Covid 19 – the impact on UK M&A activity

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Official coronavirus figures now mark the UK as the worst hit country in Europe in terms of both confirmed cases and deaths, overtaking Italy.  The current death toll stands at close to 37000, second only to the US in terms of Covid-19-related deaths worldwide.

The UK government has recently published a 51-page dossier detailing a three-phase strategy for gradually lifting the current restrictions and allowing some areas to slowly re-open, however the country is still recording in the region of 2000 new cases of the virus each day.

Amid increasing worries about the size of the inevitable downturn caused by the Covid-19 restrictions, the UK economy must slowly begin to move again despite the virus continuing to spread.  The UK Chancellor, Rishi Sunak, has said the UK faces a “significant recession” after new figures showed that just the first nine days of restrictions caused output to fall in March by 5.8%, and by 2% in the first three months of the year.

Some sectors are slowly making the transition to safely allow workers back following the UK government’s announcement that people working in sectors such as food production, construction, manufacturing, logistics, distribution and scientific research in laboratories should now return to work.  However, hospitality and “non-essential” retail businesses will remain closed for the time being.

Our ICFG member in the UK, HMT LLP, has been working through the situation since the initial lockdown began in March, with all employees continuing to effectively run the business from home.  Zoom, Microsoft Teams and other video conferencing facilities have become their new best friend, enabling vital client contact to continue and the team to work together, albeit remotely.

HMT’s Managing Partner Andrew Thomson says the mix of work has definitely changed over the past 2 months.  In terms of pre-existing transactions, disposal mandates are largely on hold and M&A transactions generally are progressing slowly, unless very well advanced and in sectors less affected by Covid-19.  New processes have been mothballed as buyers and sellers re-evaluate their strategy, with businesses likely to wait until at least September before bringing themselves to market. 

Fundraising and development capital projects continue to progress strongly however, particularly for B2B tech enabled businesses.  Following the launch of various Covid-19 government loan schemes in the UK back in April, HMT have assisted both current and legacy clients to navigate their way through the various programs on offer via their Financial Modelling services; schemes such as CBILS (Coronavirus Business Interruption Loan Scheme), CLBILS for larger corporations and the Future Fund, loans aimed at innovative companies which are facing financing difficulties due to the pandemic.

Covid-19 has undoubtedly impacted the M&A market as it pushes the UK further into a deep recession.  Uncertainty remains one of the greatest risks to M&A activity not only in the UK but on a global scale.  Many areas of business will remain on hold until targets can demonstrate strength of trading during lockdown, as well as several months minimum trading post lockdown.  Unlike previous downturns, this decline will see a considerable overnight change in the way people live, with countless businesses and sectors immediately becoming unviable.

Andrew has noticed a polarisation of how businesses have been impacted by COVID-19.  Many are simply trying to survive by reorganising their supply chain, production and respond to lower demand.  Those operating in certain sectors however, for example e-fulfilment, unified comms, medtec, have been able to optimise the current situation, both with organic growth opportunities and, as we come out of lock-down, acquisitions.

Corporate Finance businesses in the UK, as well as internationally, will therefore be faced with a very different economic horizon post the pandemic.  Andrew explains there will be winners and losers emerging from the worst and least hit sectors.  B2C businesses with no online offering will at best struggle to survive.

The most challenged sectors in the UK include Real Estate, Construction, Hospitality, Retail, Automotive and Aviation.  As with any crisis, opportunities will arise, and these deeply affected sectors are likely to present buying opportunities as they fall into distress.  Less affected sectors include Tech, Healthcare, Online Retail, Energy and Food.

Andrew predicts Private Equity will start moving first with corporate acquirers, following on with Private Equity getting to grips with their portfolio companies and ultimately being in a position to start investing.  The corporate world is likely to emerge more cautiously, as businesses remain focused on dealing with immediate supply chain issues and restructuring challenges. 

Throughout the pandemic, HMT has utilised its effective marketing function to connect and re-connect with past and current clients.  Never has it been so crucial to both maintain and build on existing customer relationships, to retain loyalty and trust.  Through connecting with their clients, HMT has successfully generated future leads by considering how they can best serve their client’s needs as the market place changes.

HMT’s Technology Team, led by Partner James Thomas, has remained busy throughout the pandemic and indeed continues to grow the team with a new manager joining to assist with the growing workload in this area. 

Like many businesses in the UK, HMT is slowly preparing itself for staff to return to the workplace over the coming weeks.  Workplaces are required to follow strict Covid-19 secure guidelines to ensure safety and social distancing rules can still be adhered to and Andrew has equipped his office space accordingly for his team to stay safe.  Remote working can and will continue for HMT in some capacity until clients are ready for site visits to resume and face to face meetings are no longer a thing of the past.