Scottish Legal Review: Stable dealings after slow start

A fter a relatively sluggish start to the year on the mergers and acquisitions (M&A) front, activity has picked up during the last few months, according to reports from Scottish law firms.

The early part of 2024 was quiet in terms of deals for a number of factors, including macro-economic issues, global conflicts and domestic political uncertainty before the UK General Election. More stable conditions in recent times have been supportive of M&A activity.

The UK and Republic of Ireland M&A Review, published by Experian in July, reported that since the decline in activity seen in late 2019 to 2020, the Scottish market has returned to a relatively stable – if perhaps slightly more modest – average volume of about 210 transactions per half year.

The results for the first half of 2024 saw 196 transactions recorded at a total value of more than £3 billion, an 8.4 per cent decline from the same period in 2023, but only a 1 per cent drop from the 198 deals recorded in the second half of last year.

It identified further evidence of the Scottish market stabilising in the volume of large transactions, which remained consistent with six transactions in the first half of 2024. The mid-market experienced an increase in volume and value with a 23 per cent and 73 per cent upturn, respectively.

However, Experian stated that “mega deals” had yet to gain momentum in H1 2024, with only one deal in this value range recorded, and small deals fell by 35 per cent compared to the first half of 2023. It added that while acquisitions continued to outperform the other deal types, it had seen a shift during H1 2024 with 40 per cent more employee buy-outs (EBOs), alongside 50 per cent fewer management buy-outs (MBOs).

Although a relatively small segment of the overall Scottish market, the trend in EBOs has continued to grow since 2021 and the statistics for the first half of 2024 followed that upward trajectory, with deals in the architectural and engineering sectors prominent.

Meanwhile, both the value and volume of minority stake transactions increased in H1 2024, as buyers looked to alternative transaction structures to mitigate risk. Scotland’s deal activity represented 6.5 per cent of the UK’s total by volume, and 2 per cent by value.

Edinburgh Airport | LISA FERGUSON

Experian analysis found that Scotland was the target of some “exciting inbound investment” during H1 2024. The largest of these transactions was the £1.27bn acquisition by France-based Vinci Airports of a 50.01 per cent stake in Edinburgh Airport, from Global Infrastructure Partners.

Professional services was the most active sector in terms of M&A activity, despite a 15 per cent decline in total volume. The value of this sector’s transactions grew to over £1.4bn in H1 2024 from only £724 million last year. The manufacturing sector experienced robust growth in M&A deals, with a 19 per cent uplift to 57 deals.

George Frier, partner in corporate finance at Shepherd and Wedderburn, says: “M&A activity has been more subdued other than in the energy and manufacturing sector, and the valuation statistics are skewed by some very large deals by, such as Natwest Bank and the sale of Edinburgh Airport. We have been particularly busy in renewable energy. Professional services have also been active with consolidation in the accounting and Independent financial advice sector.”

HIs firm was involved in the sale of 50.01 per cent of Edinburgh Airport to Vinci Partners, and numerous deals in the energy sector.

“Warranty and indemnity insurance is becoming more frequent and with softening rates, more able to be accessed for lower value [sub-£20m] deals. In Scotland, employee buyouts are increasing in number, though typically remain very low value,” adds Frier.

On the outlook for M&A, he comments that much will depend on the fiscal framework and the burden of taxation overall on business, and confidence. “Will overseas investors still consider the UK as a destination for their capital? The messages from the Prime Minister’s Inaugural International Investment conference with global corporate leaders certainly gives cause for optimism,” says Frier.

Ritchie Whyte, partner and head of corporate and business advisory at Aberdein Considine, says its M&A practice has experienced a busy 12-month period, during which it has grown the team with the lateral hire of Rod Hutchison from MacRoberts. The Experian M&A Guide saw Aberdein Considine ranked in the top-ten legal firms in Scotland by deal activity for the first half of the year.

“The year was a tale of two halves, really. The first six months saw the market improving from a slightly sluggish early-to-mid part of 2023, and over the second half the market has reached fever pitch with significant numbers of pre-Budget tax planning transactions and an acceleration of corporate activity, in order for vendors to seek to lock in existing tax rates and reliefs,” comments Whyte. “This unprecedented surge masks to some extent the underlying market trends, but generally we have seen strong activity in energy, technology and professional and financial services.

“There has also been a notable increase in the prevalence of employee buy-outs, which appear to be plugging a gap in the deals market.”

