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Firms preparing for a surge in mergers

SCOTTISH corporate dealmakers are expecting to be busier than they have been for years and are preparing for a surge in transactions that could result in more large changes across the country's business landscape in the next 12 months

IT'S A DEAL: David Leslie of PricewaterhouseCoopers said there could be big deals involving Scottish companies next year.
IT'S A DEAL: David Leslie of PricewaterhouseCoopers said there could be big deals involving Scottish companies next year.

SCOTTISH corporate dealmakers are expecting to be busier than they have been for years and are preparing for a surge in transactions that could result in more large changes across the country's business landscape in the next 12 months

The increase in mergers and acquisitions activity comes amid an upturn in confidence in the outlook for the economy that will encourage firms that have been hoarding cash to splash out on acquisitions.

Scottish businesses in favoured sectors like oil and gas and whisky are expected to attract bid interest from south of the Border and overseas.

But with banks showing renewed enthusiasm to support expansion moves, experts say a range of firms based in Scotland could use acquisitions to help grow their share of domestic and export markets.

Investors based in Scotland have also underlined their appetite for deals.

While concerns about the economic outlook for the global economy rested on activity in the first six months of 2013, deal-makers at accountancy giants noticed a marked increase in interest in M&A in Scotland as the economic recovery accelerated in the second half of the year.

Gavin Hood, a partner at Deloitte, said: "We are seeing more people, that's been the case for several months, to talk to us about transactions and to get ready for things that they would like to move forward in quarter one."

Neil Patey at Ernst & Young said: "Our deal pipeline right now is stronger than it has been at any point since 2008 or 2009."

A debt-fuelled boom in mergers and acquisitions petered out when the world plunged into a deep financial crisis in 2008.

Mr Patey noted: "A lot of corporates who have been sitting on cash have done the operational-efficiency thing so if they really want to make a step change they are now looking at inorganic options to grow."

A renewed enthusiasm among stock market investors for new issues will encourage firms to seek listings.

Companies could use cash raised on the market to fund deals.

The sectors tipped to see strong M&A activity include some in which Scotland is strong.

Oil and gas producers and North Sea assets will be in demand as will the services firms that support activity.

Firms in areas including business services, telecoms, life sciences and industrial sectors could attract attention. So might food and drink and consumer products businesses with good brands and/or exposure to emerging markets like China.

David Leslie, head of corporate finance at PricewaterhouseCoopers in Scotland, said there could be some big deals involving Scottish companies next year.

He said: "We have got people coming through our doors to talk to us about planning for transactions. There's a lot more planning going on.

"We would expect to see Scottish and UK companies attracting the attention of overseas parties and there will also be deals done UK-to-UK," noted Mr Hood.

Scottish giants like the Weir Group and Clyde Blowers engineering operations have shown their appetite for overseas acquisitions.

But Mr Patey predicted Scottish firms will be the target of overseas companies in more deals than they are the buyer in.

"Overall, more money is looking to invest in Scotland," he said.

Experts from all the big four accountants said Scottish firms that want to acquire will find debt is easier to obtain from banks than for years.

Bruce Walker, a debt advisory specialist at KPMG, said Scottish firms could capitalise on moves by some American banks, such as GE, to grow lending in Scotland.

Mr Walker said the valuable stocks held by firms in industries like whisky production could allow them to tap Asset Backed Lending, which such banks provide to support acquisitions.

Private equity investors in Scotland expect to be busy in 2014.

Brian Aitken, a partner in the Pirrie brothers' Nevis Capital business, predicted those who did not complete deals in 2014 might find themselves ruing missed opportunities.

The increased availability of debt and the greater appetite of corporate buyers for deals should encourage sector players to acquire firms and to sell mature investments.

"We have had three approaches from corporates in recent months," said Mr Aitken.

Nevis is eyeing two bolt-on deals for the James Ramsay heating and pipework business it backed last year.

Torquil Macnaughton at Penta Capital said: "We are pretty bullish about the outlook for private equity."

After making a bumper return on its investment when the esure insurance business floated in 2013, Penta likes that sector, among others.

Mr Macnaughton noted uncertainty about what will happen to the global economy when interest rates rise from their current lows.

He said he would like to see a bit more certainty regarding what Scottish independence would mean for business.

He added: "It's another layer of risk that you have to factor into your analysis, the independence debate."

But Mr Macnaughton confirmed Penta would back the right deal in Scotland.

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