M&A Outlook 2022: Trends in UK public M&A | The outlook for 2022

The general expectation amongst M&A practitioners seems to be that the current high level of UK public M&A activity will be sustained as we move into 2022, and may well increase significantly in line with M&A activity more broadly – a rising tide lifts all ships.

Activity levels may be driven in part by distressed deals – a likely consequence of disruption to supply chains created by the ongoing COVID-19 situation and the impact of Brexit, which may be exacerbated as government pandemic support starts to be withdrawn.

Sterling remaining in the doldrums and UK equities continuing to trade at a discount to international peers can be expected to provide continued impetus to international buyers of UK listed assets. Added to that is the fact that there remains liquidity across all forms of capital; the low interest rate environment means that acquisition debt remains historically cheap, corporates still have strong retained cash positions, private equity firms are still sitting on significant levels of ‘dry powder’, and equity markets are still open for the right opportunities.

Private equity has clearly been a voracious acquirer of UK listed assets over the past 12 months and that shows no signs of abating in 2022. More interesting will be to see whether 2022 will witness more corporates entering the fray. After a period of re-assessment enforced by the pandemic, there may be motivation to use M&A to re-align businesses at pace, addressing structural or commercial weaknesses which may have been highlighted by the pandemic, and to re-position for rapid growth to make up lost ground.

The impact of ESG on M&A remains to be seen, but the ever-increasing investor and regulatory focus will mean that we can expect ESG concerns to play a role in M&A decision making. The lack of a common standard for assessing ESG credentials may, however, present a challenge.

In terms of dampening factors, the uncertainty created by the ongoing COVID-19 situation (and the measures that may be taken by government in response) clearly remains as a key wildcard factor (as illustrated by the market sell-off in response to the emergence of the Omicron variant). This may act as a brake on activity, although any concerns that it would impede efficient deal execution appear to have been over-blown (particularly in a public M&A context, as H2 2020 and FY2021 will attest). Counter-intuitively, in fact, the pandemic may have acted as a stimulus to M&A – looking back to H2 2020, the low level of activity in H1 created significant pent-up demand and filled acquisition war chests.

Increasing regulatory scrutiny, and government willingness to intervene in bids in sensitive industries, may also play a role in inhibiting activity but the impact of recent legislative changes remains to be seen. In a public M&A context, the recent changes to the Takeover Code should assist with navigating the new NSI regime which came into force at the beginning of the year.

Sectors to watch in 2022 are TMT and Leisure / Hospitality, all of which were characterised by elevated activity levels in 2021 which look set to continue into 2022.

The TMT sector saw a significant uptick in M&A activity towards the end of the year, with notable transactions in 2021 including the bids for Blue Prism, Avast, Playtech, Gamesys and Sumo. We would expect this sector to continue to see significant activity, given the wider focus on digital capability, fintech, data analytics and connectivity that has been triggered by the pandemic.

The Leisure / Hospitality sector has clearly been under significant pressure since the pandemic first hit, but looks to have been rebounding strongly since pubs and restaurants have been allowed to re-open. In its 2022 outlook, CBRE predicted ‘record M&A activity’ across the sector as investors look to get ahead of the curve while asset prices remain depressed.

In conclusion, it looks like the competition for quality listed assets we have seen through 2021 may accelerate into 2022. In 2021 we saw an increasing number of consortium bids, such as the bid for WM Morrison, with financial investors choosing to team up rather than compete for larger assets. It will be interesting to see whether that trend will continue into 2022.