In autumn 2021, US private equity giant Clayton Dubilier & Rice (CD&R) secured the largest UK take-private deal for more than a decade when it announced the £9.97bn take-private of Britain’s fourth largest supermarket chain, Wm Morrison Supermarkets (Morrisons). The transaction valued the retailer at close to 12x underlying earnings and followed a bidding war for the group that ran for four months before CD&R prevailed. The runner-up for the deal was another US private equity firm, SoftBank-owned Fortress Investment.
Morrisons is one of many UK and European assets snapped up by US buyers over the past year, and in many respects has served as microcosm of the multiple factors at play that have seen American dealmakers of all hues deploy more M&A capital in Europe than in any other period.
By the end of Q4 2021, total deal value for European assets sold to US dealmakers came in at $463bn, according to White & Case M&A Explorer data. This was 82% up on the $254bn posted over the whole of 2020 and higher than any other full calendar year on record.
The transatlantic transactions have involved advisory firms of all sizes. Meera Shah, a senior corporate finance manager at Buzzacott and member of the Corporate Finance Faculty’s board, explains: “Selling assets into the US has always been a fairly chunky part of what we do, but even with that track record, we’ve seen a significant increase in inbound interest from the US. There have been months where up to one third of the businesses we’ve sold have gone to US buyers.”
Money mountains
One of the biggest drivers for the surge of US investment into Europe has been the huge amount of capital available to corporates, private equity firms and special purpose acquisition companies (SPACs) across the pond. Constituents of the S&P 500 are sitting on a $2.77trn cash pile, according to analysis of MarketSmith and S&P Global Market Intelligence data by Investor’s Business Daily. This is 1% up on 2020 levels, where cash hoards climbed by a fifth on 2019 totals. The scale of the cash reserves is such that the S&P 500 companies would be able to give every adult and child in the US more than $8,000 each.
Fenton Burgin, Deloitte’s head of UK advisory, comments: “US corporates positioned their balance sheets to weather the stresses of COVID-19 by cutting back on discretionary spending and raising new debt facilities. As a result, many are sitting on high levels of cash today and that’s driving companies to look at acquisitions as a means of driving growth.”
Private equity firms are similarly replete, with Preqin estimating that North American dry powder has crested record levels of close to $1trn. “The Federal Reserve has kept interest rates at record lows and signalled that rate rises are likely to be very gradual over the next year. As a result, you have a broad range of long-end investors looking for yield, which is resulting in very high levels of cash being pumped into the private equity arena. That’s supercharging M&A activity,” says Burgin.
With large pools of liquidity at their disposal, US dealmakers have scoured the globe searching for targets, with Europe (including the UK) the most familiar adjacent market to expand into.
In addition to the buy-out of Morrisons, other notable US private equity deals in Europe include Warburg Pincus joining a consortium to back the €5.1bn acquisition of T-Mobile Netherlands. On the corporate side, US engineer Parker Hannifin has agreed an $8.7bn take-private of UK aerospace and defence group Meggitt.
The impact of US SPACs on European markets cannot be underestimated either. They had raised an all-time high of $121bn over the first nine months of 2021, according to White & Case data.
Facing a similar urgency to deploy as their corporate and private equity counterparts, these SPACs have looked beyond their domestic market and closed deals of significant scale in Europe. SPAC Gores Guggenheim, for example, paid close to $20bn for Swedish electric carmaker Polestar.
Europe has also presented the opportunity to buy up high-quality assets at attractive valuations relative to what is on offer in a US domestic market characterised by intense competition for assets and full prices.
US M&A deal value (inbound and domestic) climbed to $2.6trn by the end of 2021, according to White & Case. This was double the whole of 2020 and represented just under half (45%) of total global M&A value of $4.3trn.
British bargains?
With their local market approaching saturation, buyers have looked abroad to find value and bought up companies at material premia to their pre-deal European valuations. CD&R’s move for Morrisons, for example, valued the chain at a 61% premium to its share price pre-deal, while Parker Hannifin’s bid for Meggitt valued the aerospace group at a 71% uplift on its pre-deal share price.
The UK has proved to be particularly appealing for US buyers who are on the lookout for a bargain. Of the $308.72bn-worth of UK deals secured during the first nine months of 2021, 59% has come from US acquirers.
A softer pound relative to the US dollar and a cheaper-looking stock market at the end of 2021 (the Dow Jones Industrial Average is trading on a price/earnings ratio of 22.01, while the FTSE 100’s price/earnings is only 14) have drawn US investors to the UK in large numbers.
Says Burgin: “US buyers are operating in a white- hot market – valuations are at record levels and competition is fierce. Looking across the Atlantic, they see UK plc with a Brexit overhang on equity valuations, alongside ongoing exchange-rate pressures. Putting it simply, the UK looks cheap.”
Common market models
In addition to asset values, the UK has also remained the foothold of choice for some US acquirers who want to expand into Europe. The bidder-friendly UK takeover code, English language and a UK regulatory and legal regime that is closer to the US model than that of continental Europe are all factors that have kept American inbound activity levels humming in Britain.
Matthew Katz, head of corporate finance at Buzzacott, agrees: “The language, the law, and commonality in the most basic things, like the types of customer relationship management systems businesses use in the UK, are often roughly aligned with the way the US is operating.”
However, although the US buyer appetite for UK and European assets may be strong, understanding that there are also cultural and strategic differences between US and European investors is essential for vendors and advisers who are hoping to land a deal with a US counterparty.
All boxed off
Chris Grove, head of transaction services at BDO, says one area that requires upfront work relates to locked-box deal completion mechanisms, which are ubiquitous in Europe but remain unfamiliar to US investors, who are used to working off completion accounts.