Danny Lee, partner in the corporate and M&A team at Burges Salmon, points to challenging macro-economic factors, pre-election uncertainty and geopolitical tensions resulting in a slow start to M&A activity in the H1 2024.

“As inflation and interest rates started to stabilise, the market has bounced back significantly in the second half of the year, with the first signs of activity felt in London’s AIM, which regained its place as Europe’s largest financial hub and the route to global investing,” explains Lee.

In the equity capital markets space, Burges Salmon recently advised, alongside Alston & Bird, its US client AOTI on its £140m float, the largest AIM IPO by raise since December 2021.

“We were extremely proud of the role we played in this landmark transaction, supporting our client, a medtech company that wants to do good in the world so people with chronic conditions can live their lives to the fullest, with a float that unlocks capital to accelerate the commercial expansion of its wound care technology,” says Lee.

He adds: “In Scotland, we’ve seen a notable surge in activity with significant deals across the technology, green energy, and financial services sectors, all underscoring the dynamic nature of the Scottish market, with domestic and international investors capitalising on Scotland’s robust economic outlook.

“One of the prominent trends we’ve observed is the increasing focus on sustainable and green investments, with companies prioritising acquisitions that align with their ESG [environmental, social, and governance] goals, reflecting a broader shift towards sustainability in the corporate world.

“In the race to embrace AI and enhance digital capabilities, the technology sector has also seen a flurry of activity, a trend that will only continue with the recent announcement that data centres are now recognised as critical national infrastructure.

“Looking ahead to 2025, the outlook for M&A in Scotland is looking strong, but as companies seek to make the most out of emerging opportunities, they will also need to navigate potential challenges, such as legislative changes and market volatility.”

Bruce Farquhar, a partner in the corporate team at Anderson Strathern, has noticed an increase in M&A activity in Scotland during last year, particularly from international buyers where Scottish companies are seen as representing good value for money.

“However, as a result of the relative stagnation of M&A activities during the Covid pandemic, there is still a bit of deals ‘bottleneck’ to deal with,” he says.

Deals that Anderson Strathern has been involved with include acting for Applexus Technologies Inc, a US based IT company, on its first major acquisition in the UK. Applexus acquired Absoft Limited, an IT company based in Aberdeen. It also acted for STEF, a French logistics company, on its acquisition of Long Lane Deliveries, a Scottish transport company which operates throughout the UK. It represented the sellers in the sale of specialist civil engineering and groundworks company Deans Civil Engineering to RSK. And it represented principals of Douglas Home & Co. – a long established accountancy firm with a strong footprint across Scotland and Northern England – in relation to its merger with EQ Accountants.

Farquhar says: “Areas of existing strength in the Scottish market continue to trend, such as artificial intelligence, software, fintech, hotels and leisure, and clean energy.”

Brian Moore, corporate partner in the Edinburgh office of Dentons, says his firm saw a noticeable uptick in M&A activity in Scotland during the second quarter of 2024. But one of the biggest deals of the past 12 months – the takeover of Smart Metering Systems by KKR, on which the Dentons Scotland team advised the latter – was completed in the first quarter.

He says there was a drive for several deals to achieve completion before the Autumn Budget statement on 30 October because of concerns about changes to the Capital Gains Tax regime. “Whether or not the race to close deals before that date means deals have in effect been brought forward and as a consequence the first quarter of 2025 will see a slowdown in deal activity is difficult to judge at this stage,” adds Moore

“In the past 12 months we have been involved in M&A deals in a wide range of sectors, with digital and data businesses, financial services and food and drink manufacturers – including deals in the whisky industry – continuing to be most prominent.”

Some other notable M&A deals Dentons has advised on over the last 12 months include: the sale of Motherwell-headquartered Ascensos to Firstsource; Thomson Reuters’ acquisition of World Business Media; March’s acquisition of Automated Control Solutions; Liontrust’s £96m offer for GAM, and Waitrose’s acquisition of Dishpatch.

Looking forward, Moore comments: “Digital and data businesses remain a hot sector and we don’t expect that to change in the year ahead. Likewise financial services and the B2B service sector continue to generate a lot of M&A activity and a number of our clients in those sectors are telling us they have more M&A plans for the year ahead.

“Trends in M&A include greater due diligence focus on data and cybersecurity – even in businesses that wouldn’t be obviously characterised as digital businesses.

“The use of warranty and indemnity insurance to de-risk sellers increases year on year. And earn-out consideration continues to be a common means by which parties can bridge valuation gaps.”