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Are The Recent Spate Of Company Acquisitions In UK, Including Arm Technologies, Really All Brexit’s Fault?

Domino effect – what’s stopping a fire-sale of British companies with the pound at its weakest level for 31 years?

The collapse of the pound in the wake of Brexit has put a price tag on many of Britain’s biggest corporates, and the fire-sale has begun.

So say many of Brexit’s fiercest critics anyway – but is this truly the case, or is Brexit rather a handy excuse to explain away the fact that many of Britain’s companies, amongst them our biggest and brightest hope for a world leading tech company are being sold to foreign owners.

And if these foreign companies have pockets deep enough to double the number of staff, (as SoftBank has promised the government it will do with Arm Technologies, for example), does it matter there are fewer brits in the boardroom? Remember, companies don’t make countries Great, people do, and not all power and influence comes from within the boardroom.

Let’s take a look at the three largest post-Brexit deals to date and assess if it really was the pound’s post-Brexit slump that was responsible for the sale of the companies.

Chinese media magnate swoops on Odeon

First, it was Odeon cinemas, purchased by US firm, AMC, on behalf of Chinese parent company Dalian Wanda, owned by China’s wealthiest man, Wang Jianlin.

The sale of Odeon, which according to the FT owns 244 cinemas in the UK and Europe, 2,200 screens in all, represents a significant exit for Terra Firma, the private equity firm led by Guy Hands who acquired Odeon in 2004 for €650m in the same year it bought UCI for €350m, merging UCI into Odeon to create the UK’s largest cinema chain.

In fact, the acquisition had been agreed pre-Brexit, with AMC Chief Exec. Adam Aron crafting the deal for months beforehand – the shock result of the referendum actually forced Aron into a rethink, leaving him “thrown for a day or two”, and admitting that Brexit “injected uncertainties into the equation.”

Aron is working for a man in Dalian Wanda’s Wang Jianlin who is splurging on cinema and media enterprises all over the world – from the $3.5bn purchase of Legendary Entertainment film studios, to the $344m acquisition of Australian cinema group Hoyts.

Verdict: the pound’s fall brought this deal below the £1bn mark, and may have convinced Aron, at Wang’s behest, to act immediately – the deal will be two thirds cash, one third stock. But this deal was a long time in the offing, a relief to Terra Firma who were looking for an exit, and was slated to happen before Brexit sent the pound tumbling.

Poundland makes the perfect proposition

The far-from-ironic acquisition of Poundland for £450m (so far has the pound fallen, you could quote this deal in euros and be only £50m out), by South African Retailer Steinhoff was confirmed last week. Although Steinhoff had declared that it was reviewing its position due to a combination of Brexit and Poundland management’s resistance to the deal, an offer of 220 pence per share, a 13% premium on the firm’s closing price last Tuesday, seems to have done the trick, with Poundland’s board deciding to recommend the deal to shareholders.

Steinhoff had been building its position in Poundland, which has been struggling since an IPO in 2014 and a largely unsuccessful takeover and restructuring of 99p stores which has seen share prices drop by 40%, for several weeks and, already own UK based businesses Bensons for Beds, and Harveys.

South African billionaire Christo Wiese, who is Steinhoff’s biggest shareholder, also holds majority stakes in Virgin Active and New Look, the clothing chain, so it’s clear that, whatever the referendum result, the Poundland deal was part of a carefully thought out acquisition strategy. The timing and the pound’s crash however may have come at exactly the right time.

Verdict: there was nothing spontaneous about Steinhoff’s acquisition of Poundland, however headline grabbing the name of the target may have been. Poundland had been struggling and insiders have even suggested that Brexit nearly prevented the sale going through. There’s little evidence the pound swayed this decision. Steinhoff will be happy simply to complete the deal after American activist investor Elliot built a 13.2% stake in the firm to try to squeeze a higher takeover price.

SoftBank bets big on smartphone chips with acquisition of ARM

The big one. Today’s smartphone chips are the building blocks of tomorrow’s Internet of Things revolution. That’s the thinking behind SoftBank’s £23.4bn acquisition of Arm Holdings, the UK’s biggest tech company, in Europe’s largest ever European tech takeover.

Arm, based in Cambridge, employs over 4,000 people and has been mooted in the past as a target for the likes of chip-maker Intel, Apple, or indeed any US tech giant looking to employ some of their vast stockpiles of cash.

Pound Signs In The Sky As A Sign Of A Windfall

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But until the news that Japanese company SoftBank, whose 58-year-old Chairman Masayoshi Son apparently loves to bet big on “crazy ideas”, will pay a 43% premium £17 per share and make multi-millionaires of Arm’s senior management team, including founder Simon Segars, who the Guardian reports owns £11m worth of shares (COO Mike Muller’s stake is valued at £21m allegedly), Arm had always resisted the overtures of the multinationals, preferring to remain as the jewel in the crown of Britain’s tech ecosystem.

Not any more. Although Arm does not lose out to the plummeting pound as badly as other British companies as it bills most of its work in dollars, the post Brexit fallout has certainly made the company a more attractive acquisition target.

The company’s revenues of around £1bn per annum and status as a designer rather than a manufacturer of chips make it relatively small fry compared to the companies, like Apple and Intel, who it works with, but its designs are present in almost all smartphones, and SoftBank are poised to take advantage not only of this, but of a likely future surge of interest in the company’s products as the Internet of Things begins to make chips even more ubiquitous than they are now.

Suggestions abound that Brexit is being used as a scapegoat, allowing Arm’s board to cash in on a company they have grown painstakingly since the 1980’s, and why shouldn’t they? That said, the falling pound may have been the straw that broke the camel’s back. SoftBank are used to making huge acquisitions, having purchased the likes of US company Sprint for £22bn in 2013, as well as investing $4.5bn in Didi Chuxing, China’s answer to Uber.

Verdict: It’s a sad blow to Britain’s tech aspirations – losing Arm means losing our one company of genuine global repute. But since Arm is essentially a brains trust, such a sale may inspire a new generation of talented techies – suddenly, some of Britain’s most successful ever tech entrepreneurs will have vast sums of money to invest in new companies, and developing the talent it takes to deliver on the global tech stage.

This is the reality of the post Brexit world. Starting again, the future uncertain. Some will see the glass as half empty, but those who see the opposite will already be thinking about building the next Arm.

And Finally – if you’re invested in a British company that pays its dividends in dollars or euros then you can expect a bumper payout this year compared to previous years. The FT reports that “exchange rate gains will lift pay-outs by £4.3bn”, according to Capita’s UK Dividend Monitor.

Roughly 40% of UK listed companies pay their dividends in dollars or euros, and last quarter’s payout’s represented a record, thanks to an unusually large number of special dividends.

But the good news is likely to be ephemeral, as most observers expect the devaluing of the pound to ultimately bring dividend payout’s down in the medium to long term. Once again, since nobody knows what the long term effects of a Brexit will be, it’s all about perception, and a healthy dose of optimism with your morning muesli is probably the best way to approach the fallout.

Don’t start stockpiling the corned beef just yet!

 

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