NE deal making landscape – key current trends in the region

When we were faced with the pandemic early last year, the impact of this unprecedented situation on dealmaking in the north east, and across Scotland, was felt almost immediately.

Now, about 20 months on from when Covid-19 hit the UK, we’re beginning to leave the depressed market behind. Speaking to our peers and other professionals, such as lawyers, there is a lot of deal making activity taking place. Potential trade buyers are proactively trying to create off-market deals. We’re getting involved in discussions at an early stage and we’re finding people are being more open than before about their intentions.

There are several reasons behind the increase in deal activity. The pandemic has led many business owners to consider what they want to do with their companies and examine their lifestyles.

In energy there’s a focus on diversifying into renewables. We’ve seen some big players making fairly modest purchases to scale-up their green credentials.

In construction and property, housebuilders are doing well due to increased demand, particularly on the back of people working from home and looking for more indoor and outdoor space. The market is also being buoyed by people deciding to sell-up in England, often around London and the Home Counties, to move back to the north of Scotland with big budgets.

When it comes to commercial property, the days of developing an office block and leasing it out for the long term are gone so other options are being explored, such as buildings being repurposed for multi-occupancy with shorter leases.

Health technology advances are another interesting area. We’ve just helped a client start a business that treats wounds remotely rather than in person as would have previously been the case.

For the food and drink sector, there are a lot of relatively small owner-managed businesses, for example gin distilleries. Businesses of scale are few and far between which makes it difficult to raise money from investors or generate interest from large trade players. I think we’ll see strategic consolidation of brands, particularly among distillers and breweries, to allow big companies to be built that will eventually allow owners to make a profitable exit.

There’s a great deal of interest in care homes with many operators refurbishing current sites to meet logistical requirements regarding resident occupancy, partly influenced by the pandemic but also investment in new homes. The sector has a robust income line but costs, such as paying staff, are increasing and it’s facing the challenge of demand outstripping supply.

Staffing issues are occurring in many areas, not just care homes. A lack of skilled people in the locations where they are needed has placed a renewed importance on staff retention and employee engagement. This has been a difficult area with high numbers of people working remotely and not benefiting from the ‘feel good factor’ that you often find in offices. Oil and gas is facing specific hurdles. Due to changes in the energy sector, most notably the green agenda, some traditional businesses have under-performed so they are not able to offer lucrative rewards to their people. We’re therefore seeing the recalibration of incentive schemes to make them more attractive.

This trend has also contributed to an uptick in our valuation work. Many firms are looking to offer equity incentive schemes to attract and retain people. Alongside this work, we’re carrying out a pre-sale valuations as businesses that have come through the pandemic look to the future and what their business is worth. There are also companies where shareholders have decided the time is right to go their different ways, which can on occasion lead to difficult conversations and challenging decisions needing to be made. .

If a business is getting ready for a sale, I’ve put together a list of tips:

• Having a clear strategy for the business. With the recent changes forced by the pandemic being able to articulate the future vision and desired succession plan is critical.
• Ensuring timely and accurate historical and forecast financial information is available to be reviewed by interested parties.
• Business is becoming ever complex especially from legal, taxation and ESG perspectives, therefore, demonstrating awareness and control of required compliance will put a target company in a strong negotiating position
• Employing a reliable management team to ensure the business runs smoothly during and after any potential transaction is successfully concluded.
• With so many changes to the way we work, purchasers are increasing their focus on the internal controls and the current safeguards in place to support new working environments but also mitigating risks especially from cybersecurity threats

If you would like to know more, contact Gordon Steele, Partner in Corporate Finance Division and Head of Deals in Aberdeen at AAB, or your usual AAB contact.