As Pound Weakens, Are More UK Companies M&A Targets?

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Andrew Birstingl, Research Analyst, FactSet

The UK has been a focus area for the markets since its European Union Membership Referendum on June 23.
One clear impact of the vote has been the weakening of the British pound. The pound has plunged 7.2% from one day prior to the vote to one day after, and is currently down 17% as of Friday’s close.
The pound’s decline in value has made it cheaper for foreign firms searching for acquisition targets to purchase pound-denominated assets. Looking at post-Brexit M&A deals, some companies have specifically cited the weakening pound as a factor for deal activity.
On July 12, Wanda Group’s AMC Entertainment agreed to acquire London-based movie theater operator, ODEON & UCI Cinemas for $649.5 million. Upon announcement of the deal, AMC President and CEO, Adam Aron, specifically cited the pound’s decline in his comments:
[drizzle]“While we acknowledge that there are some uncertainties related to Brexit, we are encouraged that current currency rates are highly favorable to AMC with the pound falling to a three decade low versus the dollar. In total, we believe this transaction will generate long-term value for our guests, our studio partners, and our shareholders.”  

Q3 Inbound UK Deal Volume Still Seventh Highest Deal Count Since 2000

During the third quarter, inbound UK deal volume was down both sequentially and year-over-year. There were 260 inbound deals into the United Kingdom in Q3, which was slightly less than the number in Q2 (262). On a year-over-year basis, quarterly deal volume represented an 11.9% decrease from Q3 2015 (295). It is important to keep in mind that 2015 marked a record year for deal activity (highest deal volume since 2000), with the third quarter seeing the largest deal volume of any quarter going back to 2000. Based on these numbers, it is difficult to conclude that the weaker pound has led to a significant uptick in inbound M&A activity into the United Kingdom. With that said, it is important to put this data in historical context as well.
Despite the quarter-over-quarter and year-over-year decline, Q3 2016 still marked the seventh highest quarter in terms of deal volume since 2000. Excluding 2015, the 260 inbound deals into the United Kingdom during Q3 were the highest count for a third quarter since Q3 2000, when 286 deals were announced. The number of deals in the third quarter represented a 29% premium to the Q3 average volume (back to 2000).
On the value side, the aggregate value of inbound M&A deals into the United Kingdom during the third quarter totaled $52.5 billion, which was a 343% increase from Q2, but a 70% decline year-over-year. The large sequential increase can be partly attributed to the $31.7 billion acquisition of ARM Holdings by Japan’s Softbank this July, while a contributor to the year-over-year decrease was the $113 billion acquisition of SAB Miller by Anheuser-Busch SA in September 2015. Similar to deal volume during the third quarter, Q3 2016 marked the seventh highest quarter in terms of deal value since 2000. Excluding 2015, deal value in Q3 was the largest value of any third quarter going back to 2000. The value of inbound UK deals also represented a 76% premium to the Q3 average (back to 2000).

Third Largest Q3 Count in Deal Volume Since 2000

In order to analyze the trend in deal volume specifically for larger transactions, FactSet looked at inbound M&A transactions into the United Kingdom with deal values exceeding $50 million. Similar to the trend seen with all inbound UK transactions, Q3 was a standout when comparing its deal volume to historical periods. In the third quarter, there were 40 inbound UK deals, which was the third largest Q3 count since 2000. Only Q3 2015 and Q3 2000 saw higher deal volumes than the third quarter this year (57 and 45, respectively).

September Marks Second Largest Monthly Deal Volume

Looking solely at the month of September, the number of inbound deals into the United Kingdom was 107, which marked the second largest deal volume during a month since 2000 (April 2008: 108 deals). It was also a large increase from deal activity during the two months immediately following Brexit (August had 74 and July, 79). Companies may have been waiting for the market’s reaction to the vote before pulling the trigger on any M&A deals.

Pace of Inbound UK Deals Slows in October

As mentioned earlier, the data makes it difficult to conclude that the decline in the value of the pound led to a significant rise in inbound UK deals. In fact, the total number of deals during the third quarter was actually down sequentially and year-over-year. However, when looking at deal volume in Q3 2016 versus historical third quarters all the way back to 2000, the quarter was certainly a standout. The month of September alone saw a record number of announced deals.
Related: Uncertainty Reigns Over Brexit’s M&A Impact
Has the rapid pace of deal activity in September continued? So far in October, there have been 48 inbound deals into the United Kingdom summing to an aggregate deal value of $2.5 billion. This is well off the pace from both a volume and value perspective seen in September. It will be interesting to keep an eye on mergers and acquisitions activity into the UK going forward.
The value of the pound has declined 17% against the US dollar (one day prior to Brexit vote through October 21), which could further attract foreign acquirers to pursue deals and spur additional M&A activity in the United Kingdom. However, as the pound has fallen, the values of the FTSE indices have climbed. From one day prior to the Brexit vote to Friday’s close, the FTSE 100, FTSE 250, and FTSE 350 have increased in value by 12.1%, 5.2%, and 10.9%, respectively. From an acquirer’s perspective, this rise in the value of equities has the potential to offset the currency decline. These are interesting areas to watch for the remainder of the year and into 2017 as we continue to monitor the effects of Brexit on deal activity into the United Kingdom.

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