Prior to COVID-19 Midlands dealmaking was in good shape with the “Boris Bounce” driving confidence in the early part of 2020 and the team at Bishopsgate were expecting another record year. The market had also seen a flurry of deals completing in February and March ahead of the Budget as there had been a well signposted leak that Entrepreneurs’ Relief was under threat. Indeed, Rishi Sunak in what now seems ages ago announced a shake-up of Entrepreneurs’ Relief in his first Budget speech reducing the lifetime limit of the tax break on sale of businesses from £10m to £1m. This went down badly with the corporate finance community but it quickly became “old news” as the country went into lockdown.
We saw an immediate impact on dealmaking with many deals put on hold as the main target’s focus switched to managing their own issues and adapting to the new COVID world.
Some of the deals that were advanced as we went into lockdown have completed in April and May, but most of the deals that were badly impacted by COVID were pulled pretty much straight away. We are continuing to see deals in sectors such as tech, pharma and food but overall we estimate that deal volumes were down by 80% during lockdown and we do not expect this to return to normal levels until 2021.
Corporate financiers are as always creative and we expect new businesses to come to market in the Autumn with add-backs for COVID with bidders expected to bid on EBITDAC (“Earnings before Interest, Tax and Depreciation and COVID) rather than the traditional EBITDA multiple.
It is too early to see what impact C19 will have on pricing as very few businesses are coming to market, with most new processes delayed until the Autumn. Perhaps, we may see increased multiples for businesses that have been unscathed by COVID such as tech and e-commerce, and these assets will be fought over by private equity as they have cash to deploy. For more traditional businesses, we would expect to see some softening in prices as buyers are more cautious about the economy and vendors may need to review their value aspirations.
We expect trade buyers to be more circumspect on acquisitions as we come out of lockdown as their priority will be more focused on their core business and reducing debt levels.
Debt financing will be interesting and until the Autumn we would expect to see limited interest from banks for funding acquisitions as they are overwhelmed by supporting their existing client base with CBILS and bounce back loans. The banks certainly have their hands full at the moment but we do expect deal structures to change with more ABL and other forms of finance filling the gap.
The corporate finance community is adapting quickly and we are now seeing management presentations being conducted by ZOOM or Teams and deals are happening remotely. Ultimately, the corporate financier relies on networking and meeting people and this is still happening but at a two metre distance!
We are fortunate at Bishopsgate to occupy a large converted mill with a garden so many of our meetings are now outside and we are converting one of our larger rooms into an airy board room.
We expect deal making to be subdued for a while but we don’t see being as bad as 2008/9 and 2021 should see a strong recovery for M&A.
