Prepare to take a long term view as firms get back to growth

All of Scotland’s major business sectors have suffered during lockdown, with few deals being done – but there are reasons to believe the country’s firms have the resilience to weather tough times and get back to growth.

Thursday, 24th September 2020, 8:02 am
Updated Friday, 2nd October 2020, 8:22 pm
There are reasons to believe the country’s firms have the resilience to weather tough times and get back to growth.
There are reasons to believe the country’s firms have the resilience to weather tough times and get back to growth.

Food and drink

Scotland has built a global reputation for its high-quality food and drink, ranging from salmon to shortbread to whisky, and its restaurant and hospitality sector has become increasingly diverse in recent years.

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Given this diversity, Eric Galbraith, partner and head of food and drink at Brodies, highlights the risk of being too generic when looking at this part of the Scottish economy. Not only should food and drink be looked at separately, he says, but a contrast should also be drawn between the likes of large “big whisky” corporates and small independent start-up distillers.

The impact of Covid-19 is very different for companies operating in various parts of the sector. Galbraith says: “The big whisky producers, for example, have global brands that will sustain them through this period. The smaller operators have obviously been much more challenged.”

He is also keen to underline the devastating effect of the pandemic on workers in the industry: “Behind this situation are personal stories and every day we hear about job losses in the sector. It’s a very vulnerable, people-orientated industry and many have concerns about their income and future.”

Deals have not been happening in recent times, but there has been some momentum in the sector when it comes to funding. One example Galbraith gives is the Glasgow Distillery Company’s announcement in July that it had secured a £5.5 million asset-based lending facility from Barclays to support its international growth and expansion plans.

Moving on to longer-term trends in food and drink, a feature of the sector has been interest in Scotland from international buyers over the last year or so.

Galbraith says: “We focus a lot on premium brands in Scotland, but sometimes the international buyer isn’t as interested in the brand as in the product. We have seen potential buyers from China looking for whisky distilleries in Scotland because they want one to add to their portfolio, not because they are targeting a particular brand. One of the buyers had recently bought a vineyard in Bordeaux and was looking to add more luxury products, including whisky, but without paying a premium for a certain brand. These are brand-agnostic acquisitions.”

Looking ahead, Galbraith says the rate of recovery from the impact of Covid-19 will be determined by how resilient a business was at the outset, particularly if there’s a seasonal dependency, but he is confident things will gradually ramp up.

Derek Mair, partner and head of food and drink at Anderson Anderson & Brown, says: “Credit has to be given to people in the food and drink sector for using their initiative and seeking opportunities, for example by moving online. This has been well received by the public. This isn’t and easy thing to do because you are taking a risk in a risky time.”

He adds that the food and drink market has become more competitive than ever, and to survive some businesses may have to look at collaboration: “There are a lot of good solid brands and it would remove some of the overheads and make businesses more sustainable if they came together.”

But Mair believes there may be some reluctance to go down that road, because a lot of businesses in the sector are family-owned and take pride in their heritage and independence. He concludes: “Culture will be important. It’s easy to say the numbers fit to come together but people will be the big thing here.”

Manufacturing, construction and property

During the Covid-19 lockdown, all but essential manufacturing had to stop, construction workers had to down tools and the property market slowed. Dealmaking was affected and some existing challenges were exacerbated.

On manufacturing, Andy Nolan, partner at Brodies, says: “I think things will remain challenging on the M&A side until a Covid-19 vaccine is found, and that will lead to a sea-change in investor confidence.”

But Brodies still views manufacturing as a generally resilient sector. Nolan says: “After that brief period of shock when the most severe social distancing measures were introduced, clients were looking to understand the impact of the situation on their own businesses and deal with the disruption to their supply chains.

“A significant number of manufacturing businesses in the UK rely on China for products and materials, and there were clearly disruptions in the import market. This experience may well lead to manufacturers in the UK becoming less reliant on overseas imports in order to ensure greater resilience in their supply chains.

“While globalisation is here to stay, it isn’t the answer for everything. Over reliance on distant markets for import and export can lead to its own issues. There is an opportunity here for manufacturers to look to home-grown talent and domestic investment to minimise supply chain risk and exposure.”

Nolan adds that the re-scoping of agreements based on changing demand has been common across the supply chain as firms consider their ability to deliver existing contracts while social distancing measures remain in factories, and wider market disruption continues.

It is expected to be a gradual road to recovery, with Make UK, the trade body for the manufacturing and engineering sectors, forecasting that it could take until 2022 for the industry to return to its pre-Covid-19 levels.

Nolan says: “At the moment, one in five manufacturers is operating at between 25 and 50 per cent capacity. That is symptomatic of reduced demand for end products and difficulties in delivery.”

He adds that resilience will be the watchword when the furlough scheme ends in the UK: “Businesses that have been careful in the way they have set up their infrastructure and supply chains are likely to be more resilient and weather the storm.”

