Dealmakers wrestle with Brexit's fallout

By Sophie Sassard, Pamela Barbaglia and Greg Roumeliotis

LONDON/NEW YORK (Reuters) - Bankers and lawyers advising companies on takeovers and initial public offerings from London to New York fretted over their deals on Friday, after a British vote to leave the European Union poleaxed company valuations and executive confidence.

Dealmakers spent the day making calls to company executives as they scrambled to assess Brexit's impact on upcoming transactions. It quickly became apparent that, while British companies were in the eye of the storm, deals involving European and North American companies could also be affected.

"We have a cross-border transaction that was supposed to get signed today and it was delayed until Monday. I suspect they want to take the time to think about whether they want to do the deal right now," said Michael Kendall, a Boston-based partner and co-head of private equity at law firm Goodwin Procter LLP.

German regulators contested plans on Friday for a merged Deutsche Boerse (DB1Gn.DE) - London Stock Exchange (LSE.L) to be based in London following the British referendum, while one politician even said the deal was now as good as dead. The two companies saw their shares drop around 9 percent, but said they would stick with their plans.

Shares of Monsanto Co (MON.N) slumped 4.6 percent as more investors doubted the prospects of a successful acquisition of the U.S. seeds company by Germany's Bayer AG (BAYGn.DE). Shares of Medivation Inc (MDVN.O), the U.S. cancer drug company resisting a hostile takeover by France's Sanofi SA (SASY.PA), dropped more than 3 percent.

"We've put our seat belts on and are prepared and ready for a potentially bumpy road," Ben Higson, head of London Corporate Practice at law firm Hogan Lovells.

Companies with direct exposure to the British economy are much more likely to see their deals scuppered compared to those just caught up in the global market volatility, dealmakers said.

"All the third-quarter deals pipeline is on hold and there is uncertainty for the last quarter," said a London-based M&A banker who declined to be named.

"Volatility, sterling devaluation and political turmoil are the main issues. In this market you can't negotiate anything and those who need to raise cash are in deep trouble," he added.

Nonetheless, even deals that made it to the finish line on Friday were affected.

U.S. specialty property and casualty insurer National General Holdings Corp (NGHC.O) said on Friday it would acquire peer Elara Holdings Inc for $165 million. While none of the companies' business had ties to Britain, National General Holdings Chief Financial Officer Michael Weiner told Reuters he would delay the issuance of preferred stock until the volatile markets became more receptive.

Bankers also expressed concerns about having to sell on loans they underwrote for deals at discount prices. The prices of junk-rated loans in particular slumped on Friday as investors stayed away from risky assets.

Pre-Brexit jitters had already taken a toll, with M&A activity in Britain and Europe this year at its lowest as a proportion of global activity since records began in 1980, according to Thomson Reuters data.

The value of M&A involving British companies has reached $57.6 billion so far this year, down 69 percent on the same period last year, representing the slowest year-to-date period since 2013, the data shows.

The United States, the world's biggest M&A market, is also already down on the year. Acquisitions of U.S. companies totaled $662.1 billion so far this year, a 28 percent decline year-on-year, according to the data.

"Brexit is more than a small blip, but its significance to the M&A market globally will decline as the manner in which Britain exits the European Union becomes clearer in the coming weeks and months," said Joseph Frumkin, a New York-based managing partner of law firm Sullivan & Cromwell LLP’s mergers and acquisitions group.

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To be sure, some deals are still getting done. German consumer products group Henkel (HNKG_p.DE) said on Friday it would buy U.S. laundry and home care company The Sun Products Corp from buyout firm Vestar Capital Partners in a deal valued at $3.6 billion, including debt.

"My advice to clients is keep looking, keep analyzing but don't rush anything," said Dietrich Becker, a London-based partner at boutique advisory firm Perella Weinberg Partners, which worked with Henkel on the deal.

Some U.S. dealmakers worried that if market volatility persists, it could hamper deal making for the remainder of the year.

"In presidential election years in the U.S., the M&A market really slows down considerably come September, particularly when there is no incumbent and the market is uncertain, so people were rushing to get deals done. The heightened volatility over the next few weeks may mean that window has disappeared," said Alan Klein, co-head of Simpson Thacher & Bartlett LLP’s mergers and acquisitions practice.

A valuation plunge and difficulties in accessing funding may force some companies to consider delisting or a distressed sale, banking sources said, flagging opportunities to buy British companies in bargain deals.

"Britain will likely become a target nation for overseas buyers," said a London-based banker, adding that sterling's depreciation will hit UK corporations' ability to buy businesses abroad.

Equity capital markets deals, which are down 40.8 percent in Europe since January, are also set for a freeze in the wake of Brexit, although Bidhi Bhoma, director of corporate finance at Shore Capital, said he was confident that activity could resume in September.

"There will still be cash inflows to fund managers, and they won't be sitting on their hands because of Brexit," Bhoma said.