarding the collateral requirements (44%), and the part of the total transaction that can be financed (39%). Co-financing conditions have become stricter according to 12% of those surveyed.

Figure 7 M&A financing requirements

The vast majority of advisors (68%) saw no change in interest rates on M&A financing in H2-2020. For H1-2021, almost none of the respondents expect an increase in the interest rate. 18% expect a further decrease.

Figure 8 Development interest rates for M&A financing

V Types of buyers & sellers

In this monitor we asked advisory firms what preferences they recognize for different types of sellers. We identified three groups of sellers: SME Entrepreneurs, investment firms and large companies. We also asked which arguments play a major role in the sale for these particular groups. The results are shown in figure 9 and 10.

Figure 9 Preferences per type of seller

Two third (64%) of the sellers prefer to sell to a corporate buyer. After which sellers prefer to sell to an investment firm on average in 22% of the cases.

SME Entrepreneurs tend to favour selling to another SME entrepreneur (32%) rather than to an investment firm (5%).

In general, offering the most favorable terms is an important argument. However, there is a clear difference in which values and conditions are preferred. The overviews can be found in Figure 10.

SME entrepreneurs value the reputation of the buyer as the most important factor, even slightly more important than the selling price or the continuity of the business after it is sold. Out of all sellers the investment firms have the strongest preference for the highest bid. They seem less interested in the continuity of the business and the professionality of the counterparty. After the good sales conditions, the corporate seller values discretion the most. The larger the deal values, the more important discretion becomes.

The research results confirm the prevailing view that investors who invest from a purely financial motive have less regard for the continuity of the company after it is sold. The results also confirm the view that strategic buyers who can achieve strong synergies are often prepared to spend more and are therefore willing to pay a higher premium.

Unsurprisingly, there is a clear preference of entrepreneurs and large companies to sell to (other) large companies rather than to Private Equity or other types of funds.

Figure 10 Arguments per type of seller - by importance

Figure 11 Reasons to prefer an entrepreneur as a buyer Figure 12  Arguments to prefer an investment firm as a buyer Figure 13 Arguments to prefer a corporate as a buyer

VI Market outlook
OUTLOOK FOR THE FIRST HALF OF 2021 IS POSITIVE. THERE IS GREAT CONFIDENCE IN THE FURTHER RECOVERY OF THE MARKET.

Assessing the performance of the UK M&A mid-market is based on many factors, including willingness of entrepreneurs to sell their businesses, availability of funding, macroeconomic developments etc. A complex interpretation of these factors is needed to determine how the market will develop. The survey included both assessments of the M&A mid-market in H2-2020 (retrospective) and H1-2021 (projection).

In H1-2020 the majority of the respondents expressed a negative sentiment about the previous half year. Only 17% were either slightly positive or positive. This view has tilted to a more positive reflection on H2-2020 where the majority (55%) reported that they positively reflect on H2-2020. The outlook for H1-2021 is still somewhat divided. However, the majority of the advisors are optimistic.

As noted earlier in the report the market dipped in Q2, and raised in Q4. We are currently back in an upward trend, which is reflected in the optimism of the market. Only 15% of the advisors still expect H1-2021 to deteriorate further. The other 85% expect a stable situation or improvement during H1-2021.

Figure 14 Assessment UK M&A mid-market H2-2020 Figure 15   Assessment UK M&A mid-market H1-2021 & Figure 16 Relative assessment