Business mergers & acquisitions in a no-deal Brexit

25 February 2019

The potential impact of a no-deal Brexit on business mergers & acquisitions

The uncertainty of a no-deal Brexit is a concern for many UK companies, but particularly for those with a growth strategy focused on cross border mergers & acquisitions (M&A). Although we would expect the UK to be able to put in place global trade deals over a period of time, a no-deal exit would mean that there would be no transition period, so companies would not have any preparation time. To date we have seen few signs of reduced M&A activity; however, for heavily regulated sectors, like finance, where the UK has been used as the base for European operations, we are seeing plans afoot to set up an EU presence in the event of a no-deal Brexit. One very clear M&A trend over recent years has been interest from overseas acquirers in UK companies. No-one can deny that the UK is seen as a market of high strategic importance across a wide variety of sectors. That being said, we have seen some slowdown in activity from such buyers over recent months. This is because potential acquirers are being forced to look more closely at market risk and foreign exchange. Until a deal (or no-deal, as the case may be) is formally finalised, much of the volatility around exchange rates will likely be noise rather than real, but this only increases the chances of a sharp dislocation in rates should news of a no-deal emerge. On larger deals in particular, hedging acquisition costs has become essential.  The huge amount of available cheap debt also continues to provide impetus to M&A activity.  Whether this will change in the event of a no-deal exit remains to be seen. What is clear is that many borrowers have taken advantage of the current favourable debt market to refinance and improve covenant terms. This may give such companies an element of future-proofing to see them through the five-year post-exit period. So in summary, we believe that there will be a pause in the first few months of 2019 in M&A activity as the Brexit saga continues to evolve, but that acquisitive companies, both in the UK and overseas, will be ready to act quickly after that, making use of strong balance sheets and cheap debt to progress their growth strategies.

The effects of Brexit on EU-funded programmes

Let’s start with some positive news: the UK government has already guaranteed investment projects that would have been approved during the EU’s 2014-2020 programme. This will, it is hoped, prevent a significant fall in activity after 29 March 2019. However, as we approach the end of 2020, there is a risk that there will be less pressure on EU managing authorities to award projects, given that there will no longer be a risk that the UK would be unable to fully claim back its allocation of the European Regional Development Fund (EDRF). EU-sponsored projects which have not been awarded by March 2019 are unlikely to be tendered after then. This is because the investment period for these funds needs to span three years and, in the case of equity investment programmes, the period is five years. All funding must be disbursed by the end of 2023.  The small print around the UK’s proposed Shared Prosperity Fund (SPF), which is likely to replace the European Structured Funds Programme, is still being developed.  We expect the levels of EDRF activity from the middle of 2020 to be influenced by how much progress has been made progressing the SPF.  To a large extent, the UK’s ability to recover EU funds depends on satisfactory monitoring of EDRF projects. The requirements around this are unlikely to change in the short term. Upon the UK’s exit from the EU, this monitoring role will however have to be assigned to a UK supervisory body, replacing the European Court of Auditors.  In summary, therefore, there is much food for thought. What is not in dispute, from a UK perspective, is that we need to maintain the levels of economic development activity between March 2019 and December 2020, despite pressure for the EU to reduce its disbursements to the UK.

Merger review and anti-competitive activity

In the event of a no-deal Brexit, the Competition & Markets Authority (CMA) will continue to investigate the effects of mergers in the UK market. However, the EU will no longer investigate the UK aspects of mergers. The UK government is currently not proposing any substantive changes to the UK competition regime. The UK’s National Security & Investment review is likely to continue regardless of how we exit the EU. There is the issue of the binding nature of future competition laws decisions by the EU Court of Justice. Currently, EU jurisdiction overrides the UK’s. Post exit this will no longer be the case. The CMA can re-open cases that had been cleared by the EU within four months of the deal closing, so deals around the planned exit date of 29 March could theoretically be at risk. Therefore, in the absence of an agreed transitional regime, there is a risk of parallel review by the UK and the EU and the re-opening of cases by the CMA. The UK government is aware of these areas of risk and has recommended that companies approach the European Commission and the CMA early in any deal process and that they also take legal advice. In summary, acquirers and sellers will need to give careful consideration at an early stage to these potential, additional regulatory conditions. Will the parties need to consider parallel jurisdiction cases and will they need to seek advice from the EC and/or the CMA, and, if so, when will they need to do this? The CMA is planning to provide additional guidance to help business owners and advisers navigate a no-deal regulatory maze so the hope is that more may become clearer at that time.  

Investment in start up and growing businesses

The current thinking is that not much is likely to change to the UK’s venture capital trusts (VCTs), Enterprise Investment Schemes (EISs) and Seed Enterprise Investment Schemes (SEISs) when the UK leaves the EU, even if we have a no-deal exit. In the medium to long term it will probably be down to the UK government to decide how it wishes to encourage investment in early stage and growing SMEs, rather than whether we have left the EU or not. On the whole, the VCT, EIS and SEIS schemes have worked well. Three years ago the EU instigated some significant changes to the regulations, which were adopted in the UK. The government has since adapted these regulations within the EU’s framework to ensure that they work well here in the UK. Given this, alongside so many other higher priority issues on the UK government’s short term agenda, we don’t see there being any changes of any note in the foreseeable future.

Source of data: Corporate Financier Magazine, www.icaew.com/cff

Contact us 

If you would like to discuss the above subject further, please contact Laurence Whitehead in our Corporate Finance team. Alternatively, send us an online enquiry.

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