Here’s How U.S. Tax Reform Shook Up U.K. Companies’ M&A Deals

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By Ben Stupples

When he signed sweeping U.S. tax changes into law six months ago, President Trump probably didn’t expect to bolster U.K. companies’ takeover transactions. That, however, is exactly what happened.

By slashing the country’s top corporate tax rate to 21 percent from 35 percent, the 2017 U.S. tax act has become a factor in the U.K.’s largest hostile takeover for a decade, and Informa Plc’s revived discussions to acquire business UBM Plc. Together, the deals are valued at more than $15 billion.

The lower rate gave GKN Plc a “tax tailwind” that the U.K. engineering business cited as part of its strategy to sway shareholders against voting for Melrose’s takeover bid. A spokeswoman for Melrose, which acquired GKN last month for 8.1 billion pounds ($11 billion), declined to comment.

The new U.S. laws, meanwhile, gave Informa and UBM’s shareholders further reason to opt for the companies’ merger, a decade after the events and publishing companies’ first takeover talks stalled.

The merged company will “benefit from the recent changes to U.S. tax legislation,” Informa said Feb. 28 in its full-year results. North America is both businesses’ largest geographical market by revenue, according to Bloomberg data. Last month, Informa’s and UBM’s shareholders voted to approve the 3.9 billion-pound merger. A spokeswoman for Informa, which led the deal, declined to comment.

Global Reach of Reform

The influence of the new U.S. tax law in U.K. companies’ merger-and-acquisitions (M&A) shows its global impact amid multinational corporations’ continued efforts to adapt to America’s reforms.

The Informa-UBM and GKN-Melrose deals may be “a sign of things to come” in the U.K., said Andrew Silverman, a New York-based Bloomberg Intelligence tax policy analyst. Yet U.S. mid-term elections in November and the U.K.'s European Union exit both create uncertainty for M&A, he added.

“There’s no doubt that U.S. tax reform is a shot in the arm to an already buoyant market” for the M&A market, said Marc Middleton, a senior adviser in transaction advisory services at EY. “Tax will never turn a bad deal into a good deal, but it may help to tip some of them over the line.”

America’s Overseas Cash

Overall, U.S. tax reform is expected to spur increased M&A activity among American businesses.

Along with the corporate rate cut, a key measure included in America’ news tax laws is a one-off levy on multinational corporations’ overseas earnings. Targeting the profits that U.S. multinationals like Apple Inc. and Microsoft Corp. stockpiled overseas from their foreign earnings to avoid domestic taxes, the measure aims to bring funds back to the U.S. to stimulate the country’s economy.

U.S. businesses now have an unequalled level of liquidity, global management advisory business Boston Consulting Group said in a Feb. 21 post on the impact of U.S. tax reform for M&A.

U.S. financial research and debt-ratings company S&P Global Ratings, meanwhile, warned in the same month that American companies’ bloated cash balances through the one-time repatriation tax will reduce their discipline around M&A at a time when deal valuations are already increasing.

“We’re expecting M&A to pick up now,” said Craig Hillier, EY’s head of international tax services. “U.S. businesses now have much more of a free hand to buy assets, and to get better returns on them, but that also probably means more competition in these deals going forward,” he added.

Comcast’s Bidding War

In the U.K.’s M&A market, Comcast Corp.’s bid for London-based media company Sky Plc is the most striking example of U.S. companies pushing up deal values in the wake of America’s new tax laws.

On Feb. 27, Comcast’s all-cash offer ignited a bidding war for Britain’s biggest pay-TV company with Twenty-First Century Fox. At 12.5 pounds per share, valuing Sky at 21.5 billion pounds, the offer was a 16 percent above Fox’s December 2016 bid. Since then, Sky’s shares have traded as much as 10 percent higher.

Comcast’s bid came after Chief Executive Officer Brian Roberts said in a Jan. 26 earnings call that U.S. tax reform provided “immediate benefits” the Philadelphia-based company. In turn, these benefits “will enable us to do more of the things that help us better serve our customers, our employees and the communities where we operate as well as drive value for our shareholders,” he added.

A Comcast spokesman said, however, that America’s tax laws weren’t a key factor behind the Sky bid.

“We have admired Sky for a long time,” he said by email. “When it became clear that not only was Sky for sale, but that every share was potentially going to have a change of ownership, we thought that now was the time to make a superior cash proposal.”

Clarity Means Business

Alongside more takeovers, increased U.S. M&A activity also creates business for investment banks.

By February, Goldman Sachs Group Inc. was having more conversations with clients on M&A due to “clarity from tax reform,” Chief Executive Officer Lloyd Blankfein said in a conference presentation.

Instead of looking overseas, though, U.S. companies stuck to M&A activity in America during the first quarter of 2018, signaling how the new tax laws are providing a stimulus to the country’s economy.

Over the same period, the volume of M&A activity from North American business in Europe fell by 85 percent in comparison to the same period in 2017, according to data compiled by Bloomberg Tax.

In the U.S., two of the first quarter’s largest internal M&A deals include insurer Cigna Corp.’s $67 billion takeover bid for Express Scripts Holding Co., the pharmacy-benefits manager, and coffeemaker Keurig Green Mountain’s $18.7 billion merger with Dr Pepper Snapple Group Inc.

“We have seen more of what corporates are doing with their new cash mountains,” said Dan Neidle, partner at global law firm Clifford Chance. Along with spending on M&A, U.S. businesses can also use their extra liquidity to increase staff wages, or return funds to shareholders, he added.

“M&A is not particularly tax-driven,” said David Blois, managing partner at London-based business M&A Advisory. “But through the new laws, with the cash repatriation, tax is providing demand and supply for M&A as U.S. companies may be more willing to sell because of the lower tax rates.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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