Bill Jamieson: entrepreneurial spirit fuelling Scotland’s deal market

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Scottish economy barely growing; apprehension over a global trade war – and on top of this the sticky, impenetrable treacle that is Brexit – who in the business world would contemplate investment, acquisition or merger against such a backcloth?

But business never stands still. It cannot afford to do so. More often than not, adversity can act as a spur to deal-making. And in the past year all manner of business investment and acquisitions have been successfully concluded.

Not only have business websites and publications bristled with news of deals pulled off, but the pipework of pending transactions also shows no lack of determination by Scottish companies to move up and move on.

This holds true across a broad swathe of business sectors – financial services (with the giant £11-billion merger of Standard Life and Aberdeen Asset Management creating the second-largest fund giant in Europe with £600bn of assets under management), infrastructure provision, manufacturing, specialist biomedical and pharmaceutical products, food products, brewing and distilling and business and digital services.

As it turns out, Scotland’s economy has not been as moribund as previous forecasts had suggested. Revised figures show it grew by 0.4 per cent in the first three months of 2018, outpacing that of the UK (0.2 per cent).

And on an annual basis Scotland’s growth rate is just above that for the UK (1.3 per cent compared with 1.2 per cent), mainly driven by an increase in output across the services and production sectors.

Meanwhile manufacturing exports – accounting for about half of the total value of exports from Scotland to the rest of the world – are up by 3.6 per cent.

Many deals struck in overseas markets are small yet significant. Typical is the recent signing by Glasgow-based life sciences firm Collagen Solutions of distribution agreements with two new Chinese partners. This follows the restructuring of the group’s presence in China and the securing of export licences earlier this year.

This article featured in Deals 2018. A digital edition can be found here

Brexit of course has been of concern to business leaders and the long months of uncertainty will have caused many with subsidiaries in the EU or who trade heavily with the economic area to hold fire until more clarity is provided on the detail of the UK’s exit from the bloc.

But it has far from dampened entrepreneurial spirits. As Douglas Martin, head of corporate finance at Scottish accountancy and business advisory firm Anderson Anderson & Brown, comments: “The Scottish deals market remains healthy with positive deal activity in most industry sectors underpinned by stable market conditions in spite of the wider political uncertainty over Brexit.”

The firm completed more than 50 transactions in the last 12 months. Most notable among these were the management buy-out of metal recycling specialists John Lawrie Group; the sale of kit specialist Scotframe Timber to Saint Gobain of France and the sale of energy services company Equalizer International to Actuant.

Elsewhere, prominent Scottish deals in the past year have included the multi-million pound takeover by a consortium led by Billy Walker of the GlenAllachie Distillery near Aberdour from Pernod Ricard and the Weir Group’s £98 million acquisition of Singapore-based KOP Surface Products.

Prominent deals in which legal firm Brodies has been involved include advice on pension aspects of the sale of Menzies Distribution Ltd to Endless LLP for £74.5m, the sale of FIM Services to Gresham House Holdings in a deal valued at up to £25m; the acquisition of a 75 per cent shareholding in South Staffordshire Water with its 1.6 million customers by Arjun Infrastructure Partners; advice to shareholders in Barrhead Travel Group, one of the UK’s biggest retail travel firms on the sale of the group to US-based Travel Leaders; advising Rovop Group on an equity investment by Bluewater and BGF Investments and the sale and management buy-out of John Lawrie (Aberdeen) to Thunderbird Bidco.

Shuna Sterling, head of corporate and commercial at Brodies, believes a weak pound was driving deal activity in Scotland’s leisure sector.

“Inward investment has been a much used term in conversation since January – a falling pound has proven to be an attractive prospect to overseas investors who are driving a great deal of market activity,” she said.

“This has been particularly prevalent in the hotels and leisure sector, where a number of existing brands have expanded their presence, as well as new entrants who have secured their first foothold in the market.

“What’s particularly interesting is this activity is widespread across Scotland; from prime locations in Edinburgh’s West End and Glasgow’s Southside to Dundee’s Waterfront, and more rural areas in south-west Scotland and the Highlands, in locations popular with tourists.”

