UK Companies Are Maintaining Profitability

The profitability of UK non-financial corporations in Q2 2013 as measured by net rate of return (NNR) was estimated by 11.4% according to the ONS. It compares well with the last 18 months but is lower than 2011. The revised estimate for Q1 was 11.3%.

The manufacturing sector reported net rate of return of 7.2% in Q2 2013 one of the lowest levels since 2003. Services NRR was estimated to have been 15.1% in Q2 equal to Q1 but higher than the last two and a half years. UK continental shelf companies (oil & gas) NRR, which are not directly comparable with other industrial sectors and can be very volatile, grew by 37.4%. Non-UKCS companies grew by 10.7%.

Putting it into context, real GDP grew by 0.7% in Q2 2013 and the NRR of UK companies was 11.4%, an increase of 0.1%. The operating profits of UK non-financial corporations increased by 1.2% (according to Quarterly National Accounts) suggesting that profits are increasing at a faster rate than capital employed.

UK M & A Lowest For Some Time

The overall value of mergers and acquisitions involving UK companies decreased in the first quarter of 2012 compared with the last quarter and remains low. Overseas acquisitions by UK companies fell to their lowest quarterly level since this series of statistics began in 1987. The value of acquisitions in the UK by foreign companies also reached the lowest level (£3.9bn) since Q2 2010 when it was £2.8bn. Domestic acquisitions fell from £1.8bn to £1.1bn, the lowest since 2009. The net value of cross border transactions was -£5.3bn. What it means is that foreign companies invested more in UK companies in inward investment, than UK companies invested abroad in outward investment. The most significant transaction abroad by a UK company was the disposal by Old Mutual Plc of Skandia Insurance Company Ltd (Sweden) for £2.1bn. The most significant inward transaction was the acquisition of Northern Rock Plc by Vigin Group Holdings Ltd. Other significant transaction included the acquisition of Kalahari Minerals Plc by China Guangdong Nuclear Power Holdings Corporation. The most significant transaction by a UK company in the UK was the acquisition of Encore Oil Plc by Premier Oil Plc for a reported value of £0.3bn.

UK Companies Spending Big Abroad

UK companies expenditure on acquisitions abroad in Q2 2011 reached its second highest since Q1 2008 spending total of £10.2bn even though it represents a fall of 51% from £20.7bn. The 6 month figure of over £30bn is also above any 6 monthly period in 2009 or 2010. The number of acquisitions fell from 58 to 41.

The number of inward acquisitions increased from 43 to 46 and to a value of £8.5bn in the second quarter. The value of domestic acquisitions rose from £1.3bn in Q1 to £2.2bn in Q2 2011. The number of acquisitions fell from 68 to 59.

The largest transaction abroad by a UK company was the acquisition of Pride International of the USA by Ensco Plc for about £4.6bn. The acquisition of Netto Foodstores by Wal-Mart Stores Inc for £778m was a significant transaction in the Uk by the US company. Boparan Holdings acquisition of Northern Foods for £343m and Carillion acquisition of EAGA Plc for £298m were other significant transactions in the UK by UK companies.

The data is often affected by one or two very large transactions which may skew the trends underlying the data.

Returns For UK Companies Fall Again

There has been another slight fall in the net rate of return by private non-financial UK companies in Q1 2010 following a fall last year. The net rate of return was 11.1% (11.4% gross) compared with the revised estimate of 11.3% and 11.6% in 2009.

Service companies NRR was 14.4% (14.3% gross), slightly down on the 14.7% of Q4 2009 and the 16.4% of the same quarter last year. Manufacturing companies NRR was 6.4% (Gross=7.5%) down from the 6.9% of the previous quarter and the 8.3% of the same quarter last year. Companies other than UK continental shelf companies reported NRR of 10.2%. UKCS companies NRR was 36.4% (Gross=22.4%) an improvement on the 32.3% (20.6%) of Q4 2009.

Low Level Of M&A Activity Involving UK Companies

Foreign companies spent less on acquisitions in the UK in Q2 2009 in the lowest number of transactions since Q2 1987. There were 14 such transactions compared with 25 in Q1 2009. The fall from £12.3bn to £0.4bn is also the lowest since Q2 1987. UK companies also spent less on acquisitions abroad with expenditure decreasing from £3.7bn in 17 transactions in Q1 to £2.4bn in Q2 2009 in 25 transactions. UK to UK acquisition transactions decreased from 88 to 41 with a value of £0.7bn in Q2 2009 the lowest since Q3 1992. Included in these latest statistics from the ONS are the acquisition of a controlling stake in the Vodacom Group by Vodaphone Group for £1.6bn and the disposal of Cadbury by Schweppes Australia for a reported -£0.6bn. UK to UK transactions included the acquisition of Aricom Plc by Peter Hambro Mining Plc.