He spoke for only 25 minutes, which may make it one of the most expensive speeches in history. Last Friday (23 September), freshly installed UK Chancellor of the Exchequer Kwasi Kwarteng delivered his not-a-budget “fiscal event” in the House of Commons. It was the biggest tax giveaway in half a century, with the Resolution Foundation think tank projecting government borrowing will climb GBP 411bn (EUR 461bn) over the next five years as a result.
The effect on sterling kicked in that afternoon and has continued into the new trading week: It’s tanked. Though off lows late yesterday (26 September), the pound had flirted with USD 1.03 in early trading. This is record territory.
While the ruling Conservative party’s Ayn Rand contingent may be scratching their heads, a supply-side sugar rush was never going to go down well with markets when inflation runs above 10% and with the Bank of England pushing hard in the opposite direction by raising rates.
The central bank will have to move further – and may have to move faster – than it had intended. Indeed, Governor Andrew Bailey said yesterday evening that the Bank of England "will not hesitate to change interest rates" in service of its 2% inflation target.
Kwarteng's timing might have been terrible, but the move was flagged well enough in advance for a cheeky bid for a FTSE 100 name to hit the market before the currency chaos erupted. On 21 September, French digital automation player Schneider Electric [EPA:SU] agreed the GBP 10.1bn takeover of industrial software provider Aveva [LON:AVV], raising eyebrows from long-term investors who have seen the move as opportunistic.
‘Tis but a scratch
Is the Aveva deal the shape of things to come? Thankfully, we have a model – like The Black Knight in Monty Python and The Holy Grail, Britain is a glutton for punishment. The clearest signal may come from the last self-inflicted blow to sterling, following the Brexit referendum in June 2016.
According to Mergermarket data, 2H16 saw 298 UK inbound deals worth a total of GBP 83.5bn, with that latter value up 142% versus the previous quarter. Then, as now, UK companies with exceptional growth stories were in the crosshairs. Then, as now, the FTSE 100 – whose constituents gather c.75% of their profits overseas – outperformed the wider, more domestically focused FTSE 250.
A bargain UK price for a multinational concern was the real bargain prize. Softbank [TSE:9984] made a GBP 24bn move for chip giant ARM Holdings [LON:ARM] in July 2016, with four out of five of the top inbound deals in 2H16 coming from the tech sector. Other top 10 deals at the time were in the leisure, healthcare, chemicals and financial services sectors.
Everything must go
Looking through Mergermarket’s proprietary Companies for Sale database – compiled from our exclusive reporting on likely M&A targets – there are comfortably more than enough UK telecoms, media and tech (TMT) names for overseas strategics and financial sponsors to get their teeth into. We’ve identified some 177 UK TMT targets in the second and third quarters of this year alone.
Just last week, we revealed Equistone had tapped Houlihan Lokey to advise on the sale of its UK-based connectors manufacturer Bulgin. London-based digital stock trading platform Freetrade is on the lookout for capital from US and European tech-focused growth funds in 1H23, having achieved a GBP 650m valuation late last year, COO and co-founder Viktor Nebehaj told us last week.
Meanwhile, Dealogic’s proprietary Likely to Issue (LTI) algorithm has pegged UKFast.net Ltd, Advanced Computer Software Group and Options Technology Ltd among key sponsor-backed TMT names to watch for potential exit in the coming 12 months. They fit the post-Brexit model of companies with a high growth and/or overseas profits profile.
Of course, UK financial services names were also coveted back in 2H16 – and here again, just last week Mergermarket reported London-listed wealth management groups including Quilter [LON:QLT] and Rathbones [LON:RAT] are on the takeover watchlist following a GBP 1.6bn offer for rival Brewin Dolphin [LON:BRW] earlier in the year.
There is always a risk that the battle royale between a fiscally lax Kwarteng and the hawkish Bank of England could go off in unexpected directions. Dealmakers more cautious than Schneider Electric's management might want to stand on the sidelines for a few days or weeks to see just how the macro situation plays out before committing capital to the UK.
At least the exchange rate makes a fact-finding trip to the UK a cheap option.
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