Deal activity expected to return to levels seen before pandemic

The overall end-of-year transaction figures for dealmakers are expected to show a sizeable drop on 2022’s bumper post-Covid tally, but Scottish advisors are cautiously optimistic for what the new year will bring.

While 2023 is expected to have suffered double-digit year-on-year falls in deal numbers, activity is still expected to have returned to similar levels to those seen before the pandemic.

A clutch of significant transactions in Scotland in the run-up to the festive period also provides confidence for 2024. The food and drink sector has been particularly active with Dingwall-based Fuel10K being snapped up in a £34 million deal with Premier Foods, behind brands including Mr Kipling and Cadbury, and AG Barr added to its soft drinks portfolio with the £12.3 million purchase of the Rio Tropical brand.

The allure of Scottish growth companies to overseas buyers has continued to be strong with latest acquisitions including US-based Certara buying Glasgow biotech Formedix.

Scottish firms have also been expanding their horizons, with Inverness-based energy services business Aurora striking its first overseas deal with the purchase of US wind turbine blade repair and maintenance specialist Cotech Group.

Although a recent poll of UK dealmakers showed a generally optimistic outlook for the next 12 months, respondents to CIL’s Investment 360 Index survey say they expect a gradual uptick rather than a bounce.

Donnie Munro, Harper Macleod’s head of corporate, commercial and regulatory, agrees there does need to be a degree of caution about the challenges still posed by the operating environment for both sellers and buyers. 

Higher interest rates are impacting on deals underpinned by debt, and inflationary pressures continue to work their way through the system for both sides of the equation. 

“Those two forces combined are creating an uncertainty in the market which could be seen as unsettling for both buyer and seller,” says Munro.

“However, while a vendor may not achieve the price they would have been hoping for, the interest rate increases mean any capital gained could be put to better use now than it would have been a year ago. They may be losing out on their valuations but making better returns on their new investments,” he points out.

Alison Gilson, corporate partner and head of Shoosmiths’ Edinburgh office, highlights the risks from a weak global economy and ongoing conflicts as factors that may also dampen the risk appetite of businesses.  However she believes there remain good reasons to be optimistic about 2024. “Barring an external shock, deal activity should hold steady thanks to Scotland’s mature markets, skilled workforce, competitive costs, and reputation for innovation,” she predicts.

Although higher inflation and interest rates have inevitably impacted on activity, Graham Alexander, head of corporate finance at Johnston Carmichael, sees a sense of confidence returning to M&A markets now that the peak on both appears to have been reached. “We anticipate opportunities in 2024 for well-funded corporates, particularly international buyers, and private-equity investors as they continue to look for deals where they can deploy their available funds.”

Sectors such as renewables are expected to be particularly active in 2024, underpinned by a renewed focus on bolstering energy security and net-zero targets. Recent deals in the sector include a funding package of almost £2 million from NatWest-owned Lombard for a new 20-acre solar park near Forfar in Angus.

Chris Gotts, partner in the energy team at law firm Burness Paull, sees investment in the sector remaining buoyant. “Renewables has been less impacted than other industries by short to medium-term macroeconomic challenges and M&A in the sector is not typically debt funded so isn’t affected to the same extent by the increase in interest rates.”

Callum Gray, corporate finance partner at AAB, says that proven renewables experience is also increasingly a factor for oilfield services companies hoping to attract a buyer.

“I think you really need to stand out from the crowd and for the majority of oilfield services businesses you need to be involved in renewables and a have a strategic plan for where you fit within that supply chain.”

Although 2024 is likely to see deal numbers increase, Frank Fowlie, head of corporate for Scotland at CMS, cautions the trend of a longer due diligence process will be a key issue for parties to bear in mind. “We can also expect to see warranty and indemnity insurance continuing as an important part of the mix as parties are looking to mitigate risk,” he says.

One factor that will undoubtedly be a growing topic for dealmakers during the year ahead will be the potential impact of a general election, due to be held by January 2025 at the latest.

Andy Ley, partner in the corporate team at Addleshaw Goddard, says there appears to be no shortage of sales mandates waiting for the right time to progress and the prospect of a change at Westminster could be the catalyst needed.  “Everything has a price, and I expect some sellers who have been waiting will be looking ahead at the prospect of a general election and potential changes to the tax regime and decide that 2024 is the right time to sell, as conditions are unlikely to get any better in the short to medium term,” he argues.

Funding boost sets the stage for growth in technology and software  deals

The technology and software sector has been one of the bright spots for dealmakers over the past year and advisors believe the stage is set for a buoyant 2024.

David Anderson, co-head of Addleshaw Goddard’s tech group, cites recent developments in the funding space – the launch of Par Equity’s £100 million venture fund and the British Business Bank’s £150 million investment fund for Scotland – as being among the catalysts.

“Scotland already has a great ecosystem in place for tech businesses and the recent launch of these funds show that further support is there for high-growth businesses. I expect this sector to thrive.”

Donnie Munro, Harper Macleod’s head of corporate, commercial and regulatory, argues that the creation of JP Morgan’s new European tech hub and Barclays’ Eagle Labs in Glasgow as a base for technological development are also encouraging signs for the sector.  

“Scotland has a well-established community of funders and advisors to early-stage businesses, coupled with a healthy stable of universities producing innovative businesses and entrepreneurs,” he adds.

Although the drop in valuations across technology stocks has had a knock-on impact on smaller firms, Alistair Lang, lead partner in Thorntons’ ventures and innovation team, also sees a positive consequence.

“New money is coming into early stage tech businesses from large, established businesses which have traditionally been more focused on later stage investment. This may be a reflection of the market taking longer for later stage investment to produce the returns typically achieved historically,” he says.

“As these investors have to be more patient, they appear increasingly prepared to commit to the lengthier timeframe required when investing in Series A and Series B funding rounds.”

Deals in Focus

Irn-Bru owner swallows tropical brand

Cumbernauld-based AG Barr acquired the Rio Tropical soft drinks brand from independent brewer and pub company Hall and Woodhouse in a £12.3 million deal. The drink had been marketed, sold and distributed under licence by AG Barr’s previously acquired Boost Drinks arm since 2021. The deal was funded from the Irn-Bru maker’s existing cash reserves.

Multi-million pound MBO

Logistics and storage company Bullet Express was acquired in a private equity-backed MBO. The deal for the Glasgow firm, supported by Panoramic Growth Equity and Maven Capital Partners, saw founders David McCutcheon and Gary Smith step down from the board but retain a stake in the business.  Advisors included Consilium, Addleshaw Goddard, TL Dallas, BCN Management, Millarise HR, Granta Strategy & Beverley Bell Consulting.

Genetics business secures £1.72m

Genetics business Beta Bugs secured £1.72 million to scale up production of Black Soldier Fly eggs for the insect farming sector as a sustainable alternative to current sources of protein for animal feed.  The funding round for the Edinburgh company was led by the Tricapital Syndicate LLP, with participation from SIS Ventures, Scottish Enterprise, Beeches Group, Climate VC, together with existing shareholders in the business and InnovateUK.

US firm snaps up Scottish biotech

Certara USA acquired Glasgow-based Formedix which specialises in clinical trial automation software. Formedix was founded by chief executive Mark Wheeldon in 2000 who had gained experience running clinical trials at a pharmaceutical company. The company works with major pharmaceutical, biotechnology and academic institutions. Shoosmiths corporate legal team in Scotland acted for Certara USA in the deal.