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Goodwill Impairments in the UK fell to €7.7bn in 2015 (or £6.5bn at current exchange rates), the lowest level since 2010 according to the 2016 European Goodwill Impairment Study by Duff & Phelps, the premier global valuation and corporate finance advisor. The study, which tracks the STOXX® Europe 600 Index, found that goodwill impairments by UK companies in the index had fallen by two-thirds from a peak in 2012, when they reached €23.7bn.
Goodwill is recorded for financial reporting purposes after a company acquires a business and generally reflects the excess of purchase price over the fair value of the acquired identifiable tangible and intangible assets. Goodwill impairments typically arise when there is deterioration in the ability of the business to generate cash flows sufficient to support its book value.
Against a strong economic backdrop, M&A activity in 2015 returned to pre-crisis levels with both value and volume the highest since 2007 and 2008, respectively. This drove higher deal multiples and P/E ratios for listed companies over the course of the year. Impairments were therefore likely to have been confined to individual deals where synergies were not delivered or where the underlying risks were not fully factored into the original deal prices including, for example, under performance of foreign-based operations.
As projected in last year’s Duff & Phelps study, companies in the Energy industry saw a spike in impairments in 2015. In fact, impairments in Energy increased from €0.4bn in 2014 to €1.3bn in 2015, with approximately 83% of companies that carry goodwill in the sector recording goodwill impairments. This has clearly been driven by the collapse in oil prices, with Brent crude oil dropping 34% from $58 at the start of 2015 to around $38 at year-end. In 2016, oil prices have recovered to around $50, but are still far from the peak level of $115 reached in mid-2014, which means impairment risk in Energy is expected to remain somewhat high for 2016 financial statements. Goodwill impairments in the Industrials and Utilities sectors were also impacted by the low oil and gas environment, increasing in 2015 to €1.6bn and €0.8b respectively, from €1.2bn and €0.1bn in 2014.
Interestingly, the Telecommunication Services industry recorded no impairments in 2015. Historically, this industry had accounted for over a third of total goodwill impairments in the UK primarily due to the effects of the euro sovereign debt crisis, weak macroeconomic conditions and consequent write-downs in a number of European countries, particularly in Spain, Italy, Ireland, Greece and Portugal. For reference, the five-year average goodwill impairment for the Telecommunication Services sector is €5.9bn, compared to the overall five-year average aggregate UK impairment of €15bn.
A comparison between companies in the FTSE 100 Index versus those in the FTSE 250 Index reveals a somewhat different picture. Overall, companies in the FTSE 100 Index, which overlap significantly with the UK companies in the STOXX® Europe 600 and whose operations are more globally diversified, saw goodwill impairments decline by almost half from approximately £8.6 billion in 2014 to £4.3 billion in 2015.
In contrast, FTSE 250 companies’ aggregate impairments showed a slight increase, from approximately £1.3 billion in 2014 to £1.4 billion in 2015. Impairment concentration remained consistently high between the two years, with the top five impairments accounting for about two-thirds of the overall impairment amounts in 2014 and 2015.
Despite 2015 being a very robust year for M&A activity, this overall trend in impairments indicates that UK businesses are still facing uncertainty and valuation challenges.
Michael Weaver, Managing Director, Duff & Phelps, commented, "The STOXX Europe 600 and the FTSE 100 Indices tell quite a different story to the FTSE 250 for goodwill impairment in 2015. Following the Brexit vote in June 2016, the anticipation is that those differences will be more marked for 2016. This is likely to put pressure on all industries in the second half of the year, as impairment testing should take account of a more difficult business environment in cash flow projections.”
"The increasing prospect of a “Hard Brexit” will further heighten impairment risks, particularly for businesses acquired before the vote, where the impact of Brexit was likely not factored into the price or expected cash flows. Following Brexit, M&A activity has also declined, affecting multiples and further increasing impairment risk."
Notes to Editors
For comparison between the indices, 94% of the current constituents of the FTSE 100 and 33% of the current constituents of the FTSE 250 are also on the STOXX® Europe 600 as of calendar year-end 2015.
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M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory and capital raising advisory services are provided in a number of European countries through Duff & Phelps Securities Ltd, UK, which includes branches in Ireland and Germany. Duff & Phelps Securities Ltd, UK, is regulated by the Financial Conduct Authority.
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