Tom Faichnie, managing director of Aberdeen-based Hall Morrice Corporate Finance Limited, believes that the next 12 months will see a surge in activity as shareholders finally look to execute exit plans. As 2018 approaches, he predicts how the business landscape of the Granite City will transform in the next year.
Deal activity in 2017 has continued to be slow as the oil and gas industry becomes accustomed to the reduced oil price. But I believe that January will signal the start of a very intense period for both buyers and sellers.
I predict that in 2018 we are going to see more companies coming up for sale, not only at the bigger end of the market, but what would be considered the smaller end too – companies that sit within the £2m to £10m revenue bracket.
Oil is still a volatile commodity and the North Sea remains a long way off a full recovery, however, over the past two years companies have seen their financials stabilise and reach a steady base. The worst is over and order books are tipping in the right direction.
There is now a level of confidence that has been lacking for a long time and shareholders feel that they have now built their businesses back up to a point where the time is right to sell.
It’s also important to consider that many business owners have been through this cycle before: they simply no longer want to go through another round of ramping a business up and developing it to the pre-downturn levels. They are saying, “It’s now sellable, let’s exit.”
I also predict that 2018 will see an increase in consolidation. Major deals like GE Oil and Gas and Baker Hughes earlier this year have resulted in companies not just growing, but becoming mammoth in their scale.
For companies lower down the supply chain, it stands to reason that you too are going to have to grow and do things on a bigger scale. There are a lot of companies out there for which the quickest solution will be to merge.
In 2018, the main barrier to deals activity, I believe, will continue to be the availability of finance. It is very difficult to seize opportunities when you cannot get working capital that will allow you to realise your plans and as we enter another year it is still difficult to know what reaction you may get from a bank when you discuss the issue of business loans and refinancing.
The key to addressing this remains in anticipating your finance needs and engaging with potential funders at an early stage. It is without question more difficult to get finance than it was five or 10 years ago, and if you suddenly hit a funding requirement in order to fulfil a contract there is simply no guarantee of receiving it.
As we start a new year, think of it as being a blank page and a good time to get a company health check. You may not need working capital right now, but it’s always a worthwhile exercise to look at financial models. Ensuring they are kept up to date is also key: this allows you to be one step ahead in anticipating funding needs and mitigating challenges.
So, for me, 2018 is going to be the year of acquisitions and mergers. What I cannot predict is what the first major deal of the year will be – that is anyone’s guess.