It has been widely discussed that due to macro-economic pressures and the slide in the sterling UK plc is up for sale and that it presents an enticing opportunity for overseas or opportunistic domestic raiders. This should, in theory, prompt a wave of M&A deals. It’s a familiar narrative.

Boards of PLCs are reading the same, raising anxieties and we are often being asked to prepare and reassure in this regard. Equally, we are helping a number of possible buyers assess how to make their move, and importantly, when or if at all. 

The primary “pull factor” is that UK public markets are at a meaningful discount to global (particularly US) peers. A weak sterling, strong dollar makes for a valuation disconnect that private equity should be able to exploit, particularly since they appear to be sitting on piles of dry powder. The UK also operates in a permissive and predictable regulatory framework overseen by a sponsor community emboldened by the post-COVID flurry of P2P transactions.

Then there are “push” factors. Institutional UK public investors are facing redemptions and therefore are more receptive to liquidity opportunities, Equally in many instances they do not take the long view quite like other investor populations do, again notably in the US. Closer to home, there’s unease and caution in the air about the future in plc boardrooms, many of whom are at the same time questioning the cost/benefit analysis of a public market listing. It is imaginable that many are experiencing fatigue on reporting cycles and short-term targets, alongside the demoralisation that comes with their incentive packages being underwater with little hope of being reset. Many may just welcome a period of restructuring outside the glare of the public arena.

There is a healthy debate on the accuracy of the above, and we should also remember that the doom-mongering headlines are not new. Similar headlines appeared following the global financial crisis, in the wake of the Brexit vote, and during the “hot money” years of late 2020 through 2021. Looking back on 2021, it was a golden year for take-privates by financial sponsors across global markets but the crucial reason for that was not necessarily the push or pull factors set out in the press but rather the easy availability of transaction financing.

The M&A markets are currently either slow, if open at all, notwithstanding the ingredients for a frothy market. This is attributable to two predominant factors – the “valuation gap” whereby sellers are not yet ready to adjust their expectations of price to meet the cautious valuations offered by buyers and secondly, crucially, that credit and transaction financing is not generally available at all or at least on compelling terms. This is not a UK issue but even more pronounced in overseas markets where PE bidders are, in our experience, overwhelmingly more debt-weighted on their deal financing structures. And for the bigger ticket transactions, the usual underwriters in large syndicates are already unable to shift their exposure to the mega deals that were once a dream ticket and now are a symbol of the excesses of the cheap-money era, and therefore unlikely to be keen to take on more.

So, whilst long-established and much-repeated ingredients for a frothy takeover market remain, and we invariably see interest in such activity, the flood of UK public to private takeovers may not materialise quite as expected. Boardroom fears of an imminent opportunistic raid should be put in that context. In fact, a recent survey of UK PE fund managers (as well as anecdotally from our conversations with market participants) suggest that the majority view is that this market will take 12-18 months to correct. That said, it is also our experience from past downturns that markets ease up sooner than most people expect.

Debt markets will assuredly open up in due course and given the relative strength of the US economy, less impacted by gas supply shortages, America is likely to be first out of the blocks. And we may continue to see a wave of M&A deals on both sides of the Atlantic in the short term, but not ones which are backed by PE needing debt finance.