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As profit warnings rise...

US-Scottish deals withstand headwinds

BenRiach whisky
BenRiach: acquired by US firm

Deal activity between Scotland and the US held up over the past two years despite turbulence in global markets, according to new analysis from business advisory firm Deloitte. 

There were 40 deals in both directions – 28 involving US acquirers in Scotland (16 in 2015 and 12 in 2016) and 12 Scottish businesses purchasing assets across the Atlantic (seven and five).

The manufacturing and TMT (technology, media, and telecommunications) sectors were the largest source of activity, with eight US outbound deals and three UK outbound acquisitions each. 

The value of transactions with a disclosed figure topped £4.8 billion, which was significantly higher than the £2bn achieved in the ten quarters to Q4 2015.

Of the UK regions, excluding London and South East England, Scotland was third for US outbound M&A, behind the East (57) and North West (33) of England. 

Among the most notable Scottish deals in 2016 were Facebook’s acquisition of Edinburgh immersive audio company, Two Big Ears, and Brown-Forman’s, owner of Jack Daniel’s, £285 million purchase of the BenRiach Distillery Company.

In the other direction, John Wood Group added to 2015’s purchases of Kelchner and The Infinity Group by acquiring Houston-based Ingenious, a supplier of software and consultancy services.

Cahal DowdsThe research is part of Deloitte’s third US/UK M&A Deal Monitor. Cahal Dowds (right), chairman of Deloitte’s corporate finance advisory business, said: “Globally, M&A activity has dropped in the aftermath of Brexit – an expected outcome as the levels of uncertainty increase.

“Nevertheless, US/UK M&A deals have remained resilient, as has the level of activity in Scotland.

“Some people might be surprised by the number of transactions, particularly in Scottish manufacturing; but the availability of good businesses is driving activity in this sector, regardless of outside factors.

“Many corporates still have a lot of cash on their balance sheets and the best path to growth for them is through acquisition – that’s likely to remain the case in 2017.

“Despite headwinds, confidence hasn’t been shaken: the US/UK deal corridor continues to be the largest of source of M&A in the world. The US is still investing in Scottish companies and the outlook for the next 12 months remains largely positive, with TMT and manufacturing likely to stay at the vanguard of M&A activity.”

US outbound deals to the UK rose 3.6% in the last six months, while UK outbound deals to the US fell by 20.4%.

However, the final quarter of 2016 saw UK outbound M&A leap to $86.4 billion in value, ensuring the US/UK deal corridor performed roughly in line with the global trend for M&A. 

Mr Dowds said: “Two trends stand out in the second half of 2016, the strength of US outbound dealmaking and the sharp fall in UK outbound dealmaking.

“Widespread expectations of a collapse in US outbound dealmaking following the UK’s vote to leave the EU has not come to pass. On the contrary, US buying of UK assets has outperformed the previous six months.

“Companies everywhere are being tested on their ability to deal with technology convergence, and if you have a technology need in your product lines, then today there is a great opportunity to go out and find a company that can solve that. 

“If you are not investing in those solutions organically then you have to buy those solutions, and quickly.  This is going to create a lot of future dealmaking.

“The US is looking beyond uncertainty as the fundamentals of M&A have seldom been stronger. In this low economic growth environment, a key way to get increased revenue is to buy it. The quest for growth continues.” 

Profit warnings

Scottish listed businesses issued five profit warnings in the last quarter, two fewer than the previous quarter and one less than Q4 2015.

But the annual total was the second highest on record, according to EY’s latest Profit Warnings report. 

There were 19 profit warnings from Scottish headquartered companies in 2016 which is second only to 2008 when 21 were issued.

Colin DempsterColin Dempster (right), EY’s head of restructuring for Scotland, said: “The annual total for 2016 was unusually high as a result of a record number of profit warnings in Q1. This can be attributed to the impact of the low oil price on the supply chain while the global economy struggling to build momentum was also a factor. 

“Scotland’s performance in the remainder of the year was remarkably strong, generating an average number of profit warnings that was lower than the average of Q2, Q3 and Q4 for the last seven years. This is evidence of Scotland’s resilience as well as the relative stability in both the UK and global economy in the second half of 2016.

“It is further evidence that the actions many Scottish companies took to future-proof their businesses in the run-up to the independence referendum in 2014 has stood them in good stead for the current uncertainty. A number of sectors which are prevalent in Scotland, such as food and drink, also benefited from strong consumer spending.”

UK quoted companies issued 73 profit warnings in Q4 2016, five more than the previous quarter, but 27 fewer than Q4 2015, when warnings spiked following the fall of the oil price. 

Behind the headlines, however, the report says that there are less positive signals.

A record level of FTSE Support Services warnings in 2016 suggests that businesses are starting to react to uncertainty, as does the 27% of warnings citing contract delays or cancellations in the final quarter.

Companies exposed to the weak pound are also reporting increasing pressure on earnings, with 11% of warnings citing adverse exchange rates.

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