TRANSACTION NUMBERS FALL BUT DEALMAKER PULSES RACE.
IN terms of transaction numbers, 2017 may have got offto a slow start but there has been no shortage of positive newsflow of late to set the pulses of Scottish dealmakers' racing.
Although it will be several months before it completes, the proposed PS11bn merger of Standard Life and Aberdeen Asset Management would be the biggest all-Scottish corporate deal seen in Scotland, generating estimated fees approaching an eyewatering PS100m for advisors. Another blockbuster deal involving a Scottish firm was announced just after the end of the first quarter when US-based TS G Consumer Partners paid PS213m for a 22 per cent stake in Aberdeenshirebrewer Brewdog, valuing the business at almost PS1bn.
Although both transactions will make a welcome contribution to Scotland's deal value tally come the end of the year, in terms of completed deals, numbers in the first three months fell mainly due to a drop in M&A activity blamed on Brexit caution.
Scottish deals completed in the first quarter came in at 107, down from 168 in the first quarter of 2016, a fall of more than a third. Total deal numbers involving Scottish advisers dropped by a similar proportion, from 218 to 144.
The rationale behind the Brewdog investment is partly to help pave the way for a possible float of the company at some point in the medium-term, a welcome prospect after the recent announcement of a proposed PS620m takeover of Edinburgh-based testing specialist Exova which will further reduce Scotland's tally of quoted firms.
The quarter also saw news of the loss of another Scottishheadquartered listed company after Ithaca, the North Sea-focused oil and gas operator, was won over by a $1.2bn offer from Israeli-listed Delek, which holds a 19.7 per cent stake in the London and Torontolisted company.
Rosalie Chadwick, head of corporate finance at Pinsent Masons, who is advising Ithaca, says the deal highlights a "renewed level of interest in North Sea assets as prices have stabilised and expectations adjusted".
The quarter's activity included a number of significant upstream and mid-stream oil and gas deals, including the acquisition of a package of assets by Chrysoar from Shell for $3.2bn as well as BP selling its interests in the Forties Pipeline System to INEOS and separately a package of assets including its interests in Magnus and the Sullom Voe terminal to EnQuest.
According to Frank Fowlie, partner at CMS, the transactions have been part of a growing trend for deal structures designed to bridge value gaps and to deal efficiently with decommissioning liabilities.
"These innovative structures are likely to increase in use and complexity as the market gains genuine traction after an extended number of months with improved oil and gas prices," he argues.
However, he says deals in the oilfield services sector have been more sluggish.
"It will take time for returning orders to feed into improved financial results to allow deals to happen in any number," he points out.According to Clare Munro, head of energy and infrastructure at Brodies, the acquisition by INEOS of the Forties Pipeline System is good news for the UK Continenal Shelf.
She says: "It will see the site at Grangemouth re-united under one ownership, which will allow optimisation of synergies.
Munro also says the deal underscores the principle in Sir Ian Wood's review of the Maximising Recovery of Oil and Gas in the UK Continental Shelf (MERUK) report of getting the right assets into the right hands.
"It will be very positive not only for the longevity of the Forties Pipleline System but for all those fields who use it."
Signs of increased deal activity in the North East have prompted Aberdeen chartered accountants Hall Morrice to recently launch a new corporate finance division to largely focus on working with corporate entities and private equity houses seeking to invest in oilfield services companies.
Tom Faichnie, managing director of the new arm, says the green shoots of recovery for the region have been continuing to emerge since the middle of last year.
"The decline in trading results seen during the period of low oil price appears to have stabilised and we can see that order books are now tipping back in the right direction. As companies start to build up again, they will need working capital to deliver and grow their order books and many will require funding.
"We also anticipate that we will see a lot of exits coming in the next six months, especially from companies at the smaller end of the scale.
"There now appears to be a steady base level of profitability upon which to structure a transaction and many shareholders who may have delayed selling their businesses are likely to see increased interest from the UK and overseas."
Although Scotland continues to be a fertile hunting ground for foreign predators - particularly against a backdrop of a weak pound -Scottish firms have also been active overseas so far this year.
