Foreign investors buy UK firms at fastest pace since 2007

24 Mar11:41 PM

[LONDON] Foreign investors are snapping up British companies at the fastest pace in eight years as an unusual combination of stronger economic growth and a weak currency lures US buyers despite political uncertainty.

Investors appear relatively unconcerned about the risk of instability after a general election on May 7 or doubts about Britain's future in the European Union. Even excluding a US$15 billion bid by Hutchison Whampoa for O2's UK operations, inbound mergers & acquisitions activity so far this year is at its highest since 2007, Thomson Reuters data showed.

The total value of bids and completed deals in the period is US$33 billion, including debt taken on by buyers. The figure rises to US$48 billion when Hong Kong-based Hutchison's bid for the mobile phone operator is included.

This reverses a seven-year decline and contrasts to a fall in inbound M&A activity in the euro zone and United States.

It also confounds expectations of dwindling M&A before the elections, in which opinion polls suggest no party will win a majority. This raises the possibility of an unstable coalition or minority government propped up by smaller parties such as the pro-independence Scottish nationalists.

On top of this, the ruling Conservatives have promised a referendum within two years on whether Britain should leave the EU, should they be re-elected.

Many British business leaders are worried by the prospect. The chairman of insurer Standard Life said on Tuesday it would be disastrous for the country and London's financial centre if Britain were to leave the EU single market.

However, bankers say US investors are being attracted by sterling's weakness against the dollar - which makes British targets cheaper for them - even though the economy is buoyant.

"The UK is at the forefront because the economy, aside from the uncertainty around the elections, is an attractive market with good growth dynamics," said Dirk Albersmeier, co-head of M&A for Europe, the Middle East and Africa at JP Morgan.

With the Bank of England expected to keep interest rates ultra low for another year, the pound has fallen 13 per cent against the dollar since July and is now hovering just above a five-year low. At the same time, official economic growth forecasts were upgraded last week to 2.5 per cent this year and 2.3 per cent in 2016.

Valuations have provided a further boost. UK shares trade at a 10 per cent discount to their US counterparts based on the ratio between price and expected earnings, Datastream data showed.

Inbound M&A activity in Britain had been falling since 2007, data from the Office for National Statistics showed, partly due to the pound's recovery against the euro since 2009.

This year's increase has been driven by 73 small and mid-sized acquisitions by US buyers, such as drinks can maker Ball Corp's US$8.6 billion move for rival Rexam and a US$2.8 billion bid by Verisk Analytics for energy consultancy Wood Mackenzie.

These deals have more than offset a drying up of last year's stream of large bids which were partly motivated by lower corporate tax rates in Britain than in the United States, such as Pfizer's abandoned attempt to buy fellow pharmaceutical group AstraZeneca.

Such bids have been curbed by a tightening of US tax rules and worries about possible fiscal changes in Britain after the elections.

As the economic recovery picks up pace, sectors which depend on growth are playing a larger role in M&A, joining defensive sectors such as healthcare and telecommunications, media and technology (TMT), where activity has been high for some time.

Aside from the telecoms and materials sectors, where the amount was skewed by the O2 and Rexam bids, inbound M&A activity this year has been at its highest in the consumer goods sector and industrial sectors, the data showed.

This marks a change from the previous year, when real estate dominated, with financials and high tech a distant second and third, respectively.

"Activity is likely to be more broad-based than last year,"said Wilhelm Schulz, head of M&A for Europe, the Middle East and Africa at Citi. "I expect this year we will see activity in healthcare, TMT, industrials, chemicals and consumer products."

REUTERS