UK – Not getting carried away

Activity

As with much of the rest of the world, 2023 was a challenging year in the UK for M&A, as economic pressures and geopolitical tensions weighed on markets. While deal volume was at a similar level to pre-Covid, deal values were down significantly.

However, activity was not completely flat. Highlights included private M&A appetite from well-capitalised strategic buyers. After many years of private equity dominating deal headlines, the weight of activity rebalanced towards corporates, who showed continued enthusiasm for transformational deals and carve-outs to accelerate portfolio realignment, as well as acquisitions and divestments more weighted towards the mid-market.

In Q4, we saw a good uptick in public M&A, which meant that by the end of the year we had seen more takeover offers than in 2022. Unsurprisingly much of this activity was in the small to mid-cap range, reflective of lower levels of debt availability.

Sectors

Tech continued to be the most active sector by volume, while energy and healthcare were the two largest sectors by value, the former due in part to BP’s buyout of its JV partner in Lightsource bp and Eni and Vår Energi’s acquisition of Neptune Energy, underscoring the two themes of energy transition and ensuring UK energy resilience. We expect this to continue into 2024.

Legal trends

2023 saw the introduction of the EU Foreign Subsidy Regulation, which applies to UK companies. This means that the regulatory planning on a deal just got a little more complex, and we would recommend parties who may be in scope (which means anyone who has received any financial contribution from a non-EU State, even if it is just payment on arms' length terms) start pulling together their data now.

The UK Government has also announced a review of the UK's foreign direct investment (FDI) regime, the National Security and Investment Act 2021. While we do not expect a significant overhaul – so for example the mandatory notification thresholds will not change – we are hopeful the review will address some of the problems encountered in the regime to date and make it more pro-business and pro-investment.

Looking ahead to 2024, the Financial Conduct Authority will publish its final rules following the review of the listing regime. Most significantly in the context of M&A will be the anticipated removal of the requirement for listed companies to obtain shareholder approval for significant transactions. The aim is to make listed companies more agile in M&A processes and so less disadvantaged in auction processes.

On public M&A, we expect to see more competitive situations – as we have already seen this year on the bid for Kin + Carta. Shareholders will continue to be key to the success of the deal and are more willing than ever to withhold support or oppose a deal, even if the target board is recommending it.

Parties have already had to resort to creative structures to get deals across the line, particularly where minority investors hold blocking stakes, and we may see more of this. For example, on RTW Bio's recent acquisition of Arix Bioscience, the bidder acquired Acacia's 25% stake in Arix for cash before proceeding to acquire the assets of Arix in return for share consideration issued to the remaining Arix shareholders. The transaction was effected through a scheme of reconstruction under section 110 of the Insolvency Act 1986, which meant that it was not subject to the Takeover Code.

We saw some very close votes on public transactions – and some deals voted down – in 2023. For as long as we continue to see a gap in valuation expectations, we expect to see more tight decisions in 2024 and directors will have to weigh their options carefully in deciding when and what to recommend (if anything).

As we discussed in our main report, we have seen a shift in private M&A processes to try and get deals over the line – including a hybrid approach to the sale process, which starts out as an auction but becomes a bilateral process to close out negotiations – and we expect this type of model to continue.

Outlook for 2024

In line with our global M&A report, "Ready for Take-off?", we anticipate that we will see a pickup in activity this year, notwithstanding potential market disruptors such as the general election.

As many London-listed stocks continue to trade at significant discounts to valuation, they remain vulnerable to takeovers, in particular take-privates, and shareholder activism. The valuation gap also continues to drive joint venture and minority investment activity, with a view to realisation of value at an asset level.

Of course there is still scope for further geopolitical shocks. But there are good reasons to believe 2024 will be a stronger year for deals, even though no-one is going to call a sudden change in conditions, or underestimate execution challenges.