Aberdeen-headquartered engineering services group EnerMech bought Australian-based EPS Group in a move which takes it into the global electrical and instrumentation sector for the first time.
Funding was provided by EnerMech's three banking partners - Bank of Scotland, HSBC and DNB - alongside long-standing equity partners Lime Rock Partners.
Doug Duguid, EnerMech's chief executive, says the deal paves the way for providing a "more focused integrated services offering to clients".
"Adding a global electrical and instrumentation capability was essential to meet a demand from many of our customers who are looking for us to provide integrated commissioning and maintenance services. The acquisition of EPS Group also widens our exposure to the infrastructure, power and defence markets."
Although overall deal numbers were down, there was an increase in buyout transactions with notable deals during the quarter including a PS6.5m 'buyer-induced' MBO at Inchinann print finishing business ACA Press Cutters.
The deal, led by print industry veteran Joseph Keenan and Glasgow-based entrepreneur Dara Changizi, was backed by Royal Bank of Scotland through a loan, invoice finance package and hire purchase agreement.
Keenan said his previous experience of working at ACA had convinced him it was "a business that had great potential".
"A skilled workforce delivering exceptional quality within a lucrative market is the type of operation entrepreneurs jump at," he says. Macdonald Henderson advised the management team on the deal.
The Business Growth Fund (BGF) made a further investment into the oil and gas sector in Scotland with PS10m of backing for Frontrow Energy Technology Group, alongside a PS3m investment from its founders.
Dyce-based Frontrow, set up by former Expro Group chief executive Graeme Coutts, will use BGF's funding to expand its resources and infrastructure.
Mike Sibson, an investor in BGF's Aberdeen office who will join the board of Frontrow, says as well as supporting the firm's growth the deal extends the fund's reach into younger, earlier stage companies in oil and gas.
BGF's other portfolio companies in the oil and gas industry include STATS Petrotechnics and Rovop.
Also in the energy sector, a renewable energy firm secured a PS51m debt facility on the back of significant growth of its portfolio of projects.
The financing deal for hydro projects developed by Green Highland Renewables was struck by infrastructure investment manager Ancala Partners which acquired the Perth business in April 2015.
The facility, which has been underwritten by Allied Irish Bank and ING, has been raised against a portfolio of ten hydro assets of which four are operational while the remainder are due to be commissioned over the next 12 months.
The debt facility for Green Highland's asset-owning vehicle will be used to support construction of the schemes and to refinance capital invested in projects already in operation.
Spence Clunie, managing partner of London-based Ancala, says raising the debt facility was "testament to the achievements of Green Highland and the successful implementation of our strategy since we acquired the business".
In the technology sector, transactions included a six-figure funding round by the Edinburghbased audio technology specialist Krotos.
Old College Capital, Edinburgh University's investment arm, supported the deal alongside Leslie Benzies, the former president of Grand TheftAuto developer Rockstar North. The investment will help the firm double its headcount to 20 and expand its suite of audio tools as it seeks to grow its presence in fast-growing consumer markets such as virtual reality.
Krotos' Dehumaniser software produces creature and monster sounds in real-time, speeding up a process that previously took up to eight hours.
Andrea Young, fund manager for Old College Capital, which was advised by Macdonald Henderson, described Krotos as an "exciting early stage company with the potential to grow rapidly and deliver real economic impact".
The quarter also saw Scottish business angel investment syndicate Archangels complete its largest Series A funding round with a PS3.6m deal to support Edinburgh-based cyber-security specialist ZoneFox.
Led by Archangels the deal also brought in co-investment from the Scottish Investment Bank and TriCap. The trio of investors was involved in a PS650,000 fundraising for the firm in 2015.
ZoneFox, currently based at the CodeBase technology incubator, is planning a move to new headquarters in Edinburgh as it seeks to grow its ten-strong headcount to 30 by the end of the year.
Aim-listed life sciences firm Collagen Solutions raised PS10.8m in a fundraising which included a PS4m secured private bond facility provided by Luxembourg-based healthcare investment trust, Norgine Ventures. The money will help Collagen, advised by Shepherd + Wedderburn, with new product launches, product development, and working capital requirements.
