Brexit Webinar One week on - weighing up the outlook Financial Advisory June 2016
Nick Edwards Head of Restructuring Services 2
Reaction To Date FTSE 100, 250 and 350 % change since 23 June 4.0% 3.0% 2.6% 2.0% 1.1% 1.0% - (1.0%) (2.0%) (3.0%) (4.0%) (5.0%) (6.0%) (6.1%) (7.0%) FTSE 100 FTSE 250 FTSE 350 Source: London Stock Exchange European markets, % change since 23 June - (1.0%) (2.0%) (3.0%) (4.0%) (5.0%) (6.0%) (7.0%) (8.0%) (9.0%) (10.0%) Source: Bloomberg Germany Italy Spain France (5.0%) (8.8%) (7.3%) (4.6%) GBP USD FX Rate 1.55 1.50 1.45 1.40 1.35 1.30 1.25 Apr May Jun Last 3 months 1 year average Source: oanda.com GBP EUR FX Rate 1.35 1.33 1.31 1.29 1.27 1.25 1.23 1.21 1.19 1.17 1.15 Apr May Jun Last 3 months 1 year average Source: oanda.com 3
Introduction Panel Nick Edwards Ian Stewart Iain Macmillan Fenton Burgin Henry Nicholson Head of UK Restructuring Services Deloitte Chief Economist Global M&A Lead Head of UK Debt Advisory Restructuring Services 4
Ian Stewart Deloitte Chief Economist 5
Market effect: down but not like 81, 92, 08 Dollar sterling exchange rate 1980-81 recession ERM crisis Failure of Lehman Brexit 6
Heightened uncertainty => lower appetite for risk Deloitte CFO Survey: risk appetite and levels of uncertainty Latest reading, Mar 16 Latest reading, Mar 16 7
Economists forecast knock to UK GDP in 16 and 17 UK real GDP profile (YoY%), actual and consensus forecasts 6 Remain GDP Leave GDP 4 2 0 Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 May-14 Apr-15 Mar-16 Feb-17-2 -4-6 -8 Consensus Economics forecasts, % chg yoy, actual, forecast Remain 2015 2016 2017 2018-26 avg. GDP 2.3 1.9 2.1 2.1 Investment 4.1 2.0 4.4 2.7 Leave 2015 2016 2017 2018-26 avg. GDP 2.3 1.4 0.4 2.1 Investment 4.1 0.2-1.6 2.0 8
Why this isn t Lehman? Not a banking crisis 3m LIBOR-OIS spread measure of additional cost of interbank lending over the risk-free rate 9
Why this isn t Lehman? UK fundamentals good United Kingdom Heritage Foundation World Bank World Economic Forum #1 Hong Kong Singapore Switzerland #2 Singapore New Zealand Singapore #3 New Zealand Denmark United States #4 Switzerland South Korea Germany #5 Australia Hong Kong Netherlands 10 6 10 Sweden 26 8 9 Poland 39 25 41 Spain 43 33 33 France 75 27 22 Italy 86 45 43 Greece 138 60 81 Business Index and Heritage Foundation Index of Economic Freedom *Higher rankings indicate better, usually simpler, regulations for businesses, greater ease of doing business, stronger protections of property rights and lower corruption. 10
Possible alternatives to EU membership No single template for life outside the EU EU member 28 European member nations EEA (Single Market only) Norway, Liechtenstein, Iceland EFTA (Free Trade Agreement) Customs Union MFN Duty-free Swiss Turkey Australia Monaco, Singapore Free movement of goods, services, and capital Yes Yes Yes No No No Free movement of people Yes Yes Yes No No No Free to negotiate trade deals and set tariff levels with non-eu countries No Yes Yes No Yes In principle, but slower EU laws and regulation Fiscal contributions Influence Yes Very limited No No No No Compliance Yes Yes Yes Yes (83% of full rate) Yes, but some optouts Yes (52% of full rate) Some No No No No No Common Agricultural Policy (CAP) Yes No No No No No 11
UK politics and policy Political and administrative challenge 1. Uncertainty elevated but below peak; long haul change; back to business 2. 2016-17, GDP slows, possibly sharply, skates recession 3. Behind the scenes: UK mulls aims, Brexit administration 4. New Prime Minister elected September 9 th 2016 5. Article 50 triggered Q4 16/H1 17 6. UK & EU negotiate 2017-2019/20 7. Trade off: access to Single Market, free movement of people 8. New deal emerges in next 2 years, uncertainty abates 9. Long term: UK trend growth broadly unchanged around 2.2% 12
EU faces multiple challenges Challenges Response 1. Brexit, further secessions Step-up integration? 2. Slow growth Multi-speed Europe? 3. Migration, borders Muddle through? 4. Fixing the euro 13
Iain Macmillan Global M&A Lead 14
Global economic slowdown has been impacting M&A markets There is a drop in M&A values in Q1 2016, compared to the same period last year Slowdown in China Slower than expected recovery in global economy % points 8 China Real Quarterly GDP (Annual YoY%) % points 0.4 IMF revision in GDP forecast for 2016, January vs April 0.2 0 7-0.2-0.4-0.6-0.8 6-1 Source: Bloomberg $ billion As the result deal activities have fallen in H1 2016 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Global M&A deal values H1 vs H2 2006-16 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: World Economic Outlook, April 2016 Resistance from regulatory authorities 500 Political uncertainty United Kingdom Economic Policy Uncertainty Index 400 300 200 100 2011 M1 2011 M3 2011 M5 2011 M7 2011 M9 2011 M11 2012 M1 2012 M3 2012 M5 2012 M7 2012 M9 2012 M11 2013 M1 2013 M3 2013 M5 2013 M7 2013 M9 2013 M11 2014 M1 2014 M3 2014 M5 2014 M7 2014 M9 2014 M11 2015 M1 2015 M3 2015 M5 2015 M7 2015 M9 2015 M11 2016 M1 2016 M3 2016 M5 15
