Legal review: Winds of change in M&A activity

At the start of the year, as the world continued to recover from the pandemic, the deals market in Scotland was performing well. But the beginning of the Ukraine conflict and political uncertainty in the UK has led to a slight slowdown in mergers and acquisitions (M&As), according to market commentators.

However, despite the unsettled conditions, members of Scotland’s legal profession report that there is still healthy activity in the market. This is particularly the case in more resilient sectors such as technology, including healthtech and cleantech, and energy, which is benefiting from the country’s drive to net-zero. The weakening of the pound also had the effect of making the UK more attractive to global investors, and there is plenty of private equity available to fund deals, according to experts.

John Morrison, partner in the corporate division at Shepherd and Wedderburn, says: “The M&A and investment market remains buoyant in Scotland, particularly in clean energy and technology. While the technology market globally has softened in the last 12 months, Scottish technology valuations, and the Scottish talent/development pool, remain appealing to international purchasers.

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“Likewise, in clean energy, interest in Scottish projects has remained strong, with real competition for portfolioscoming to market. You only haveto look to the most recentScotWind leasing round for an example of the clear competition to develop clean energy projects here in Scotland.”

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Morrison adds that, while investors favour certainty, one of the unintended impacts of the recent economic uncertainty – and, in particular, the dip in the strength of the pound– has been that relative valuations for Scottish technology companies have become more appealing to international investors and acquirers.

Shepherd and Wedderburn highlights a range of deals it has been involved in. It advised TVSquared, a global measurement and attribution platform for converged TV, in its $160 million sale to Innovid, a US-based connected TV advertising delivery and measurement platform. It acted for Scottish Sea Farms in its £164m purchase of the UK fish farming interests of Grieg Seafood. It acted for the shareholders of Granfit Holdings Limited in the sale of the entire issued share capital to Norcros Group (Holdings), for a value up to £92m. And it advised the Scottish National Investment Bank on its investments into PureLifi, Forev, IndiNature, Nova Innovation, and Iona Wind Partnership.

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Adam Knowles, partner at Dentons, says the M&A market was “hot” until the end of the financial year. He says his firm was involved in some significant transactions over the last 12 months, including advising RoslinCT, a leader in advanced cell therapies contract development and manufacturing, on Global Healthcare Opportunities Capital Partners’ investment into the company. It also advised on automotive servicing firm Axle Group’s trade sale to Halfords.

He says: “Deal activity remains relatively strong, though wider economic uncertainty means there are some transactions in a ‘pregnant pause’, where decision-makers want to hold fire until they understand what is happening with the political upheaval around interest rates, energy prices and, of course, the war in Ukraine. All of these factors impact debt-funded deals in particular.

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Shepherd and Wedderburn acted for Scottish Sea Farms when it acquired Grieg Seafood’s UK fish farms for £164m. Image: Robert Perry

“People still want to do deals, but private equity houses are being more cautious. However, anything in the medical sector is standing out and doing well. The food and drink sector is also busy, but the deals tend to be smaller. We are seeing fundraising towards building or upgrading distilleries, increasing warehousing, and brand development as products mature and enter the market. Whisky remains a very attractive market for investors, but investor demand significantly outstrips the availability of distillery assets current owners are willing to sell.”

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Barry McCaig, Pinsent Masons partner and head of its corporate practice group in Scotland, points out that – despite events at Westminster and against a background of ongoing political and financial instability – there is still a lot of M&A activity taking place. He says energy and tech are the go-to sectors for corporates and institutional investors.

He adds: “Across our firm, we are extremely busy in the traditional hydrocarbons space and energy transition, and the renewables sector is extremely buoyant with our teams advising a wide range of businesses, including several successful bidders in the ScotWind offshore wind auction process.”

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Significant deals McCaig lists that Pinsent Masons’ Scottish-based lawyers have acted on in the last year include the sale of Scottish steelworks and fabrication company J&D Pierce to Swedish investment group Storsgoken; multiple acquisitions on behalf of international software solutions specialist Idox; advising listed housebuilder Springfield Properties on its acquisitions of Tulloch Homes and MacTaggart and Mickel, plus a substantial growth equity investment by Scottish Equity Partners in Cresset, the UK-based developer of drug discovery and design software.