5 5 5 4 4 4 3 3 3 2 2 The first quarter also saw a new fund established by a group of seasoned support services entrepreneurs complete its first equity investment.
2 1 1 1 0 0 Sco Non Sco O/seas Total Sco Non Sco O/seas Total 0 Sco Non Sco O/seas Total Aliter Capital 1, which targets small and mid-sized support services businesses across the UK, has backed Glasgow-headquartered engineering group Edwin James Holdings (EJH).
50 50 50 40 40 40 30 30 30 20 Aliter said EJH, a technical services provider operating across Scotland, represents an opportunity to grow a regional business into a national provider. Aliter has already identified a pipeline of niche bolt-on acquisition opportunities to develop the company's service lines and expand its blue-chip customer base.
20 20 10 10 10 0 0 Sco Non Sco O/seas Total Sco Non Sco O/seas Total 0 Sco Non Sco O/seas Total Billy Allan, managing partner of Aliter, a former chief executive of Stiell before it was sold to Alfred McAlpine, says he believes there are huge opportunities in the sector.
20 20 20 16 16 16 12 12 12 8 "The support services sector is dynamic, with many small and mid-sized businesses performing well in their regions and sub sectors. We can offer these businesses a powerful combination of equity investment and hands on experienced operational support, to 8 8 4 4 4 0 0 Sco Non Sco O/seas Total Sco Non Sco O/seas Total 0 June 2017 INSIDER 63 Sco Non Sco O/seas Total help them grow and to create value for shareholders that are looking to stay on with their businesses or de-risk their positions through a sale."
5 The quarter also saw a landmark event in public sector financing when leaders from Aberdeen City Council opened the London Stock Exchange to celebrate the local authority's pioneering bond listing, which law firm Brodies advised on. The PS370m indexlinked bond issue, which was the first of its kind by a Scottish local authority, was also the first London Stock exchange listing for the bond securities of a Scottish local authority.
4 3 2 1 Given the uncertain political 120 3 100 2 5 80 1 60 4 backdrop, advisers are reluctant to make any bold predictions about what 2017 as a whole holds for dealmaking in Scotland. A survey of 50 leading figures from across corporate Scotland by law firm Burness Paull found that setting a date for indyref2 would be likely to lead to a pause in investment activity across some sectors.
0 40 3 20 2 0 5 1 4 0 However, business leaders were less concerned about Brexit as many Scottish companies are already "actively engaging" with clients outwith the European Union.
50 3 40 2 120 30 1 100 20 0 80 60 Encouragingly the latest confidence barometer survey from EY also found more than half of UK companies (51 per cent) plan to actively pursue M&A in the next 12 months Ally Scott, EY's head of transaction advisory services in Scotland, says companies are adjusting their strategies to maximise growth opportunities and protect margins amid changing market dynamics at home and abroad.
10 40 0 120 20 100 0 80 60 4 40 "Strategic deals that will help businesses access new markets, new geographies and new technologies look likely to remain high on the boardroom list of priorities." | 50 3 20 40 0 www.insider.co.uk 2 30
These innovative structures are likely to increase in use and complexity as the market gains genuine traction Frank Fowlie, CMS (below)Strategic deals that will help businesses access new markets, new geographies and new technologies look likely to remain high on the boardroom list of priorities Ally Scott, EY (below)Adding a global electrical and instrumentation capability was essential to meet a demand from many of our customers Doug Duguid, EnerMech (above)A survey of 50 leading figures from across corporate Scotland by Burness Paull found that setting a date for indyref2 would be likely to lead to a pause in investment activity across some sectors 0 1 2 3 4 5 4 5 0 0 1 2 3 4 5
Above: BGF has invested PS10m in Frontrow Energy Technology Group. L-R: BGF investor Mike Sibson, Frontrow chairman Graeme Coutts and chief executive
The deal to take over ACA Press Cutters of Inchinnan has been led by Joseph Keenan (left) and Dara Changizi