Looking back at 2023, including the final quarter recession many leading experts had predicted, the UK economy suffered a relatively stagnant period.
There were small increases in growth followed by slight contractions during the year.
In the energy sector, which is the main focus of my practice, the energy profits levy as well as calls from certain political parties to cease exploration for new hydrocarbon resources had operators reconsidering their investment strategy in the UK North Sea.
That said, from a mergers and acquisitions (M&A) perspective, there were still a healthy number of deals around.
Our firm advised on a number of these in a diverse range of sectors, including energy, healthcare, agriculture, education, retail and professional services.
Cause for optimism
Set against the backdrop of economic challenges experienced in 2023, businesses may have beeen forgiven for stepping rather gingerly into 2024.
There is, however, cause for optimism on the economic front.
Conditions are generally looking more favourable than last year, with a period of small but sustainable growth and a modest drop in interest rates anticipated.
A positive economic outlook tends to grease the wheels of the M&A market and encourage deal activity.
Continued consolidation
We also expect there to be continued consolidation in a variety of sectors, including energy, care homes and healthcare, which could provide the impetus for a year of reinvigorated activity levels.
In addition, there are a number of companies which have previously secured private equity investment that are overdue for exit. We expect this and new private equity investment to give a shot in the arm to the M&A sector in 2024.
Indeed, we have already secured instruction on more M&A transactions than we had this time last year, and the pipeline looks pretty encouraging for the foreseeable future.
We have received several inquiries from business owners to assist them with transactions, on both the buy and sell side, and to aid them in restructuring their companies to be “transaction ready”.
It’s crucial to engage with professional advisors as early in the process as possible to ensure your business is prepped for market. Failing to do so can significantly raise the temperature of negotiations during the transaction phase of the disposal and, ultimately, impact negatively on either reaching a successful conclusion to the transaction or the exit price achieved.
Green opportunities
Needless to say, a buoyant energy sector continues to be a material factor in the number of M&A transactions involving north-east companies.
The renewables sector increasingly offers opportunities to companies in the energy supply chain to grow their business.
Areg (Aberdeen Renewable Energy Group), a supply chain- focused membership organisation of which I am a director, last year announced a record number of members.
Many of them are optimistic about the potential that exists in renewables in the near future, with the decommissioning of offshore infrastructure also providing opportunities.
Of course, important as the just transition to renewable energy is, there is a growing realisation that hydrocarbons are going to be a material component in the energy mix for the foreseeable future.
Increasing investment in the goal of net-zero hydrocarbon extraction, with offshore wind and carbon capture having an important role to play, creates another opportunity that north-east based businesses are well placed to exploit.
Also cause for optimism for start-ups
In addition to experiencing increased instruction on M&A transactions at the start of 2024, compared with last year, we have advised more businesses in the energy sector on tenders, securing investment and restructures.
We are not alone in seeing increased activity from clients in the energy sector and this should have a positive impact on the number of M&A transactions involving north-east companies in 2024 and beyond.
A well as the fact established businesses based in the north-east continue to thrive, there is also cause for optimism in the start-up arena.
ETZ Ltd’s energy incubator and scale-up “hub” is due to open in Aberdeen this summer.
This and other new initiatives in Aberdeen’s Energy Transition Zone are unlikely to result in an increase in company acquisitions in 2024. But they could well act as a further stimulus to private equity investment in the region this year, which bodes well for the future deals pipeline.
The upcoming general-election will undoubtedly introduce a degree of uncertainty to businesses and investors. Taking into account the importance of the energy sector to the north east, the next government should reconsider the energy profits levy.
Hopefully, even a change of government will not impact too much on the positive factors mentioned. These suggest plenty of potential for deals to be done in the north-east in the coming year.
If M&As are a barometer of the economic climate, there’s certainly cause for cautious optimism.
Rod Hutchison is a corporate lawyer with more than 20 years’ experience. He is a partner in Aberdein Considine‘s corporate and commercial team in Aberdeen, specialising in M&A.
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