Deals: Some brighter deal prospects after stormy conditions

Cromarty Firth in Invergordon, Scotland. Image: Adobe Stock

Despite the unsettled economic and political situation, dealmaking activity, particularly in “hot sectors”, such as tech, appears to be continuing to build on the growth that was witnessed last year.

According to Experian Market IQ, in its Mergers & Acquisitions Review, valuations were strong in Scotland in 2022. Last year, a total deal value of £24.8 billion was recorded, up by 22 per cent on 2021, and the highest recorded figure since 2009.

And small to medium-sized enterprises in Scotland saw record levels of equity investment last year, as stated by the British Business Bank in its annual Small Business Equity Tracker published this month. It showed that equity deals involving small businesses totalled £762 million in 2022, up 37 per cent on the previous year’s record of £557m.

Martin Ewan, corporate partner at Brodies, believes the market has recovered from Covid-19, giving the example of his firm having experienced strong year-on-year growth in its last financial year, which ended in April, in terms of corporate work.

However, he points out that issues such as relatively high inflation, cost of living pressures and industrial unrest are having an ongoing impact, with certain sectors feeling the pain. Ewan says: “It’s a really mixed bag. There are some sectors that are particularly hot, technology among them, and others which are much slower in terms of activity.”

He says some sectors are still suffering as a result of last autumn’s mini-Budget, with impacts ranging from soaring mortgage costs to a slump in the value of sterling. “That fiscal event sent a chill around the London deals market and that hasn’t fully recovered yet. It’s still a tough time for the likes of retail and hospitality, which hasn’t been helped by the constraint on labour supply.”

Real estate investment is also experiencing a quieter time, says Ewan, with high borrowing costs and only pockets of activity across the UK.

Katjes Greenfood raised the dough to acquire Genius Foods, with Brodies in the deal mix. Image: Adobe Stock

Turning to sectors that are performing well, Ewan cites energy, from deals in oil and gas services to a boom in renewables. Tech, including fintech and cleantech, is also going from strength to strength.

“We are seeing lots of private equity interest around technology that is coming out of our universities and other stakeholders, such as the Net Zero Technology Centre in Aberdeen. Funders are seeking to back the winners, including those operating in the artificial intelligence sphere, in the coming fourth industrial revolution,” says Ewan.

In energy, he says that the big oil and gas companies are now fully behind the transition to renewables and are driving some of the activity at the Net Zero Technology Centre. He gives the example of the Decarbonization Technology Challenge, launched in May, led by ADNOC (the Abu Dhabi National Oil Company) in collaboration with AWS, BP, Hub71 and the centre itself.

This competition is open to energy transition technology innovators around the world. Ten finalists will pitch their innovations to judges in December with winners receiving up to $1 million to pilot technology with ADNOC.

Balhousie Care Group, Alastrean, Aboyne. Image: Fraser Band Photography

“This is all very exciting and could make a meaningful difference to decarbonisation,” says Ewan. “And we’re also seeing a lot happening in the vital areas of battery storage, hydrogen and carbon capture.”

However, although there is still a lot of activity in oil and gas, the political attitude towards fossil fuels is making some investors cautious, Ewan reports.

“The challenge of tackling climate change while preserving the supply of affordable energy in a safe and efficient way and avoiding mass de-industrialisation is one that our politicians have yet to solve.”

Oil producer Apache Corporation recently suspended drilling at its North Sea oil and gas assets and is cutting jobs, citing “burdensome” UK tax and regulation.

Across the board in M&A, one trend that Ewan is seeing is the increasing length of time it is taking to complete transactions. “The current environment is having an impact on deal execution. Deals are taking a very long time. Previously, it would take about six weeks from start to finish on a transaction, including due diligence .Now, negotiations are taking much longer.

“Buyers and investors are trying to de-risk deals. For example, rather than paying up front, a buyer or investor may offer a proportion at the start and the rest a year later, based on contingencies like performance. Across the market, regardless of the type of investment, everything is taking longer to reach completion.”

Looking ahead to what’s in store for investment in Scotland, Ewan points to the opportunities offered by freeports. In January, the Scottish and UK governments announced that the Inverness and Cromarty Firth, and Forth Green Freeports, had been jointly selected to become Scotland’s first such economic areas.

At the time, both governments stated that job creation, energy transition and business investment were the key aims of the Green Freeports programme.

Ewan says: “At Brodies we’re actively engaged in advising a number of different stakeholders from NGOs to local authorities to corporates that have an interest in the freeports. It will be interesting to see what benefits flow out of them and the implications for inward investment.”

Staying with the green agenda, Ewan says ESG remains high on the criteria for investment. That might be in the food sector, referring to the acquisition of Edinburgh-based Genius Foods, the market leader for gluten-free baking goods, which Brodies advised on (see panel), or any number of sustainability-related businesses.

Case study: Katjes Greenfoods/Genius Foods

Düsseldorf-headquartered Katjes Greenfood invests in innovative food companies whose plant-based products are shaping the food market’s shift towards greater sustainability.

Meanwhile, Edinburgh-based Genius Foods is the market leader for gluten-free baking goods in the UK and number two in Europe. The acquisition of Genius Foods represented further commitment to Katjes Greenfoods’ international growth strategy.

Together with Wilson Sonsini Goodrich & Rosati, Brodies handled all UK law aspects of this deal, demonstrating in-depth sector knowledge.

The transaction involved input from Brodies’ Scottish and English real estate, planning, tax, commercial services and employment specialists, in relation to acquisition due diligence. The law firm’s contribution included assisting with the negotiation of the terms of the transaction, drafting all necessary documents and overseeing the due diligence and disclosure processes.

It was an opportunity for Brodies to showcase its expertise in dealing with complex M&A at an international level, involving the UK, Germany, France, US and Australia.

Case study: AcalisCare/Balhousie Care Group

Brodies acted for the shareholders of Balhousie Care Group in the sale to AcalisCare.

Balhousie is the largest private care home group in Scotland, with more than 1,400 employees and in excess of 1,000 residents in the 26 care facilities which it owns and operatesacross the country,ranging from residential and nursing care to specialist care.

Brodies was instructed on the transaction, having acted for Balhousie for well over a decade, and the deal with AcalisCare involved a large number of the law firm’s specialists, drawn from its corporate, banking, real estate, regulatory, employment, and tax teams.