Dealsuite UK Monitor H1-2020

English
September 15, 2020
Floyd Plettenberg
CEO (and co-founder) of Dealsuite.com

Introduction

This is the UK M&A Monitor H1-2020. The UK M&A Monitor consolidates research performed by Dealsuite, the leading 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 first half of 2020.

Dealsuite surveyed 308 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 PROFESSIONAL SERVICES SECTOR HAD THE HIGHEST NUMBER OF DEALS: A FIFTH OF ALL TRANSACTIONS COMPLETED IN H1-2020.

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

UK Monitor H1 2020 Figure 1

Transactions may be reflected in both numbers stated above, on occasions when both the buy- and sell-side advisors took part in the survey.

The total number of transactions cannot be derived from the sum of both numbers.

Based on the data of the UK M&A Monitor, the total number of transactions can be divided over industry sectors.

Professional Services is the sector where most transactions took place (21%), followed by IT Services & Software Development and Construction & Engineering (both 12%).

These three sectors account for almost half of the total number of transactions completed in H1-2020.

UK Monitor H1 2020 Figure 2

The data shows that in H1-2020 most transactions that were performed had a deal price below £2.5 million (57%). About one in five transactions (19%) surpassed £10 million in deal value.

UK Monitor H1 2020 Figure 3

II Assignments
OF ALL RESPONDENTS 23% WITNESSED A HIGH GROWTH (> 25%) IN NUMBER OF ASSIGNMENTS DURING H1-2020 COMPARED TO THE PREVIOUS HALF YEAR

Approximately half of the respondents noticed a decline of at least 10% in the number of active projects. In our survey from April 2020 (“Impact of the corona outbreak on the UK Mergers & Acquisitions mid-market”) 64% of the M&A advisors responded that they expected a decrease of at least 25% in their projects.

If one compares the expected decline in projects from April with the actual changes provided by the outcomes of the survey “Impact of the corona outbreak on the UK Mergers & Acquisitions mid-market” we performed in April, it can be concluded that M&A advisors were probably too pessimistic in April.

The total number of projects does not tell us anything yet about the type of projects (buy-side, sell-side, due diligence, valuation, restructuring, etc.), which may vary in terms of work intensity. In Section VI developments in the number of sell-side projects will further be analyzed.

UK Monitor H1 2020 Figure 4

III Sector Multiples

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 H1-2020 was 5.45.

The sector-specific outcomes vary between 3.75 (Wholesale Trade) and 8.3 (IT Services & Software Development).

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

In upcoming editions of the M&A Monitor, the outcomes will be reviewed and adjusted when needed, in order to improve the level of accuracy.

UK Monitor H1 2020 Figure 5

IV Deal structures
THE MAJORITY OF TRANSACTIONS WERE FINANCED WITHOUT ANY FORM OF DEBT, EARN-OUTS WERE APPLIED IN 40% OF THE CASES.

In the survey two topics related to deal structures were included: debt finance and earn-outs.

The results show that in about one third of all transactions a debt instrument was being used. In those cases where debt was being used, it made up for half of the total transaction price.

Furthermore, 2 out of 5 deals were structured with an earn-out clause.The average earn-out had a length of 28 months and accounted for 38% of the total deal size

UK Monitor H1 2020 Figure 6/7

V Sell-side projects
A GROWING NUMBER OF PROJECTS ARE BEING CANCELLED, WHILE UNCERTAINTY STILL SURPRESSES MARKET ACTIVITY

In April 2020 (“Impact of the corona outbreak on the UK Mergers & Acquisitions mid-market”) we asked how many sell-side projects had been stopped and cancelled. In this M&A Monitor, these results are compared with the data from our latest survey.

We assume that the status ‘on hold’ represents uncertainty (i.e. it is not sure whether/when the project is going to be resumed), while the status ‘cancelled’ is a negative, but certain outcome. Then the results suggest that the market has started absorbing the impact of the coronavirus outbreak, leading to a shift in sell-side projects that were initially put on-hold now being cancelled. Notably, the group of advisors that didn’t have any sell-side projects cancelled declined from 68% to 40%. Thus, three in five respondents now mentioned that at least one project has been cancelled at their firm.

UK Monitor H1 2020 Figure 7/8

As the corona outbreak initially caused a spike in uncertainty, which we observed through the number of projects on hold, our latest data suggests that the number of cancelled projects is rising.

This does not mean that uncertainty has been totally eased; still 1 in 3 projects were on hold at the end of H1-2020. The seasonal effect during Summer, when activity is typically low, should not be disregarded. The respondents expect activity to pick up again from September onwards.

It seems that the summer of 2020 offers, now more than usual, a moment for the market to reconsider and prepare for a reboot of activity in Fall.

UK Monitor H1 2020 Figure 9

The data collected for our survey in April and for this Monitor shows that 38% of sell-side mandates in the UK were on-hold after the coronavirus outbreak. Of these, 29% are now resumed.

VI Market outlook
ADVISORS EXPECT IMPROVING CONDITIONS IN THE SECOND HALF OF THE YEAR

Forecasting the performance of the UK M&A mid-market is based on many factors, including the 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 H1-2020 (backward-looking) and H2-2020 (forward-looking). A majority of over 83% expressed a negative sentiment (slightly negative, negative or very negative) on the overall market in H1, while just 37% were pessimistic (slightly pessimistic, pessimistic or very pessimistic) about H2. The data clearly shows that advisors are confident that conditions will not deteriorate further and are generally optimistic about H2-2020.

UK Monitor H1 2020 Figure 10

UK Monitor H1 2020 Figure 11

UK Monitor H1 2020 Figure 12