UK businesses entered 2022 following a period of exceptional disruption and significant M&A activity.
The pandemic accelerated digital transformation, changed consumer behaviour and created new demand across technology, healthcare and outsourced services. At the same time, inflation, supply-chain disruption, labour shortages and Brexit created new operational and financial pressures.
Polestar CF’s 2022 Sector Outlook examines the economic environment, public-market valuations and M&A trends across Business Services, Food and Leisure, Manufacturing and Industrial, Software and Technology, and Healthcare and Education.
Inflation was one of the principal concerns for the year ahead.
Trade barriers, Brexit, Covid-19 and the previous movement towards offshore production disrupted global supply chains. A rapid recovery in demand, combined with labour and material shortages, created further inflationary pressure.
UK inflation was forecast to reach between 4.3% and 4.8%. The Bank of England increased its base rate from 0.1% to 0.25% in December 2021, with further increases expected during 2022.
Despite these pressures, the UK economy was expected to continue recovering towards its pre-pandemic level. Growth remained dependent on labour availability, supply-chain performance, interest rates and the continuing effects of Brexit.
UK equities entered 2022 with comparatively low valuations, partly reflecting political and economic uncertainty surrounding Brexit.
Lower listed valuations encouraged overseas private equity firms and corporate buyers to pursue UK acquisitions. International buyers were also attracted by low bond yields, stretched valuations in other markets and the relative strength of non-US equity opportunities.
Listed-company multiples continued to provide an indication of valuation trends, particularly when comparing historical and forward revenue and EBITDA expectations.
The increase in transactions commonly experienced after an economic downturn was expected to continue into 2022.
Companies were considering acquisitions, disposals and other strategic transactions. Distressed M&A and Software and Technology were expected to contribute to activity.
Businesses also used acquisitions to accelerate digital transformation. Some companies acquired technology-enabled businesses to respond to changes in customer demand and modernise their operating models.
Strong corporate balance sheets, private equity capital and unused credit facilities provided funding for continued dealmaking. However, buyers increasingly needed to demonstrate how acquisitions would create value and support corporate strategy.
The five sectors covered recorded the following transaction volumes:
Landmark UK transactions included the sale of Refinitiv to London Stock Exchange Group, the creation of Virgin Media O2 through a joint venture between Liberty Global and Telefónica, and the sale of ASDA to TDR Capital.
Together, these transactions represented more than £70 billion in enterprise value.
Business Services revenue multiples demonstrated long-term growth expectations across most subsectors. Communications was the principal exception, with projected revenues reflecting the impact of reductions in marketing and external-communications budgets.
Professional Services continued to experience demand but faced higher personnel costs and staffing challenges. Employee illness, taxation and reduced access to EU workers affected recruitment and service delivery.
Longer-term improvement was expected through technology adoption, wage growth and recruitment from outside the EU.
Logistics and Distribution businesses also adapted their services to meet demand from Consumer Goods, Grocery, Health and Pharmaceutical customers.
The pandemic encouraged Business Services companies to reconsider their operating models.
Automation, data and digital technology allowed some providers to deliver services without being tied to a single location. This offered opportunities to reduce costs, improve efficiency and overcome geographical limitations.
Business Services recorded 1,804 transactions during 2021:
Professional Services and Business Process Outsourcing accounted for most of the activity.
Outsourcing accelerated during the pandemic and was expected to create further opportunities as companies sought additional third-party support.
Providers needed to demonstrate that they could deliver resilient services and meet customer expectations during disruption. This was particularly important within logistics, where outsourced-service failures could affect wider supply chains.
Demand for Professional Services employees also remained high after workers moved into other sectors during the pandemic.
Revenue expectations across Food and Leisure were generally improving as consumers returned to restaurants, bars and hotels.
EBITDA margins remained comparatively strong, and some subsector valuations had increased substantially since the start of the pandemic.
However, Food and Leisure companies faced labour shortages, disrupted supply chains and higher inflation. The Food and Drink Federation suggested inflation within hospitality could be between 14% and 18%.
Demand for leisure remained strong despite economic and operational challenges.
The immediate question was whether the sector’s infrastructure and workforce could support this demand while managing product shortages and rising costs.
Food and Leisure recorded 196 transactions during 2021:
Activity within Hotels and Restaurants also supported transactions across Food, Beverage and Tobacco suppliers.
Three external pressures were expected to affect the sector:
Illness, isolation requirements and recruitment difficulties reduced the number of bookings some hospitality businesses could accept, affecting demand passed through to suppliers.
The acquisitions of Morrisons and ASDA demonstrated investor interest in food retail. Continued efforts by larger retailers to reduce costs could place pressure on suppliers.
Proposed salt and sugar taxes and the objective of reducing national meat consumption encouraged consolidation and interest in businesses with differentiated products less exposed to price competition.
Manufacturing and Industrial companies faced inflation, labour shortages, raw-material shortages and supply-chain disruption.