A locked-box mechanism obliges both parties to commit to a certain price upon signing a deal. By contrast, the completion-accounts approach puts a mechanism in place for final adjustment of the price following completion.
“What we’ve sometimes found is that you end up with a UK seller trying to implement a locked box, the US buyer is still relatively unfamiliar with the mechanism and they can sometimes come up with something that’s a bit of a compromise,” says Grove. “You end up with this hybrid that’s somewhere between a locked box and a completion accounts mechanism. That’s pretty unsatisfactory.”
Although the choice of completion mechanism may seem like a procedural issue, Grove has found that significant shifts in value can occur depending on what completion method is agreed.
“Quite often, you’ll see value shifts around the completion mechanism, so there’s scope there for quite a lot of adjustment to price, which increases risk for the seller. You absolutely need somebody in the mix, somebody in the negotiation, who’s familiar with the chosen completion mechanism but also has an eye on the ultimate goal. There’s a massive education piece.”
Advice and understanding
Buzzacott’s Katz says that US buyers also think about buying the assets of a business, rather than shares, which can lead to complications down the line if the acquirers are not supported and educated by advisers.
US directors on the buyside require more time to understand their fiduciary duties as directors of UK companies, to get to grips with how a UK target operates when it comes to employing agents and paying sales commissions to ensure compliance with the US Bribery Act, and to understand differences between labour laws in the US and European jurisdictions.
Says Katz: “Covering off these risk areas for US buyers can take longer than when selling to a European buyer, simply because this will all be new for the US dealmaker, who’ll really want to get to the bottom of each point. Your endgame stays the same, but it’s about keeping everyone aligned and progressing, even if it might take slightly longer.”
Delays caused by national security interventions into M&A deals in strategic industries also need to be built into US buyer timetables. For example, the Parker Hannifin deal for Meggitt has triggered a security review from the UK government, which has instructed the Competition and Markets Authority to report on the proposed deal in March 2022. Cobham Group, which is owned by US private equity firm Advent, has seen its £2.57bn bid for UK-listed defence company Ultra Electronics subjected to a similar review process.
“In the US, dealmakers are used to the Federal Trade Commission administering national antitrust legislation. But, operating in a European context, there are a range of different national regulators all now increasingly involved in the M&A landscape. In the UK, the new National Security and Investment Act sets out 17 defined sensitive areas where you may need approval to complete a deal,” Deloitte’s Burgin says. “Across Europe, the local merger control landscape for strategic asset deals is equally complex for US buyers, particularly in sectors like TMT, industrials and infrastructure.”
Bright prospects
For any European – including UK – vendors hoping to land a deal with a cash-rich US buyer, these regulatory and cultural differences are more than manageable and can be safely navigated with the right advice, proactive US buyer education and early preparation.
Indeed, there is little sign of these friction points deterring US players from dipping into European markets during the next 12 months.
“The feeling in the market is that US private equity and corporates are preparing for another big year of M&A activity,” says Grove, who predicts: “We’ve seen so much deal flow coming out of the US in 2021, but I do think we’re going to see more US buyers coming into the UK and Europe next year.”
The US processBringing a US buyer with deep pockets into an M&A auction process has become increasingly common over the past 12-24 months. Burgin says the subtleties emerge when advisers have to figure out how serious an American buyer’s interest is. “A US buyer won’t really engage materially with a process until it’s in the second round or they can be told that they have a real prospect of exclusivity. In a European process, you’d expect a much smaller group of European buyers to be firmly engaged in your round one process,” he says. “Your difficulty as an adviser is assessing whether your US buyer is really engaged to the same extent, or just operating as they would in their domestic market, where they’ll give a very high-level view on value, but not really spend much time on a process until the field is narrowed down.” The presence of a US party in a process is highly desirable, but making the most of the American appetite for UK and European assets is not without its complexities. Buzzacott’s Meera Shah says US buyers typically have a very long-term strategic approach, so take a broader view on valuation upfront in order to get ahead of a process, whereas European players will spend more time interrogating valuations and multiples before they’re comfortable with moving forward. “For us, the goal is to get the best buyer, best price and deliverability for our clients. It’s always a fine line, but when you’ve got US and non-US buyers in the mix, it adds to the complexity. “The US will race ahead initially and you want to use that to push the European buyers forward. But you know that the US buyers will then slow down at some point, so you don’t want to have rushed the European buyers outside of their comfort zone, then keep them hanging on. You have to keep them all aligned, make sure that you’re communicating regularly and be upfront about where things stand.” |
A different kind of diligenceOne of the most noticeable differences between US and European M&A markets (including the UK) is the approach to due diligence. Awareness of these nuances can help vendors to gain traction with a US buyer. BDO’s head of transaction services, Chris Grove, says that US buyers, particularly corporates that don’t transact as regularly as private equity firms, tend to focus more on attestation and procedures when undertaking financial due diligence. In Europe, vendor and financial diligence reports offer more opinions and give a view on forecasts. “When US buyers look at reports we produce, they’re generally surprised at the extent of the work and the amount of opinion and commerciality we provide for prospective UK and European bidders. If there’s a US bidder in the process, we do take a different slant and shift focus a bit to meet their requirements.” Reasons for the different approaches to financial due diligence could include the US legal environment, where there is more sensitivity around the disclosure risk for vendors, and the fact that far fewer companies are subject to audit in the US. Because of this last fact, says Grove, “US buyers are generally looking for comfort around extraction of information from source documents. We’ve undertaken a number of exercises, particularly in the case of carve outs, where we’ve gone back to trial balances in order to create an audit trail to the financial statements.” Going back to the trail between source documents, management accounts and filed accounts gives the US buyer an additional layer of comfort, Grove explains, and helps to build traction in a sales process. |