Shift away from pounds acts as protection from Brexit-related currency swings
US private equity groups buying UK-listed companies have started paying in dollars rather than pounds, in a move that protects them from Brexit-related swings in sterling and passes the risk to UK shareholders.
Bids for cyber security group Sophos and satellite company Inmarsat were both made in the run-up to major Brexit deadlines and both were in dollars. Overseas companies would typically make an offer in pounds and pay to hedge the currency risk instead.
Foreign currency risk “is definitely top of mind” for US buyout firms doing deals in the UK, said Brenda Rainey, senior director of Bain & Company’s private equity practice.
“The UK right now is relatively attractive for foreign investors because the pound has weakened, but there’s a lot of uncertainty around Brexit and people naturally look for ways to mitigate the foreign exchange risk,” said Ms Rainey. Shifting the risk to the seller by buying in dollars can be “a smart move” for buyers, she said.
In the case of Sophos and Inmarsat, a dollar-denominated bid also made sense because both companies have a global presence and report their results in dollars.
The Inmarsat bid came just days before March 29, the original deadline for a UK exit from the EU, and the Sophos offer came weeks before the extended October 31 deadline. Thoma Bravo, which made the Sophos offer, and Apax and Warburg Pincus, which led the Inmarsat bid, declined to comment. Thoma Bravo and Warburg Pincus are headquartered in the US. Apax is based in the UK.
According to figures from data provider Preqin, there were no dollar-denominated bids for UK listed companies between 2009 and 2017 and most of the them are still made in sterling.
The £3.3bn deal for US toy company Hasbro to buy London-listed film and television production company Entertainment One — owner of cartoon franchises Peppa Pig and PJ Masks — shows why bidders might be starting to switch away from sterling. On Tuesday, Hasbro announced a $20.9m after-tax charge “as a result of hedging part of the British pound purchase price of eOne”.
Johnny Colville, a managing director at investment bank Houlihan Lokey, said that while some institutional shareholders may be happy with dollar payments, other UK shareholders — who “in an ideal world would like sterling” — may accept the currency risk in exchange for “the certainty of a deal definitely happening”.
Source: Financial Times