Working around the clock

By Graeme Sheils

Published:

THERE will have been much celebrating among business owners and their advisers in recent weeks as they battled to get transactions completed before the deadline of April 6, when capital gains tax (CGT) almost doubled.

Anecdotes doing the rounds across the north of Scotland are of corporate finance teams working around the clock and holidays being cancelled in a rush to seal deals.

It has already been reported that there has been an 800% increase in mergers and acquisitions in the last month across Scotland, and the north-east has seen its fair share.

The financial reasons for this are quite compelling.

Taxation levied against the sale value of business acquisitions has, from April 6, risen from 10% to 18% – a major increase which, when announced, brought immediate predictions of a flurry of M&A activity in the run-up to its enforcement.

For example, the tax-cost variation on a transaction of £10million under the new rate is some £800,000 – rising from £1million to £1.8million in CGT due to HM Revenue and Customs.

However, for every deal that did make the deadline, there will have been others which, for various reasons, did not.

These businesses may be comforted by special dispensation available in certain areas, allowing some relief from the CGT for entrepreneurs made on the disposal of all or part of a business, or made on disposals of assets following the cessation of a business.

These include a freeze on the effective rate of 10% on the first £1million of gains, with amounts gained above this level subject to the standard 18% rate. An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1million of gains qualifying for relief.

So what does the future hold for M&A activity when the dust has settled on this recent flurry of activity?

Locally, we expect to see further deals being done, but probably focused on the oil&gas or related sectors as the high levels of activity and sustained high oil prices continue to be attractive to financiers despite a general nervousness surrounding the credit crunch and general economic downturn.

We also expect to see a shift towards smaller and mid-sized deals in this sector rather than the larger corporate mergers of the last few years.

Much of the activity in this sector has led to consolidation.

Oilfield services consolidation is primarily driven by three factors: the shortage of skills and equipment; strong demand (oil service providers are in high demand from upstream companies which have an increased need for drilling services with oil prices at $100-plus per barrel), and technology transfer.

Acquiring innovative technologies and distributing them across their global network is an extremely attractive option for larger service companies.

Oil service companies specialising in successful niche technologies will be especially attractive, and private equity will continue to play a vital role in growing and developing businesses in this area.

Private equity firms from the UK, Norway and the US are now active in the local market, attracted by the opportunities presented by oil service companies as they are less exposed to oil-price risk than their exploration and production counterparts and have strong order books, providing greater visibility on future income streams.

The transactions completed in the last few weeks show that financial investors have continuing confidence in our oil&gas companies.

Deals include Close Brothers’ £142million acquisition of Energy Cranes and Bank of Scotland Corporate integrated finance’s £80million investment in Integrated Subsea Services as good examples.

With strong industry economics (tight supply and high demand), consolidation in the oil services sector can be expected to continue in 2008, and while M&A activity will not continue at the pace experienced in the lead-up to the recent tax changes, we can expect a period of sustained M&A activity in the local marketplace.

Completed transactions can be expected to be of high quality to attract the financing needed, given the general uncertainties in the broader economy.

In these uncertain times, the expertise and experience of professional advisers will be even more crucial in the pricing and structuring of deals.

Graeme Sheils is a partner with Deloitte in Aberdeen