Low Valuations See Foreign Firms on Buyer Frenzy for UK Companies

Following the UK suffering from several economic challenges last year, including rising interest rates and inflation, and a continuation of the Russia-Ukraine war, foreign takeovers of UK companies are becoming more prominent. Additionally, a weaker pound sterling has led foreign investors to capitalise on lower valuations and acquire companies at a cheaper rate. In light of this, Claire Trachet, CEO of business advisory, Trachet, and M&A expert, comments on the future of UK M&A deals and what these foreign takeovers mean for the UK market.

A report from EY found that in 2022, the UK recorded 929 Foreign Direct Investment (FDI) projects, a drop of 6.4% from 993 in 2021. Despite this, the low valuations the UK is experiencing as a result of various economic uncertainties have prompted a greater interest in British companies from foreign firms. Since the beginning of Q1, the M&A sector has witnessed a deal value of £13bn compared to £9bn this time last year, of which the majority of the activity has come from this last month alone.

However, according to data from ONS, the total value of inward foreign companies acquiring UK companies in Q4 of 2022 was £10.1bn around the period of Trussonomics – where the pound took a deep dive. The theme continues into this year with, French voucher and card provider Edenred, announcing that it has acquired UK company, Reward Gateway, for £1.15bn. In addition to this, Canadian private equity group has been in discussion to acquire British holiday resort, Center Parcs, seeking between £4bn and £5bn, as well as Dechra Pharmaceuticals – a veterinary medicine group – having announced they received a £4.6bn cash bid from Swedish private equity firm, EQT.

According to research from the Annual Business Survey, by 2019, there were 2.5 million businesses operating in the UK non-financial business economy, and while only 1.3% of these were foreign owned, they contributed 28.5% of approximate gross value added. This suggests that while there are concerns amongst UK investors surrounding British companies, there is a clear return on the investment these acquisitions bring to the UK economy.

Claire Trachet (CEO/Founder) comments on the future of M&As and the UK as a foreign investment destination:

“While this is positive for the UK, as it reflects how attractive the country is as an investment opportunity and the return on investment the economy receives, it also signals that foreign firms are posing difficulties for UK-based investors who appear unable to compete financially, as a result of foreign firms benefitting from low pound valuations. 

“In addition to this, investors are no longer frozen – knowing there is less of a reason to be risk-averse – as they know opportunities are presenting themselves and are ready to actively seize them. They also know that a lot of investment opportunities will come from growing industries like the AI and cybersecurity sectors which are on the rise, as well as struggling companies that will be eagerly looking to exit. 

In this sense, acquirers know they will be getting a bargain from low valuations, potentially leading to a flurry of M&A deals, presenting a more positive outlook for M&A activity in the UK. However, this poses an issue for companies getting less than they bargained for. 

“In addition, there is a growing number of investors who are sat on a dry powder pile having paused investments due to uncertainty in 2022, following the collapse of SVB and a continuation of inflation and rising interest rates. 
This means there are significant opportunities on the horizon, and now is the moment to prepare and get deal ready as optionality will increase in H2 of this year.