Scotsman Legal Review: Corporate M&A

Sterling's fall and EU vote fail to dampen appetite.

Leonard Russell, right, of Ian Macleod Distillers and Alex Nicol of Spencerfield Spirit Company.

Sterling’s fall to a 31-year low against the US dollar last month signalled bad news for some but, according to some of Scotland’s top legal experts, the repercussions of the Brexit vote have had little impact on the “healthy” deal market, with international investors continuing to show a strong appetite for channelling funds into Scottish businesses.

“About 80 per cent of our deals have some sort of foreign element,” says Shuna Stirling, head of corporate and commercial at Brodies.

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“A lot of those deals just got cheaper for the foreign investors because of the devaluation in sterling.”

The corporate team at Brodies recently reported its busiest quarter ever, following just a brief pause for thought from clients over the EU referendum result.

“I am sure many woke up that morning (24 June) and wondered if the world as we know it had ended,” says Stirling.

“By a quarter to ten I had lost a deal in financial services recruitment but actually that [trend] didn’t continue.

“We did have a couple of weeks where things went quieter while the market drew breath, but I would say beyond that that it’s just picked back up again with clients rolling up their sleeves and getting on with things.”

Colin Lawrie, partner at CMS, agrees that there has been talk in private equity of bargains to be had as a result of the currency situation, however his view is that in reality people are acting cautiously.

“Certainly there are plenty of businesses out there that still have the same decisions to make about their future post Brexit as they did before,” says Lawrie.

“Do they hand the business on to the next generation or do they sell it to private equity, do they look for new private equity buyers?

“Very little of that is driven by Brexit – it’s driven by the whole range of decisions that drive businesses on a day-to-day basis.

“Yes, everyone is keeping an eye on it but most businesses, I think, are still focused on their cashflow and whether their growth is going to be organic or by acquisition.”

With talk of a second referendum on Scottish independence, lawyers are looking at a prolonged period of political uncertainty, which will be a factor in how private equity views the opportunities in the Scottish market.

Lawrie says that in terms of his team’s workload, Brexit and Scottish independence have developed into a new “product line”: “People come and say to us ‘how does that affect our business in the UK’.

“There’s a big private equity out there and it has to be invested. It will be invested by very smart people and they will be looking at the full range of businesses, factoring in Brexit and the Scottish independence potential.”

Meanwhile, food and drink, technology and healthcare are emerging as core areas of focus for Scottish dealmakers, while oil and gas is holding its own in spite of the challenging economic climate in the North-east.

Bodies such as the Scottish Food Commission have been created to highlight the potential of food and drink to drive forward the economy in Scotland.

“Both the corporate and other practice areas in the firm are very active in this arena,” says Andrew Blain, head of corporate at Shepherd & Wedderburn.

“There has been a real focus on promoting food and drink and the industry is now the largest manufacturing sector in Scotland and indeed the rest of the UK, adding a gross value of £1.9 billion to the Scottish economy.

“We are fortunate to act for clients such as Whyte & Mackay, William Grant & Sons and for Scottish Sea Farms.

“For exporters, the impact of Brexit is of particular relevance but certainly we continue to see overseas investors looking to invest in Scottish food and drink brands.”

Drinks brands have meant big business for CMS which acted for Ian Macleod Distillers in its acquisition of Spencerfield Spirit Company, which produces three whiskies and Edinburgh Gin. The deal was announced in September.

Likewise, Brodies has attracted work around the rise of new whiskies, craft beers and gins, working with the Three Stills Company, which has plans to build the first new whisky distillery in the Borders since 1837.

“We have seen deals in a large variety of different sectors of key importance to the Scottish economy,” says Stirling.

“For me, one that stands out is oil and gas. While the slump in the price of oil has undoubtedly had a negative impact on the sector, deals are still being done, such as joint ventures and renegotiation of commercial deals as well as actual M&A activity.”

Last year, Brodies advised Ineos Upstream on its purchase of DEA assets in its first venture into the North Sea. One of the biggest deals in the sector in the last year, the transaction shows there is still money to be made in the North-east of Scotland.

Skyskanner and FanDuel are leading the way for Scottish technology businesses, having received a vast amount of publicity around their respective success.

With good companies on the market and investors looking to invest or even acquire them, Shepherd & Wedderburn has reported an increase in work in the tech sector.

“The firm advises some of Scotland’s fastest growing technology businesses, including FanDuel, TV Squared and DeltaDNA, acting recently for TwoBigEars in their sale to Facebook,” says Blain.

“The telecoms sector is also fairly buoyant – we have acted on a number of deals in this arena, recently advising Satellite Solutions Worldwide on three acquisitions.

“That company has been acquiring businesses both in the UK and beyond and is now the biggest satellite broadband provider in the UK.”

Lawrie predicts an increase in fintech start ups in the next 12 months.

“There’s a lot of know-how about it in Scotland with the historic representation of financial services businesses and also technology businesses,” he says.

“I think private equity will play a part in developing business in that sector.”

Developments in healthcare and life sciences have led to an increased workflow for dealmakers in the sector, with many projects and start-up companies growing out of research at Scottish universities.

Blain points to the sale of Aircraft Medical to Medtronic for $110 million, in which Shepherd & Wedderburn acted for Aircraft Medical.

Stirling’s team at Brodies instructs multinational biotechnology development company Thermo Fisher.

“Many of our clients have continued to be very busy and have been hard at work producing new product lines,” says Stirling.

“Life sciences is a key sector in the Scottish economy, supported by our universities, which continue to punch above their weight internationally in terms of groundbreaking research.”

Briefing: Mergers & Acquisitions, by Colin Lawrie

The current M&A market in Scotland can best be described as “soft”. While there’s no sign that Brexit or other wider economic concerns have had an impact on deals that were already in motion, there’s a clear sluggishness in terms of new transactions coming on line.

A wait and see mentality has developed within the market with people taking longer to convince themselves that significant transactions, including strategic acquisitions, are the right thing to do at present.

This response is similar in many ways to what followed the liquidity crisis in 2008.

We are likely to experience a prolonged period of uncertainty as the market adapts to what has become “the new normal” with those who adjust quickest more likely to capitalise on the opportunities that arise.

Some sectors remain active, including food and drink where we are seeing continued interest mainly driven by private equity funds seeking good mid-size deals, and renewable energy where the trend for consolidation and rationalisation of asset portfolios continues.

While Aberdeen remains a challenging environment, there are encouraging signs of its resilience both to adapt to the long term prospects of a lower oil price and to diversify away from over-reliance on North Sea related activity.

Colin Lawrie is corporate finance partner at CMS.

Briefing: Banking & Finance, by Bruce Stephen

We have seen a rapidly-changing landscape for clients over the past 12 months with activity across a range of sectors, in particular in project finance renewables funding, funding certain real estate asset classes and large loan books acquisitions.

There has been some interesting corporate acquisition activity with investment from overseas being boosted by the weakening of sterling and better value perceived by investors, particularly from the US. Brexit has, of course, affected clients but the initial and overall activity levels have held up well over the summer and have been increasing in September and October.

The degree of access to Europe to meet workforce requirements, supply of goods and provision of services (particularly financial services) will be strongly influenced by negotiations over the coming year, and clients are pressing negotiators hard to ensure their interests are understood and protected.

Clients have continued to invest in their business and acquiring other businesses.

For instance, we advised Park’s of Hamilton (Holdings) in relation to the funding provided to it for its purchase of Macrae & Dick.

We also act for many funds and we advised London & Scottish Investments in relation to financings totalling £75 million to regear the acquisition of various commercial property portfolios.

These deals demonstrate strong activity in the acquisition and real estate sectors.

Bruce Stephen is head of banking and finance at Brodies.

The Scotsman’s annual legal review looks at some of the most active areas of legal practice in Scotland. Informed by comprehensive data published by Chambers and Partners and Legal 500, the articles give exclusive insight into the work of more than 11,000 practising solicitors and over 460 practising advocates.