US private equity buyers ditch sterling for dollars

US private equity buyers ditch sterling for dollars

There has been an increase in foreign investment made in the UK with a greater number of offers being made in dollars as opposed to sterling. US private equity fund Thomas Bravo LLC made an offer for Sophos Group plc  for $3.8 billion (£3.01 billion) whilst a consortium consisting of US, Canadian and British private equity funds made an offer for Inmarsat plc with an offer price of $3.4 billion (£2.6 billion). The consideration to shareholders was offered in dollars rather than sterling suggesting a need to hedge against currency risk, although it should be noted that both Sophos Group and Inmarsat report their financial results in dollars.

A weaker pound and the availability of cheap debt has piqued the interests of foreign bidders to acquire public companies in the UK. However, Brexit uncertainty and the consequent volatile movements of sterling has meant that bidders might increasingly be looking for ways to reduce exposure to a decrease in the value of the pound.

Both of the firm offers were made around the Brexit deadlines, with Inmarsat’s offer announced on 25 March 2019, four days before the first Brexit deadline of 29 March 2019 and the firm offer for Sophos Group announced on 14 October 2019, just over two weeks before the 31 October 2019 exit date which has recently been extended. 

Conversely, several other offers were made in the form of sterling but bidders paying to hedge against movements in the exchange rate may find that the costs of doing so are significantly higher than if they made the offer in dollars. Hasbro, Inc. acquired Entertainments One and it paid £16.2 million ($20.9 million) after tax charge in relation to foreign currency hedging.

It therefore seems that the choice of paying the consideration in dollars is being used to hedge against a currency swing that might be caused by Brexit or the uncertainty related to it. Rather than pay in sterling and additionally pay to hedge against currency risk, these bids shift this risk onto UK shareholders.

Market Tracker will continue to monitor this development. 

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