MERGERS and acquisitions activity will remain strong in Scotland this year despite concerns about the impact of the Omicron variant on the economy, prominent dealmakers have said.
They reckon firms in a range of sectors will attract attention from bidders amid hopes that any disruption will likely prove to be transient.
The bounce back experienced last year following the easing of previous lockdowns has encouraged confidence that much of the corporate sector will be able to weather challenges associated with Omicron.
This may lend renewed momentum to a process that has seen firms use acquisitions to help them respond to developments in areas such as technology and distribution, which have been accelerated by the pandemic.
The process that has seen a range of successful Scottish firms get snapped up by overseas bidders in recent months is likely to continue. However, Scottish firms have shown that they are ready to make bold moves.
Ally Scott, manging partner for accountancy giant EY in Scotland, noted that the firm has a very strong pipeline of deals in progress after advising on high profile transactions in recent months.
He said there is clearly concern about the prospect of Omicron resulting in tighter restrictions being imposed on people and businesses in a way that could pose big challenges for firms in some industries. This could include consumer-facing sectors such as leisure.
However, noting that the start of the pandemic resulted in only a limited “pens-down period” on several deals he said: “Lots of disruptive forces have been drivers of M&A activity rather than detractors. We expect that to continue to be the case in 2022.”
Andrew Kerr, who became a director at the N4 Partners advisory and investment firm after helping to develop EY’s corporate finance business in Scotland, takes a similarly bullish view.
“There are a number of deals that are in process or are coming into process in a wide variety of sectors,” he said.
Mr Scott said the combination of Covid-19 and Brexit had resulted in supply chain considerations encouraging firms to do deals. Large corporates could use acquisitions to help increase control over the supply chains they rely on or to develop new ways of going to market.
This could stimulate interest in firms that have developed relevant technology, including IP that can help firms capitalise on the growth of the subscription economy. Demand for home entertainment services such as Netflix boomed amid the lockdowns.
Mr Scott said businesses operating in sectors such as food and drink and housing had also been beneficiaries of shifts in consumer behaviour that were encouraged by lockdowns.
These include growing interest in cooking and eating in and in housing that offers the space required for home working and access to open areas.
EY advised on the £56 million acquisition of Tulloch Homes by Springfield, which was announced last month.
The appeal of the housebuilding sector was underlined by the acquisition of Edinburgh-based Miller Homes by funds managed by Apollo from the Bridgepoint private equity business, which was announced on Christmas Eve.
The deal is thought to have valued Miller at £1 billion plus.
Mr Scott also expects firms with added-value manufacturing capability will be in demand.
Businesses could use acquisitions in the sector to help them capitalise on the sustainability drive.
EY advised on the acquisition of the Vegware compostable packaging business by America’s Novolex last year. The purchase of the Edinburgh-based firm provided Novolex with a range of eco-friendly products developed by Vegware to help cut waste and allowed it to expand in Europe. It is thought to have valued Vegware at tens of millions of dollars.
Firms that provide overseas players with a similar kind of growth platform could attract interest.
But other Scottish businesses besides Springfield showed last year that they were willing to make big moves on the M&A front.
Notable all-Scottish deals included Donaldson Group’s acquisition of housing heavyweight Stewart Milne’s timber frame business last month.
Banks have shown they are ready to make debt available to support deals. With interest rates still close to record lows the prospect of modest rate hikes next year should not weigh on the market. Fears about the threat of inflation may impact on valuations without affecting deal flow.
Mr Scott noted that a range of Scottish firms were able to list on the stock market last year, such as the AMTE Power battery business. Firms can use listings to help them raise capital.
Firms based in Scotland can access growth funding from a wide range of sources, including several angel networks.
Mr Kerr at N4 Partners said sectors such as travel and bricks and mortar retailing could come under pressure amid the fallout from the pandemic.
However, hot sectors are likely to include housing, clean energy, digital, medical technology and life sciences.
Foreign exchange factors may have been helpful to overseas buyers in the wake of Brexit, but are unlikely to be the rationale for deals according to Mr Kerr. He reckons these will be driven by the quality of the targets concerned and the platforms that they can provide for buyers. Mr Kerr added: “There is still a deep pool of private equity capital that has not been put to work in Scotland.”