How can Swiss investors make the most of opportunities in the UK?
In this blog post we look at the opportunities and potential pitfalls of doing deals in the UK, Europe’s second-largest economy and a hugely important trading and investment partner for Switzerland.
Close trade and investment ties with Switzerland, vibrant M&A scene
With direct investments from Switzerland amounting to just over CHF 50 billion at the end of 2015, the UK is one of the top five destinations for Swiss foreign direct investment. It’s similar the other way around, with UK direct investments in Switzerland running at over CHF 30 billion, and nearly 30,000 Swiss jobs attributable to British investments.
The ties aren’t just financial: in 2016 the annual volume of trade between the two countries came to over CHF 50 billion. Deal flow is also stable: in 2017 the UK bucked the recent global downtrend in mergers and acquisitions to post increases in both deal counts and deal value.
PwC’s Deal Talk UK takes a close look at the deals landscape in the UK. It examines the implications of issues such as Brexit, and highlights areas to focus on to ensure deals are a success. Written by members of our team in Switzerland with extensive deals experience in the UK, Deal Talk is designed to give outsiders the benefit of an insider’s view.
Originally from the UK, since joining PwC in Switzerland in 1996 Martin James has provided financial due diligence services to corporate and private equity clients. Markus Widmer spent seven years in London, where he specialised in deals in the retail, leisure and travel sector. Luca Borrelli spent two years in London between 2015 and 2017, working on deals for clients in life sciences and private equity.
What’s the deal in the UK?
The authors describe how despite its transformation from a leading industrial powerhouse in the 19th century to a modern, service-dominated economy, the UK is one of the world’s most developed economies and still a force to be reckoned with. It’s the second-largest economy in Europe behind Germany (having recently overtaken France), with growth driven by a diverse and dynamic services industry. An attractive economic environment is likely to boost M&A activity going forward.
What’s the catch?
The success of the UK economy is closely bound up with London’s prominence as a global financial hub. While London is also a centre for the creative, media and technology industries, financial services is what dominates the London economy – which is growing at twice the rate of the country as a whole. But the importance of finance is precisely what makes it the Achilles heel of the UK economy. Think Brexit. Depending on the outcome of negotiations on trade relationships between the UK and the EU, Britain’s role as the centre of European financial services could be in jeopardy. This could have major implications – both positive and negative − for investors seeking deal opportunities.
What are the conclusions for investors?
The recent uncertainty surrounding Brexit has created opportunities for foreign investors. It has led to a devaluation of sterling, which is making UK acquisitions much cheaper for foreign investors. And it has increased the attractiveness of inbound investment in export-driven UK companies. By the same token it has put pressure on companies such as retailers that have a high share of imported products.
Another key factor is the relationship between the UK and the US. Most deals over the past five years, both inbound and outbound, have been done with the US, with technology, media and telecoms leading the way. Uncertainty on Brexit negotiations means that it’s important to keep an eye on how deal activity between the UK and the US develops.
A short checklist for successful UK deals
Our Deal Talk UK surveys the British landscape and looks at the main areas for prospective investors to keep an eye on. If you need a useful checklist, here’s a summary of the key points to bear in mind:
- Private equity: The UK has a well-developed private equity (PE) industry. The market is mature, with transactions including secondary, tertiary and even quaternary buyouts. Backed by one of the world’s largest financial centres, PE houses have good access to capital and debt financing ranging from seed capital to LBOs.
- Key deal terms: Private equity involvement in deals is high and most deals run in competitive auctions. Purchase price adjustments are less common. Sellers typically ask for a daily cash profit. PE sellers try to limit the periods for warranty claims, and the use of R&W insurance is very common – and worth including in your calculations and deal timeline.
- Sell-side advisors: Sellers are usually supported by a lead advisor, and vendor due diligence is extremely common. Buyers need to be prepared to run competitive and fast-paced processes. This type of service is also often required by banks and private lenders in order to finance a deal.
- Accounting standards: The new financial reporting framework became effective on 1 January 2015. UK GAAP is a true and fair accounting standard. Small entities profit from a specific financial reporting standard and have to prepare abridged accounts. Companies are required to have their annual accounts audited but an exemption applies to small companies. Annual accounts have to be filed and are publicly available.
- National living wage and pension: From 1 April 2016 there has been an obligatory minimum wage payable to workers over 25 in the UK. The national living wage is expected to increase gradually between now and 2020. This is likely to lead to personnel cost inflation in sectors with low-income workers, and this in turn might significantly impact profitability. Employers have to enrol their employees in a workplace pension scheme. Historically, companies often had unfunded defined benefit schemes, but now most of these have been closed and defined contribution schemes are prevalent. Nevertheless, companies may have legacy pension liabilities which need to be assessed as part of the due diligence process.
- Trade unions: Although the number of employees belonging to a trade union has declined sharply over the last 20 years, in blue collar dominated workforces unionisation might still be relevant in a deals environment.
These are some of the main points to bear in mind if you want to increase your chances of a successful deal. If you like to find out more, check out PwC Deal Talk UK, or contact us for a more in-depth conversation about doing deals in the UK. Best of luck!