Foreign investors and buyers swooping on UK business assets

As the Brexit-date approaches, the surrounding uncertainty has driven down the pound to its lowest level in over two years. It is down 8 per cent on the US dollar since early May, and 16 per cent down on its pre-Brexit vote level three years earlier. With a better than even chance of a no-deal Brexit eventuating, the currency is highly likely to devalue further over the coming months.

As a result, buyers are prowling the market in record numbers casting their slide rules over UK assets.

The quoted sector has the most visible activity. Overseas bids have been storming in over the past month for companies like Merlin, Sci Sys, Just Eat, Cobham, Amerisur, Inmarsat, Kcom, BCA Marketplace, Acacia Mining, and easyHotel. Many others like accesso Technology Group and Helical bar are being heavily stalked. Strong brands like Burberry are going to look very attractive, as are housebuilders including Barratt, Redrow, Persimmon and Bovis, not to mention pub companies including Mitchells & Butlers.

Mitchells & Butlers larger competitor, Greene King, has just been bought in a £4.6 billion deal by Hong Kong-based CKA Asset Holdings in its search for “businesses with stable and resilient characteristics and strong cashflow capabilities”. CKA paid a large premium for the pub, restaurant and hotel operator that was founded in 1799 and now employs over 38,000 people

Overseas buyers see this as tremendously opportune time to invest in the UK, with companies trading at comparatively cheap valuations coinciding with a very low point in sterling.

Richard Bernstein, of the Crystal Amber fund, recently summed it up: “UK plc is now on sale.”

Money is cheap in the US, and private equity funds there are casting their net to the UK to secure bargains. Yields on 10-year US Treasury notes recently fell to just 1.66 per cent, the lowest level since October 2016. Meanwhile, German 10-year Bund yields have fallen well into negative territory at 0.573 per cent.

Cobham, one of the UK’s Britain's largest defence companies, has just been bought for £34 billion by US private equity company Advent International. UK entertainment giant Merlin Entertainments recently got bought by Blackstone, Canadian pension fund CPPIB, and the Danish family owner of Lego in a £6 billion deal.

Warren Buffett said earlier this year that whatever happened with Brexit, he is “ready to buy something in the UK tomorrow.”

“We’re hoping for a deal in the UK or in Europe no matter how Brexit comes out,” Buffett added. “I’m not an Englishman, but I have a feeling it was a mistake to vote to leave… but it doesn’t destroy my appetite in the least for making a very large acquisition in the UK”

The fact is that overseas buyers think British companies are going cheap, thanks to the plunging pound, and they are buying up assets big-time.

Look at the success of US private equity firm Mayfair Equity Partners. In 2015, they bought a significant stake in UK fishing tackle firm Fox International from Next Wave Partners who had backed a management buyout the year before. The deal valued Fox at £50 million. Next Wave hadn’t done badly during their short tenure, reaping a whopping 150 per cent IRR.

Fox International was founded in Essex 55 years ago by Clifford Fox. An interesting fact is that fishing is the country’s most popular sport, with more than 2.9 million participants - about 600,000 more than those who play football.

Mayfair believed that the Fox management team had done a fantastic job in building dominance in its domestic market and, with help, could be replicated in new territories. Management needed the funds for further acquisitions and for R&D into new product categories.

Just three years later, Fox is now selling more than 3,000 products in over 30 countries. It is firmly focused on product leadership and innovation in the supply of fishing equipment for anglers globally.

In July this year, Mayfair offloaded its stake to Lew’s Holdings, which is backed by Wall Street titan Byron Trott’s BDT Capital Partners. The deal valued Fox at £150 million, meaning that Mayfair roughly tripled its stake.

Mayfair’s Managing Partner, Daniel Sasaki, said: “If you are a dollar-based investor, you are buying anything in the UK at a discount to what you would have done three-to-four years ago.”

There is just as much interest in the private mid-market sector though it’s tough to get in, according to Boris Rykov, Business Sale Report’s Marketing and Operations Manager. He says: “We are getting a stream of requests from foreign buyers, including entrepreneurs, trade buyers and private equity firms looking to buy businesses with revenues from £2 million to £50 million. There just isn’t the supply to satisfy them. Owners are interested but hesitant to commit in the current climate. Some of the owners waiting in the wings ought to understand that this is a very special window of exit opportunity. It may not last for long.”

Of particular interest are British firms with good profit margins, solid business plans and something special about their product or service. This will offer a clear route for owners
to reinvest their cash to grow for years to come.

The flip side of a plunging pound is that it costs Brits more to go on holidays abroad, and many are saving pennies by taking domestic holidays, or ‘staycations’. At the same time there has been a big rise in summer tourists - summer flight bookings to the UK from India are up 20 per cent on last year, Chinese bookings are up 21 per cent and Japanese flight bookings are up 10 per cent. Unsurprisingly, accommodation providers are doing very well, with many having their best year ever.

India-based OYO Hotels & Homes recently announced that it had increased its presence in the UK to over 100 hotels across 25 major cities and towns including London, Manchester, Edinburgh, Glasgow, Blackpool and Torquay. The business has only been in the UK for a year, and has tripled its portfolio in the last three months.

Smaller hotel business easyHotel is also flourishing. Despite the ongoing political and economic uncertainty facing the UK, the group says it continues to outperform its hotel markets in the UK and in Europe, with sales up 47 per cent.

Luxembourg-based Icamap has a 38.7 per cent stake in the business and has just joined forces with Ivanhoe Cambridge to launch a £139 million bid for the business. This represents a 36.7x multiple of easyHotel’s most recent EBITDA of £3.4 million.

UK business is generally agile and used to a fast-moving, competitive trading environment. The legal and regulatory environment is robust and corporate tax rates are low. An uncertain political and economic landscape will not stop the wheels turning.

Foreign buyers are more than aware of this, and cheap sterling affords them a unique opportunity to buy into British ingenuity, creativity and profits far beyond Brexit deadline day.

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