Construction and Engineering experienced strong demand, but shortages of skilled workers and materials constrained output and increased costs.
Industrial Technology faced similar conditions, with demand remaining high while supply-chain difficulties restricted productivity.
Recycling and Renewables was expected to experience strong revenue growth following COP26.
Demand for services supporting net zero and the energy transition allowed some businesses to increase prices and improve margins. ESG investment also increased attention on community impact, employee wellbeing and environmental performance.
Regulators were moving towards greater disclosure of non-financial information.
Long-term growth was linked to digital transformation.
Smart factories, robotics, automation and AI-enabled services could improve efficiency and introduce more predictive manufacturing processes. These developments offered a way to address high demand while dealing with labour and production constraints.
Manufacturing and Industrial recorded 451 transactions during 2021:
Manufacturers were expected to focus on:
The sector needed to balance near-term growth with elevated operational risk and longer-term environmental requirements.
Software and Technology performed strongly, particularly within Software and Services and E-commerce.
The pandemic accelerated automation, remote-working technology and digital adoption across sectors that had previously changed more slowly, including Healthcare and Education.
Data and Analytics also benefited from technologies making it easier to share and use information across organisations.
Cloud providers, Software-as-a-Service vendors and systems integrators offered modular services that could be adapted to different customer requirements.
Scalable SaaS models produced high EBITDA margins because services could be introduced to additional customers with relatively little setup cost.
Technology also enabled companies to automate repetitive manual processes, accelerate service delivery and improve the stability of their IT operations.
Telecommunications revenue faced long-term pressure from falling prices.
Profitability was nevertheless improving through consolidation, cost reductions and greater automation linked to higher-margin services.
Software and Technology recorded 1,655 transactions during 2021:
Software Services accounted for more than half of the sector’s activity.
Capital was expected to continue moving into disruptive technology over the following six to twelve months.
Companies were looking for technology capable of reducing costs, increasing revenue, supporting scale and restoring competitive advantage.
AI adoption was expected to grow across cybersecurity, workflow management, sales and customer support. HealthTech, FinTech and CleanTech also demonstrated how technology-led entrants could develop new markets.
Education entered 2022 with strong growth expectations.
Projected reductions in revenue and EBITDA multiples indicated that expected growth in Education Technology was already reflected within valuations. Strong balance sheets and cash reserves generated during the pandemic were expected to support further acquisitions.
Digital learning was becoming an established part of education delivery, from early-years learning through to universities.
Healthcare growth was supported by delayed treatments and long-term demographic trends.
Pharmaceutical businesses had cash available for investment, while the rapid development of Covid-19 vaccines strengthened confidence in the sector’s ability to develop treatments more quickly.
Healthcare Technology continued to grow through medical devices, remote consultations and healthcare software.
Hospitals and Care Centres faced more uncertain near-term revenue because concerns around new Covid-19 variants could discourage attendance.
Healthcare and Education recorded 241 transactions during 2021:
Valuations remained high as investors sought opportunities created by changing healthcare and education markets.
Digital technology was affecting distance learning, early-years education, patient care and precision therapeutics.
The pandemic exposed weaknesses within both sectors. Continued investment, innovation and M&A were expected to help providers meet demand and establish more sustainable long-term operating models.
M&A entered 2022 with significant capital available from private equity, corporate balance sheets and credit facilities.
Digital transformation was a common theme across all five sectors. Businesses used technology to automate processes, improve efficiency, overcome staffing constraints and respond to changing customer behaviour.
Other recurring themes included:
Transaction activity was expected to remain strong, but buyers increasingly needed to connect acquisitions to a clear value-creation strategy.
Business Services recorded 1,804 transactions. Professional Services was the largest subsector with 959 deals.
Business Services recorded the highest number of transactions, followed by Software and Technology with 1,655 deals.
Software and Technology recorded 1,655 transactions, including 967 Software Services deals and 463 Data and Analytics deals.
Manufacturing and Industrial recorded 451 transactions. Construction and Industrial Technology were the two most active subsectors.
Healthcare and Education recorded 241 transactions, led by Healthcare Services, Education and Pharmaceuticals.
Food and Leisure recorded 196 transactions. Food, Beverage and Tobacco accounted for 77 deals, while Hotels and Restaurants accounted for 72.
Inflation, supply-chain disruption, labour shortages, higher interest rates and the effects of Brexit were among the principal risks.
Technology allowed businesses to automate manual processes, operate more efficiently, deliver services remotely and respond to changes in consumer demand.
Software Services, Data and Analytics, artificial intelligence, cybersecurity, workflow management, HealthTech, FinTech and CleanTech were among the areas expected to attract interest.
COP26 and growing regulatory expectations increased demand for Recycling, Renewables and businesses supporting net-zero objectives. Companies also faced greater pressure to disclose non-financial performance.