Nolan adds that investing in skills will also be crucial for the longer-term recovery of the sector: “We need to invest in skills so that Scotland is ahead of the curve and able to place itself at the forefront of future development.”

Turning to the construction and property sectors, Gordon Steele, partner and head of transaction support, corporate finance at Anderson Anderson & Brown, says: “Since the beginning of June we have seen more opportunities for project finance come on stream. This includes rental-based projects, such as student accommodation, and the private sector rental schemes, or housing developers looking for project finance to support small to medium-sized developments.

“We’re seeing quite a bit of interest from families and high-net-worth individuals who had been in that space before and see it as a safer bet at the moment.”


Douglas Martin, pictured, partner and head of corporate finance at chartered accountants and business advisors Anderson Anderson & Brown, on the sector.

There has been a lot of activity over the last 18 months or so in the technology space. One of the busiest areas has been software as a service (saas). Businesses in this sector are often what we describe as “sticky” – ie, unless something goes wrong, their clients are likely to stick with them.

One thing any buyer or investor will look at is the visibility of income in a business. It’s one thing to say you expect sales, but the real question is around how many are in the bag. Technology businesses lend themselves very well in that respect. It’s like when you’re buying a mobile phone – you expect to have it for a two or three-year contract. The provider can therefore pretty much back that sale. With saas, it’s very attractive as you can build the platform and add services.

Another area that appeals to investors is around data enablers, where people interpret and monetise information. The more you can harvest data – particularly if you own it – and monetise it, the more attractive your business becomes, especially if there is transferability.

A good example of this would be in the oil and gas sector, where you are seeing control instrumentation for offshore being applied to renewables, and I expect more of that to happen.

Clean technologies are also doing relatively well. The pandemic has accelerated a lot of medium and long-term plans in this area.

I believe saas will continue to grow, not least because the “new normal” has to be underpinned by technology. If you can go to one or a couple of companies and say, “I want you to manage all of my outsourced IT requirements”, it’s preferable to having a large number of people providing you with different services. saas allows clients to focus on their own businesses.

Oil and gas

Scotland’s deals market was subdued overall in the first half of the year as Covid-19 took hold and transactions came to a virtual standstill during the second quarter.

Analysis by Experian shows that the number of deals in the first six months of this year declined almost 73 per cent against the same period of 2019. And the oil and gas sector has been hit hard by the coronavirus pandemic.

Clare Munro, partner and head of Brodies’ oil and gas team, says: “Last year, there was quite a lot of M&A activity and things were going really well. Covid has had a massive impact on the oil price. Anything that impacts the oil price obviously has a knock-on effect on developments and, as a result, a lot of capital expenditure has been cancelled or postponed. The pandemic has been disappointing for the sector, as there was a general feeling that it had just got through the worst of the last downturn.”

Looking at the impact of Covid-19 on the value of deals, Munro gives the example of Premier Oil agreeing in January to buy the Andrew Area and Shearwater sites in the North Sea from BP for $625 million (£482m). This headline price has now gone down to $210m (£162m), reflecting the negative effect of the pandemic. Premier also announced a deal at the start of this year to acquire an additional 25 per cent stake in the Tolmount project for $191m (£147m), but this deal is no longer going ahead.

Munro says: “In some senses, the situation can only improve. This is what tends to happen when there is a big shock to the oil price until people adjust to the ‘new normal’. Covid is having a relatively big impact on the UKCS [UK Continental Shelf]. As a mature basin where fields have lower volumes left to produce, the changes in oil price have a more marked impact on field economics. But there is still life in the North Sea and businesses will want to make the most of their assets.”

Despite such difficulties in recent months, Munro says the sector is resilient and has done an amazing job to keep going during the pandemic to ensure that people could go offshore safely and keep oil and gas flowing.

Looking ahead, Munro says the sector is up for the challenge of embracing energy transition to greener sources and it has an experienced workforce that can use their skills to transfer to renewables.

Callum Gray, director and head of deal origination, corporate finance at Anderson Anderson & Brown, believes that after the initial shock some stability is returning to the oil and gas sector and that will continue as long as a vaccine against Covid-19 is found in the not too distant future.

He says that transactions are still happening, giving the example of Rockrose Energy being recently taken over by Viaro Energy, which has ambitious growth plans in the UKCS. Rockrose produces about 20,000 barrels of oil equivalent each day from a portfolio of assets in the UK and Dutch North Sea.

Gray adds: “Gas has been relatively flat, as you would expect, as businesses went into survival mode from March to June.”


Scotland has built a strong reputation in fintech, thanks to a combination of well-established players in banking, insurance and investment, and successful start-ups assisted by a supportive ecosystem.