In looking at prospects for the remainder of 2018 and beyond, several areas stand out. Among these is the retail sector. It is experiencing unprecedented turbulence due to the onward march of online giants such as Amazon and eBay and a profound switch in household shopping habits. Not only are front-line retail companies now obliged to consider mergers, retrenchment and disposals in the face of technological change, but wider change also confronts our shopping centres and the property companies which hold many of the freeholds. Outlets previously considered as prime retail sites are now being mooted as online distribution centres. Similar changes are also affecting the physical presence of bank branches and estate agents.

Tourism, hotels and the leisure sector look set for significant development, while business services generally face a further wave of change as digital innovators re-shape work and communication habits.

So, in spite of the headwinds facing the macro economy and concerns over political stability – indeed, more often because of them – business will continue to adapt, innovate and change. Deal-making looks set to be as busy as ever.

Comment: Appetite for food and drink sees healthy transactions on menu

By Lyn Calder, head of deals, Central Belt at Anderson Anderson & Brown.

The importance of the food and drink industry to the Scottish economy has been well documented in recent years. This is consistent with the continued spotlight on the sector within the Scottish dealmaking community.

In the last year, food and drink transactions have continued apace, for example Beverage Brands’ acquisition of the majority shareholding in Super Nova; the acquisition of a majority stake in Nolan Seafoods by International Fish Canners; and Pelagia’s acquisition of Shetland Fish Products.

Business Growth Fund’s investment in Entier, a leading catering services company based in Westhill, Aberdeenshire, also shows the attraction of food and drink-related businesses.

We have also seen an increasing desire for operators in the sector to build critical mass quickly via external capital, with equity fundraising being particularly common in craft brewing and distilling –whisky and gin.

These transactions are common in start-ups as well as maturing businesses looking to accelerate growth. There are several distilleries and breweries looking for funding at the moment and we would expect to see fundraising activity in the drinks market continue in the next 12 months.

Our experience at AAB is that the food and drink sector continues to be one which attracts buyers, and we have a number of acquirers actively looking for targets in manufacturing, wholesale and food service.

Niche businesses are likely to attract a premium, as are ‘free from’ products, high-end luxury food and drink, and businesses with strong brand recognition.

Only time will tell what effect Brexit will have on the price of exports and the food and drink industry’s regulatory environment, but for now there are no shortage of parties looking to do a deal.

Comment: Fortune favours the bold and resilient

Shuna Stirling, head of corporate and commercial at Brodies

With just six months to go until the UK is due to leave the EU, much of the conversation around the deals landscape has been occupied by the challenges of Brexit. Yet, with every change comes opportunity – and in Scotland’s case that opportunity has manifested itself in various ways.

Private equity, strong corporate balance sheets and a re-energised willingness from banks to lend have all fuelled the fire of activity that we are seeing across sectors including food and drink, energy, technology, financial services, hotels and leisure, real estate, manufacturing and life sciences. Over the past 12 months, Brodies has seen a myriad of MBO and M&A transactions from both buyers and sellers as businesses commit to strategic growth and a re-focus of ambitions – testament to the resilient attitude that corporate Scotland has shown many times before.

Scotland continues to be an attractive place for inward investment; a prime example being the sale of retail travel leader Barrhead Travel Group to US travel company, Travel Leaders Group, in which we advised Barrhead’s shareholders. The hotels sector is another area where overseas interest and acquisition activity is high, particularly in tourist hotspots to the west and north of the country. And in the north east, the stabilising oil price is helping the market pick up its pace, with private equity homing in on home grown firms with international credibility.

Regeneration is also proving to be a key catalyst for deals activity; most recently the Buchanan Wharf development on the Clyde, with Barclays snapping up a prime spot from Drum Property Group for its campus headquarters in one of Scotland’s biggest ever construction deals. We’ve also provided advice on a heating scheme and environmental matters for Clyde Gateway Developments for its extensive transformation vision for Glasgow’s East End and part of South Lanarkshire, which is likely to boost jobs prospects and attract future private investment. To the east, it’s full steam ahead for the Edinburgh St James’ Centre development, with the long-term effect of such a headline-grabbing venture creating ripples across the city’s retail and leisure sectors.

The approach of Brexit appears to have done little to deter those in the market who are bold enough to press on with business – in fact, if anything, quite the opposite. While there will continue to be some nervousness about 29 March 2019 and what a post-Brexit landscape will bring, there will always be those who are resilient enough to recognise and embrace the opportunities, rather than shy away from the challenges.