Uncertainty is a key factor influencing M&A, particularly in UK in recent months Impact of uncertainty on UK M&A market 200 Scottish Referendum UK General Election EU referendum 150 75% Disclosed deal values ($bn) 100-48% 50-45% 0 2012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q12014 Q22014 Q32014 Q42015 Q12015 Q22015 Q32015 Q42016 Q12016 Q2 16
Headwinds - UK Policy uncertainty index is at record levels UK involved deal volumes vs UK policy uncertainty index 6000 BREXIT 450 Deal volumes 5000 4000 3000 2000 1000 Iraq War Coalition Government Banking crisis Fuel panic London riots 400 350 300 250 200 150 100 50 UK economic policy uncertainty index 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LTM 0 Domestic volumes Outbound volumes Inbound volumes UK Economic policy uncertainty index 17
Headwinds Currency fluctuations will have some opportunistic impact, but M&A still relies on underlying fundamentals of the business and growth prospects 11% depreciated after the Brexit announcement, registered a 31-yr low against the dollar Potential impact of GBP fall on M&A 2001 crisis 2008 crisis Pound depreciation 3% 26% YoY % change in UK involved deal volumes YoY % change in UK involved deal values -36% -40% -7% -31% UK targeted deal volumes vs UK pound -6% CAGR 2013-15 30% CAGR 2013-15 1200 3% CAGR 2011-13 2.2 UK target deal volumes 1000 800 600 400 200 3% -36% -26% -40% 8% CAGR 2011-13 2 1.8 1.6 1.4 1.2 UK pound spot rate 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1 Deal volumes UK pound spot rate 18
Tailwinds 110 FTSE 100 and FTSE 250 indices performance 105 100 95 90 85 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 FTSE 100 Index FTSE 250 Index 15% 10% FTSE 350 movers % change since Jun 23 5% 0% -5% -10% -15% -20% FTSE 100 and FTSE 250 P/E multiple 21X 19X 17X 15X 13X 11X 9X 7X 5X 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FTSE 100 FTSE 250 FTSE 100 sales by geography FTSE 250 sales by geography 26% 74 % 17% 22% 49% 51% 20% 12% 35% 19% Continental Europe North America Rest of World UK 19 Real Estate Funds Retailers Financial services Banks Life insurance Household goods Travel Auto Telecom Support services Electricity Industrial transport Food producers Constructuion Software Metals Media Chemicals Forestry and paper Oil equipment Electronics Engineering Mobile Aerospace Beverages Mining Tech Hardware Healthcare equipment Utilities Personal goods Oil and gas Tobacco Pharma
What next? Long term investment decision Immediate impact somewhat limited Measured response UK only event International investors are seeking opportunities Clarity on trade terms Uncertainty means processes may elongate Protect value on potential divestments Refinancing Private Equity activity 20
Fenton Burgin Head of UK Debt Advisory 21
Debt Movements Banks All lenders Bonds 22
Henry Nicholson Restructuring Services 23
RS Outlook Impact will be felt over various horizons KEY FACTORS FX impact on covenants FX on trading if unhedged Impacts of changes in exchange rates, investment activity and economic growth felt in covenants and liquidity Changes in lending relationships post Brexit Impact of changed financial services landscape Changes in public sector funding post Brexit Interest rates Business investment Consumer confidence Debt market availability Failed financing / M&A 3 months 24+ months 24
RS Outlook These effects can be seen in share prices today FTSE All-Share sector impact from 23 to 29 June (30.5%) (8.9%) (6.2%) Airlines Other travel Leisure (ex. Compass) (25.1%) (0.9%) HSBC and Stan Chart Banks (ex. HSBC and SC) (13.2%) (2.4%) General Retail Food and Drink (29.0%) (17.0%) (17.6%) Construction Real Estate Housebuilders (35.0%) (30.0%) (25.0%) (20.0%) (15.0%) (10.0%) (5.0%) - Source: Bloomberg 25
Restructuring Outlook Conversations with clients Treasury management Financing options M&A Outlook Performance Improvement Supplier risk management Location strategy Managed exit Financial distress 26
Q&A 27
Contact Information Nick Edwards Head of UK Restructuring Services 0207 007 3013 nedwards@deloitte.co.uk Ian Stewart Deloitte Chief Economist 0207 007 9386 istewart@deloitte.co.uk Iain Macmillan Global M&A Lead 0207 007 2975 imacmillan@deloitte.co.uk Fenton Burgin Head of UK Debt Advisory 0207 303 3986 fburgin@deloitte.co.uk Henry Nicholson Restructuring Services 0207 007 4009 hnicholson@deloitte.co.uk 28
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. 2015 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom.