Despite the volume of recent high profile deals, even more UK companies are likely to find themselves the subject of interest from overseas private equity firms over the coming months.
The high street might have been one of the major casualties of the coronavirus pandemic, but this has not stopped private equity firms with mountains of cash burning holes in their pockets targeting well-known UK brands.
According to the Association for Financial Markets in Europe, many small and medium sized businesses across Europe have benefited from funding availability from private markets. Private capital investment in European SMEs during the first half of this year was 240% higher than in the same period in 2020.
Market intelligence provider S&P Global has calculated that the UK accounted for more than a quarter of the total capital deployed across Europe between January and June 2021.
The British Private Equity and Venture Capital Association says its members support businesses employing more than one million people. However, recent deals have been dominated by firms from outside the UK, attracted by a combination of the weakness of the pound against the dollar and low interest rates.
One of the best examples is the acquisition of Morrisons by Clayton, Dubilier & Rice (CD&R;) in a deal worth £7bn. CD&R; outbid a rival firm despite an earlier employment tribunal ruling on pay rates for shop floor workers that could end up costing the company £100m.
Unilever has agreed to sell UK tea brands Lipton and PG Tips to a firm that was part of the consortium that acquired Debenhams 18 years ago and the owner of LloydsPharmacy has agreed to sell its UK businesses to a pan-European asset management group.
Elsewhere there are rumours that a major US private equity firm is circling Marks & Spencer in the belief that its shares are currently underpriced and that its share of Ocado’s retail business is undervalued.
Asda was a rare example of a major UK business that moved from US to British ownership when Mohsin and Zuber Issa and investment funds managed by TDR Capital acquired a majority stake in the supermarket chain earlier this year.
Members of pensions and life insurance mutual LV= will vote on a deal to sell the company to a US-based private equity firm in December. Management have justified the deal by saying the company had been struggling to raise investment capital due to its mutual status and that the alternatives including winding down its operations.
Cameron Joyce, Vice President Research Insights at alternative assets data provider Preqin, says deal volumes are being driven by negative real long-term interest rates, which justify the lofty valuations multiples that are being applied to deals in the current market.
Both LV= and Bain Capital have stated that the business will not take on any additional debt. However, comments from a group that represents the pharmacists who work for LloydsPharmacy highlighted the concerns faced by companies acquired by private equity firms, noting that such purchasers often believe the best way to derive extra value from the business is through cuts and closures.
Paul Day, Director of the Pharmacists’ Defence Association, called on the new owners to instead invest in the company and generates profits by improving its operations.