Martin Sloan, a partner working in intellectual property, technology and data at Brodies, says: “The reason Scotland has such a good reputation is that you have history with the big institutions, such as Royal Bank of Scotland, Bank of Scotland and Standard Life, and an ecosystem builds up around that.

“More recently, the likes of Tesco and Sainsbury’s banks and Virgin Money have looked to Scotland – Edinburgh in particular – as a place to set up operations and expand.

“Then there are the universities. For example, the University of Edinburgh has always had a very strong reputation for computing science, and it is now well regarded for AI and data. All these factors makes Scotland an attractive place to set up fintechs.”

And Sloan points to a lot of innovation in the area of payment technology for Scottish fintechs: “Historically, we were a cash-driven society, then credit cards came in, followed by chip and pin and contactless. Payment technology has changed hugely in terms of the ability of new entrants to be part of that.

“It was previously controlled by large institutions, but we now have open banking and peer-to-peer payment technology, where cash doesn’t touch an institution.”

Other areas of growth where Scotland has potential are crypto assets and blockchain. Sloan gives the example of Edinburgh-based cryptocurrency wallet-and-exchange platform Zumo, which recently raised more than £1 million from crowdfunding.

Sloan says: “Consolidation is inevitable. For successful businesses there is an attraction in being acquired by a bigger player, which might give them a springboard to a larger market. A transformative deal can help people reach the next level, and there will always be big players looking for acquisitions.”

Fintech is clearly a growing sector and Sloan believes it will expand even more if the recommendations from a recent report by Mark Logan, commissioned by the Scottish Government, are adopted. Last month, the former chief operating officer of Skyscanner published the Scottish Technology Ecosystem Review. This presented a 38-point plan to grow the digital sector. Not long after the publication of the report, Holyrood finance secretary Kate Forbes acted on one of its findings when she announced a national network of technology hubs – tech scalers – to support start-ups.

Sloan says: “The report has lots of recommendations around education, infrastructure and funding. We have great building blocks for fintech in Scotland, and if we implement the report’s recommendations the outlook is good.”

Healthcare and life sciences

Before the pandemic, the life sciences and health sectors were relatively strong, but Covid-19 put an almost immediate stop to dealmaking as attention focused on responding to it.

David Gallagher, partner and high-growth specialist at Brodies, says there was a lot of M&A activity, fundraising, and deals being completed at the start of this year, but Covid-19 quickly changed this.

He says: “Quarter-two of this year for most sectors, including life sciences, was the worst performing since the financial crash in 2008. Businesses were assessing their priorities and focused on putting their business continuity plans in place.”

It is unsurprising that the pandemic has created a particularly busy period. Gallagher says: “There are companies that have pivoted since March to do Covid-19 work in the broadest sense. That could involve the leading-edge development of therapeutics or treatments. or somewhere along the supply chain – such as PPE.

“Many of these companies have done well and there is no shortage of cash to fund activities that are in direct response to Covid-19. A lot of that is coming through government intervention or big pharma placing a lot of little bets, while some of the SMEs we have in Scotland are more agile and quicker to respond.

“A lot of outsourced R&D, particularly in response to Covid-19, is being leveraged by big pharma. Companies in Scotland, the UK and across the world are benefiting from that approach.”

However, that necessary focus on Covid-19 has detracted funding and attention away from R&D in other areas –

traditional disease, oncology and respiratory conditions – adds Gallagher. He says that about 50 per cent of clinical trials worldwide have ground to a halt.

He says: “This is due to a variety of factors. There are healthcare systems that are being overwhelmed and this is preventing access to patients and physicians, and there are supply chain issues globally.”

Looking at when a semblance of normality could return, this is clearly dependent on when a vaccine against Covid-19 will be available.

Gallagher says: “As far as a vaccine is concerned, there are certainly a lot of promising candidates. Once we establish some sort of sense of normality it will allow a lot of backlog to be cleared in respect of clinical developments and trials put on hold, but this will take time.”

He adds: “Life sciences as an industry relies heavily on collaboration, particularly in close contact settings. If you can only operate an R&D lab at between 30 and 50 per cent of traditional, in-person capacity, things are going to take a lot longer to get done. Companies will need to find innovative and collaborative ways of working.”

Looking ahead, Gallagher believes that companies that were financially resilient prior to the pandemic will thrive, because they have stronger balance sheets to ride out the storm as traditional investors become more cautious with their investment approach. And companies that embrace technology and new ways of working, with a culture and mindset that is open to change, will grow.

But, he adds: “There are a lot of promising start-ups that are either looking for their first funding round or are early in their development lifecycle. Scotland as a country has a lot of promising technology and we’re a nation of innovators, but this needs support, the right backing and innovative routes to funding.

“It’s also incumbent on companies to take advantage of the fact that healthcare and life sciences is a global market – that means looking beyond our borders for support, funding and opportunities for licensing or acquisition.”