January 20, 2017

What’s in store for South West M&A

The common theme from our South West clients is increasing confidence about their business’ prospects as the shock of the Brexit vote and the Trump election subsides. The M&A market is highly susceptible to prevailing economic conditions but the trend we are experiencing is that market confidence, whilst still susceptible to short-term blips, is continuing to increase. With Mark Carney indicating that the Bank of England looks set to upgrade its forecasts for the UK economy, and with Theresa May providing some clarity as to the UK’s intended approach to Brexit, our belief is that the South West deal market remains well placed to weather any economic volatility. The slide in the value of sterling has seen an increase in the number of clients looking to sell their businesses to overseas buyers. Private Equity remains a popular source of funding for transactions, often alongside bank lending.

Financial Services businesses that we speak to are keenly awaiting clarity as to the precise nature of the UK’s exit from the EU, with much of UK financial services regulation deriving from EU law (for example the Prospectus Directive and Prospectus Regulation, both of which regulate the information which must be provided when offering securities to the public). Our view remains that the government would be wise to seek limited change initially, with the UK no doubt keen to present a message of stability to the markets, investors and international financial services businesses based here as and when Brexit materialises.

In terms of deal structures, earn-outs continue to be popular with buyers looking to insure themselves against a downturn in the target’s market. We are however seeing a trend of deals moving away from the traditional earn-out model, whereby the sellers sell the entire share capital of the target on completion (receiving an initial cash sum with the balance of the purchase price payable depending on the performance of the target over two to three years post-completion) to a consideration share earn-out model, whereby the sellers receive cash on completion together with shares in the buyer (“Consideration Shares”). The Consideration Shares are then subject to put and call options (i.e. a right for either the sellers or the buyer to compel the other party to buy or sell the Consideration Shares, as the case may be) within exercise windows three to four years after completion and at a price calculated pursuant to a pre-agreed formula (often with a maximum and a minimum).

The continued expansion, and further strengthening of, our South West Corporate & Commercial team, with healthcare expert Hazel Phillips joining, Edward Chapman arriving from TLT and Natalie Pring qualifying into the team, demonstrates our optimism for the South West market for 2017 and beyond. We look forward to continuing to help our clients navigate acquisitions and disposals as smoothly as possible.

Associate James Worrall advises clients on a range of corporate and commercial issues and is a specialist on mergers, acquisitions and MBOs.

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