International buyers swoop for low-hanging Brexit fruit

Since the EU referendum in June, the new British prime minister Theresa May has repeatedly declared that "Brexit means Brexit". As definitions go, this has proven to be particularly headline-grabbing, yet it provides very little clarity around its meaning. In particular, serious question marks remain over the level of access that British companies will have to the European single market. For investors looking to put capital to work, the post-Brexit economic picture features a strikingly shallow depth of field.

Yet, in recent weeks, there have been some indicators that have brought the short-term impact of the vote into focus. Of particular note, a devaluation of the pound has coincided with an increasing number of non-sterling buyers for high-profile British assets.

The starting point is trying to work out what impact FX has on the trading and profitability of the business itself" – Mo Merali, Grant Thornton

Throughout a two-week period in July, Vitruvian Partners sold Inspired Gaming Group to US-based Hydra Industries Acquisition Corp in a £200m deal; Bregal Capital and Motion Equity Partners exited Morrison Utility Services to US private equity house First Reserve; and Terra Firma sold Odeon & UCI Cinemas Group to US trade buyer AMC Theatres in a £921m deal. Meanwhile, on the public market, Arm Holdings was acquired for £24bn by Japanese conglomerate SoftBank.

In the period from 23 June to 22 July, the UK currency dropped by around 12% against the US dollar. While the aforementioned deals will have undoubtedly been subject to several months of extensive due diligence, there can be little argument that the buyers have benefited from a favourable exchange rate. Indeed, when AMC acquired Odeon & UCI, the trade buyer stated the "three-decade low" of the pound versus the dollar made the valuation "highly favourable", despite "some uncertainties related to Brexit".

Mitigating against volatile currencies
Samantha Bett, a director at advisory firm JC Rathbone Associates (JCRA), argues the short timeframe makes it highly unlikely such investments were fundamentally driven by the devaluation of the pound. However, she believes the development likely acted as a catalyst in deals that had previously been on hold in the run-up to the referendum. "The Odeon transaction made a lot of sense given the depreciation of the British pound, but on the whole it will depend on where the investee company does its business," she says. "If it has significant foreign revenues for a UK cost-base that would be particularly attractive, hence why we're seeing the FTSE 100 do so well."

It is an argument echoed by Mo Merali, partner and head of private equity at Grant Thornton. Merali points out that, while a strong dollar undoubtedly has a positive impact for US buyers in the short term, the crucial factor is determining how well positioned a company is to withstand changing currency rates over a three-to-five year holding period. "The starting point is trying to work out what impact FX has on the trading and profitability of the business itself," he says. "You have to understand the underlying flows of any business to be able to say with any level of conviction that you have factored in the impact of FX."

The current currency advantage may not remain as wide, even beyond the next three to six months. There is the potential game-changer that could occur in the event of a president Trump outcome to the US elections" – Samantha Bett, JC Rathbone

One sector JCRA's Bett highlights may benefit from the drop in sterling is the oil and gas sector in Aberdeen, where costs are almost entirely paid out in pounds while revenues are recouped in dollars. Bett explains these firms continue to own particularly impressive intellectual property with worldwide application. However, she points out that, even with beneficial exchange rates, the drop in oil prices over the past two years means these companies remain under a lot of pressure. As such, it would require bold investors to act on opportunities.

With high levels of uncertainty currently sweeping across Europe and the US, it is also possible that current exchange rates could yet swing strongly in the opposite direction. As Bett explains: "The current currency advantage may not remain as wide, even beyond the next three to six months. There is the potential game-changer that could occur in the event of a president Trump outcome to the US elections. If that were to happen, and should we see the introduction of the various protectionist policies he's discussed, there would absolutely be an impact on the dollar."

Lengthy due diligence combined with medium-term political instability mean it is unlikely the drop in sterling has been a key driver behind the increase in post-Brexit buyouts by non-sterling investors. However, with potential UK deals having reportedly been on ice in the lead-up to the referendum, a cheaper pound means the picture is currently bright for well-positioned international buyers.

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