Grim Year for U.K. M&A Made More Uncertain by Britain’s Decision to Leave EU
Initial public offerings are also at risk; lower fee revenue is in the offing
LONDON—Dealmaking bankers and lawyers are pointing to early victims of Britons’ vote to leave the European Union: companies that won’t be bought and stock and bond offers put on hold until Britain’s next steps are clearer.
A number of U.K. and European deals had been lined up in the event of a remain vote in anticipation of buoyant markets once the uncertainty around the referendum was dispelled. Instead, an already grim year for U.K. mergers and acquisitions and securities sales is seen as getting worse after stocks and sterling plummeted on Friday.
At least half a dozen U.K. companies that had planned to start initial public offerings or debt-financing deals next week have had to change tack, people working on those transactions said. A senior banker at an American investment bank in London said the IPO market “will be tough for a while,” and lawyers said the only M&A they expect now are opportunistic swoops by foreign buyers on long-wanted British targets.
“I would expect that M&A deal volume in the EU will be very muted if not frozen until the markets stabilize and the ramifications of the exit become clearer,” said Bart Friedman, a senior partner at Cahill Gordon & Reindel. “Cross border activity in Europe having any degree of significant U.K. involvement is likely over for the rest of this year,” he said.
Many companies took a wait-and-see approach in the run-up to the vote, figuring it wasn’t worth the risk to try to guess the outcome. Thomson Reuters figures put U.K. M&A at its lowest level on record this year, accounting for just 4% of global activity through mid-June. Inbound cross-border M&A in the U.K. is down 74% from the same period a year ago. Dealogic data show just $3.33 billion was raised in the U.K. IPOs between January and mid-June, down from $8.29 billion in the same 2015 period.
A pull-back means lower fee revenue for the bankers, lawyers and other advisers who keep U.K. deals ticking. Investment-banking fees paid by U.K. companies dropped 22% from a year ago to $1.9 billion, according to Thomson Reuters. Capital-markets fees in the U.K. fell by 37% from the same January to mid-June period last year, making 2016 the slowest year since 2003 for those fees.
Following Thursday’s outcome there are questions about M&A already under way, such as Anheuser-Busch InBev’s $108 billion offer for SAB Miller PLC. Bankers said the deal could be complicated by Brexit as the weaker pound could make AB InBev’s sterling-based offer to SAB Miller shareholders less appealing and add to charges for AB InBev. AB InBev already lost $599 million in the first quarter on its currency hedges from the deal, the company disclosed in May.
A spokeswoman for Anheuser-Busch InBev said the company didn’t want to speculate on potential hypothetical impacts of Britain’s decision to leave the European Union.
There were also concerns about the planned merger between Deutsche Börse AG and London Stock Exchange Group PLC, and whether London still makes sense as the planned headquarters of the combined entity. The two companies on Friday said the merger won’t be derailed by Brexit.
“Some people have Brexit provisions in their contracts but I don’t see a huge raft of contracted deals falling apart,” said Richard Browne, a partner at Allen & Overy.
“Most of the questions I’ve been getting from clients is on wanting to know what everyone else is doing,” he said.
Rob Allard, a former Goldman Sachs banker and co-founder of U.S.-based hedge fund Firebreak Capital, said Brexit won’t affect his plan to buy a U.K.-based consumer-finance business although he will reassess his currency hedges. He said he is also thinking about knock-on effects of the separation.
“Brexit has probably put us off looking at Ireland at this stage,” Mr. Allard said, because of his concerns about how U.K.-Ireland trade flows might fare in a new EU order.
Others were optimistic that a weak pound could give a small boost to deal flow after the initial uncertainty has passed.
“In a month or two, we might actually see an increase in deal volume as opportunistic investors find the valuation opportunities too seductive to pass up,” Mr. Friedman said.