Takeaways: Our newspapers, TVs and social media are becoming inundated with all-things-political as the UK trundles towards May’s General Election. Celebrity endorsements, campaign posters, Tony Blair taking centre-stage once again and not least, Margaret Thatcher’s 18-tonne bombproof ‘battle bus’ used in her 1983 campaign going up for sale – a steal for just £25,000.
With 2014 Q4 GDP revised upwards and the latest EY ITEM club highlighting that the UK economy is set for an expansion of close to 3% in 2015, what has come out from the first few weeks of campaigning which could have a bearing?
- Labour’s pledge to remove the 200-year old non-domicile resident tax regime has been met with mixed views by politicians and economists alike. Critics claim it could lead to millions in lost tax revenue and drive talent, business and investment away from the UK – making the country uncompetitive on the international stage. The Conservatives believe that their approach, raising the annual charge for non-doms and tightening the rules, is the right one. The Institute of Directors have also come out stating that it is a shrewd political move, but one with unconvincing economics. Supporters however, claim the opposite – it will generate millions in additional tax revenue through taxation on overseas income for those 115,000 UK residents currently under the status, that very few of the wealthy non-doms will actually leave the UK as a result and that the move will bring the UK in line with all other major economies. Duncan Bannatyne, of Dragon’s Den fame, has come out already saying that this Labour pledge alone was enough to swing his vote from blue to red, but the economics are far from clear from either side
- The entrepreneur’s tax reliefs could also be in the firing line as an incoming Government inevitably looks to boost its tax revenues. Given that both of the major parties have vowed to not change the upper or lower rate income tax bands (although Labour plan to bring back the 50% higher rate on income over £150,000), VAT or national insurance, which accounted for almost two-thirds of the total receipts this year, the question is where else can the additional revenues be found? The next few weeks could therefore be busy as sellers look to close deals under the current tax regime, unsure of what the future may bring. This comes amidst growing momentum in the mid-markets with Q1 closing with strong volumes as private equity buyers continue to look to deploy capital, with conditions remaining competitive against a limited supply of assets and bolstered by buoyant credit markets. We saw a 46% increase year-on-year on new funding deals written in the European mid-markets, versus 36% for the market as a whole.
- Between the various pledges being made, we need to consider that this is one of the most uncertain elections in a long time. Governments come and go, but one thing always stands true – equity markets and investors simply do not like uncertainly. Whilst the campaign trail has only just begun, we have already seen big retail outflows from UK equity funds and with almost a month to go until polling day, this uncertainty will no doubt continue. From a sector viewpoint, energy companies face challenges through potential price freezes and windfall profit taxes on providers. The Conservative plan for a referendum to leave the EU, which may unseat London as a global finance hub, and also the potential for a banking levy, is hanging over the banking sector. Housebuilders are seeing the flip side, and remain poised to be supported to build new homes by each of the political parties (notwithstanding, of course, those who might be caught up by Labour’s mansion tax proposals). Whilst many questions remain open for the time being, no doubt uncertainty will prevail much to the dissatisfaction of the equity markets.
Away from the world of UK politics, large M&A deals continue to shine.
The climate remains set for more large transactions and we remain expectant that more transformative and innovative deals are on the horizon. Board room sentiment remains strong and companies have headed on the acquisition trail to achieve growth. 2015 has already seen a strong start to the year with global M&A volumes at the highest level since 2008 and up over 54% from the same period last year.
Shell’s talks on acquiring BG Group came to light this week and at £46 billion it would be the 14th largest M&A deal in history. But could the rapidly declining oil prices be paving the way for another spurt of all-equity defensive mergers last seen in the late 90’s? Back then, when oil prices were at all time lows, we saw a number of today’s large global players created as a result – BP, Chevron and ExxonMobil to name but a few.
Amidst the current low-price environment, the gates could now be open for a new raft of strategic deals which could drive value enhancement and help overcome the current market turbulence. Players with strong balance sheets remain well positioned to fare the storm and are able acquire assets from those who are suffering from less liquidity and operate further up the cost curve.
Where one major starts, others tend to follow… ExxonMobil’s CEO recently stressed on an Analyst’s call that the company’s financial strength gave it options which were not available to its competitors, saying they “maintain flexibility so if something really interesting is in front of you, you don’t have to pass because you didn’t have the financial capacity”. However, compared to Shell, Exxon isn’t under the same pressure to do a deal, having replaced 101% of its reserves over the past three years (versus Shell’s 76%) – that said, with its large scale, low debt and triple-A credit rating, it certainly has the fire power.
Lord Browne, the former CEO of BP, commented in his memoires that a merger with Shell which was considered over a decade ago could have saved the combined group over $9 billion per year in synergies. In a market dominated by intense pricing pressure and high fixed costs – could we see more strategic M&A coming to the forefront? Either way, the ground is set and the fundamentals are in place for interesting times ahead.