Fraser Gillies of Wright, Johnston & Mackenzie
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Chairman of Burness Paull, Peter Lawson, says that while there has been a softening in the market following Russia’s invasion of Ukraine and in the face of global inflation, deal activity in Scotland has remained strong.

His firm has continued to receive instructions from private equity, both within Scotland and the wider UK, as well as internationally, for venture capital activity; domestic investors and innovative high-growth businesses; around M&A transactions within the technology space; for capital markets work, and from clients who have ESG considerations as key components of their acquisition and investment strategies.

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Notable client activity Lawson cites for his firm’s most recent activity includes advising Incremental Group on its acquisition by Telefónica Tech in a transaction worth up to £175m; acting for STV during the divestment of its external lottery management business, which manages The Scottish Children’s Lottery; and advising Scandinavian residential real estate company Heimstaden Bostad on its entry to the Scottish market through a £125m forward-funding deal for a 464-home build-to-rent project in Edinburgh.

Craig Stirling, partner and head of corporate team at Davidson Chalmers Stewart, is optimistic in his view of the market. He says: “The M&A market in Scotland is as healthy as I have seen over recent years. We’ve seen a high level of activity, with sectors including energy, technology and healthcare continuing to perform strongly in terms of deal volume and value.

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“This has been driven by numerous factors, including unfounded fears of significant changes in capital gains tax, which helped drive activity at the beginning of the year, and record levels of private equity investor and alternative lender capital within the market.”

His firm acted for Belgium-based AcalisCare in its acquisition of Balhousie Care Group, a care provider which houses nearly 1,000 residents and employs 1,400 people at 26 care facilities across Scotland. Stirling says: “This transaction, which is one of a number of significant deals we supported in the healthcare sector this year, involved a large cross-departmental team from our firm.”

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He adds: “Deal activity across the healthcare sector as a whole remains particularly buoyant. As a firm which has developed strong expertise in this sector, we are seeing the benefits of this trend.”

Graeme Bruce, corporate finance partner at CMS, says that after a buoyant start to the year, and a slight lull over the summer, the Scottish deals market continues to gather pace. He observes: “There is undoubtedly a shift in the balance of power from seller to buyer with sale processes becoming more extended. The evidence for this is in the longer lead times in agreeing heads of terms and more protracted negotiations at the execution phase of many transactions.

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“This is partly driven by sellers being less robust in their forecasts of future revenues, given uncertain market conditions, but it’s also the result of more rigorous buyers who are taking longer to test projections.”

He adds: “As you might expect, renewable energy and anything connected to it remains a hotsector for M&A activity. There is a perfect storm of high energyprices and long-term climate change measures that will continue to drive deal activity within the sector.”

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Euan Tripp, partner in the corporate law team at Anderson Strathern, agrees that despite all the uncertainty and disruption, it has been a positive year for M&As. He says the financial year 2021-22 was the most successful year ever for his firm’s corporate M&A team, both in terms of the number of deals and their overall value.

Anderson Strathern has been involved in numerous deals in the renewables sector, particularly solar and battery storage. Tripp adds that a significant deal in the renewables sector was when it acted for Eurowind Energy (A/S) on its share purchase of Uisenis Power.

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While current uncertainty makes it difficult for commentators to predict what lies ahead for M&A in Scotland, many lawyers remain relatively positive, particularly when it comes to such sectors as energy and tech, which have done well through turbulent times.

Tripp says: “Apprehension around the economic outlook and what that will mean for business could see a slowdown in M&A activity over the next few months, but I would expect a pick-up thereafter – notwithstanding a likely recession.”

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Knowles says: “Despite the outlook being uncertain, we expect to continue to see deal activity continue as dealmakers adapt and the financial modelling becomes more sophisticated as they prepare to take long-term commitments.”

Morrison sees potential for growth in the Scottish technology sector and, in particular, with scale-ups, adding: “It is for this reason we launched our Start-to-Scale initiative, which seeks to supercharge Scotland’s start-ups and scale-ups by providing resources, insights and market square events here in Scotland.”

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McCaig concludes: “We can’t ignore some strong head winds on the horizon, and issues such as labour shortages, supply chain problems caused by the war in Ukraine, rising inflation and genuine cost of living concerns.”