Gin proves a real tonic for investors in Scotland

Looking at the headline figures on the value of deals done in the first half of this year, it would seem that oil and gas were particularly active, but analysis shows there is more to the investment story in Scotland.

The largest deal recorded in the first six months of 2019 was in oil and gas with North Sea operator Ithaca Energy’s purchase of Chevron North Sea for £1.6 billion. This ‘mega deal’ added a further ten 
producing field interests to its existing portfolio.

This deal by Ithaca, a wholly-owned subsidiary of Israeli 
integrated energy company Delek Group, made up almost 20 per cent of the total value of deals done in Scotland in the first half of the year. But when smaller and medium sized transactions are taken into account, it is clear there was activity across a diverse range of sectors.

Experian analysis shows that financial services was once again the most active sector for merger and acquisition (M&A) activity in Scotland, with 243 recorded deals, out of a total of 348. Manufacturing was the second most active sector with 41 deals worth £3.8bn, followed by professional services, infocomms and the wholesale and retail sector.

While financial services saw growth of 1.3 per cent, the professional services, infocomms and wholesale and retail sectors
averaged a 36 per cent decline by volume on deals done in the first half of the year from the same period in 2018. Only the manufacturing and wholesale and retail sectors saw values increase in the first six months of this year.

Looking at the oil and gas sector, Callum Gray, director and head of deal origination, corporate finance, at chartered accountants and business advisors, Anderson, Anderson & Brown (AAB), says that what is interesting about the biggest deal of the year is that Chevron had made it known for some time that they wished to exit the North Sea.

He explains: “Ithaca is an up-and-coming smaller operator trying to grab more of a market share and that was a key opportunity for them.”

He adds that a lot of recent deals in oil and gas have involved majors who have been in the North Sea for some time that want to diversify out of there into other parts of the world. Active buyers are making those exit strategies possible, he says.

In general, Gray expects larger transactions to be done at the back end of this year in Scotland and into 2020 – particularly in “hot sectors”.

He adds: “I see oil and gas being a part of that because there is greater stability,” he explains. “The oil price is at a level where people are willing to do deals and the operators are making profits again. The North East is a bit more buoyant with respect to large projects starting. This means money should then flow through to the supply chain.”

On oil and gas, Laura Petrie, legal director for projects, energy and infrastructure at Brodies law firm, cautions on the complexities of making deals in the realm of the UK Continental Shelf (UKCS), see the panel below, right.

Away from oil and gas, there have been transactions across a range of sectors, from food and drink to healthcare, to publishing and technology.

Gray says: “I think these are interesting times.” As an example, he points to publishing group DC Thomson acquiring PSP Media, a Glasgow-based publisher and event specialist, in April this year.

This was a deal in which AAB assisted its client DC Thomson. The Dundee-based media company referred to the transaction as “another key step in transforming the business from traditional 
publisher to modern media 
creator”.

Gray describes technology as another sector in which firms have to be innovative. He explains: “You need to have that drive to get to the next thing that will continue to spur opportunities.

“There’s one client we are working with now that has made
29 acquisitions in 18 months in
the software sector.”

In the food and drink sector –
despite the potentially disastrous impact of Brexit – advisers have seen a lot of activity focused on whisky, but increasingly also
on others spirits – most notably gin.

Gray reports that AAB has advised on a number of investments in spirits over recent months, and that companies
have been raising between £1 million and £2m for expansion and to tap into adventurous opportunities in overseas markets, such as the Far East.

This view is echoed by Brodies, with partner Neil Burgess saying: “Food and drink has continued to be quite an active sector in the Scottish economy.

“There has been a steady stream of investments and merger and acquisition transactions over the period, particularly driven by demand from overseas players. It remains a very attractive sector for investment.”

His colleague Eric Galbraith, a fellow partner at the law firm, adds: “Without a doubt, spirits 
are attracting the most attention in food and drink. There were a few deals in the whisky sector, but gin is giving whisky a run for its money these days in terms of investment.”

But across food and drink, Galbraith admits that uncertainty around Brexit, in particular
concerning the freedom of
movement of goods, has prolonged some deals. Nevertheless, he fully expects food and drink transactions to pick up over the next few months.

Strategic acquirers spur onward activity

In addition to the active upstream sector, we continue to see deal flow across several industries, including oil and gas services, manpower and recruitment, food and drink and technology.

Often this activity is being driven by strategic acquirers – which have the ability to complete deals and have the time to assess the market and find businesses which complement or expand their own.

Typically these “off-market” deals are the outcome of the current business owners recognising the opportunities available under a larger owner.

Other key themes include
portfolio companies of private equity businesses with strong growth aspirations, capital to deploy and seeking to progress their buy-and-build strategies.

Unsurprisingly, deals in the food and drink sector are noticeably quiet due to greater uncertainty around the freedom of movement of goods post-Brexit.

While this hasn’t stopped activity, it has prolonged the timescales. However, we would expect to see an increase in deal completions in the run to Christmas and into next year.”

Callum Gray, director and head of deal origination, corporate finance, at Anderson Anderson & Brown.

Assets give food for thought

While it is becoming commonplace to hear the names of investors reported alongside the names of their investee companies that have acquired UKCS assets, obtaining investment in oil and gas projects remains a complex area for independent companies looking to grow their presence, or international organisations.

These investments typically involve a package of different types of assets which require a corresponding package of various securities – which need careful consideration when applied to oil and gas assets.

UKCS regulation impacts the taking of security over those assets and, combined with both English and Scottish laws regulating the granting and enforcement of securities, often means that both investors and oil and gas companies find themselves dealing with multiple advisors and a range of guidance and advice.

That said, deals still get done and investment is available. With the right support and guidance both the investor and the oil and gas company can structure a mutually-beneficial 
arrangement that meets both their needs, as well as avoiding overly complex arrangements, gaps in protection or falling foul of the regulator.”

Laura Petrie, legal director for projects, energy and infrastructure at Brodies.

This article first appeared in The Scotsman’s Deals 2019 supplement. A digital version can be found here.