By Ben Martin
LONDON (Reuters) - Bankers are bracing for a drop in mega-deals in Britain in 2019 as companies cautious about Brexit and other geopolitical risks row back on big transactions following the best year for UK mergers and acquisitions in three years.
Advisors caution that the bitter trade war between the United States and China, a no-deal Brexit and tighter regulation could all deter companies from pursuing more ambitious acquisitions.
"Our view is that next year will be a decent year for M&A but there will be less of the mega-deals," said Eamon Brabazon, the co-head of EMEA M&A at Bank of America (NYSE:BAC) Merrill Lynch.
"Given the potential direction of geopolitics, the world's a bit more cautious and so companies may be less likely to do a $10bn-plus deal in 2019," he added.
The value of deals involving British companies climbed to $466.5 billion (367.96 billion pounds) in the last 12 months, up from $362.7 billion in 2017 and the highest since 2015, according to Refinitiv data.
Outbound M&A by UK firms accounted for $179.6 billion of the volume this year, while inbound deals totalled $142.2 billion and domestic deals between British businesses reached $87.3 billion.
The value of M&A in the UK - which was the world's third largest market for deals - rose even as the number of transactions slid by 7.7 percent to 4,568, as firms pursued fewer but bigger acquisitions.
Globally there were 42 mega-deals worth more than $10 billion, the most since 2015, the Refinitiv data show. Those involving British companies included Vodafone's (L:VOD) $21.8 billion acquisition of Liberty Global's (O:LBTYA) assets in Germany and eastern Europe and Comcast's (O:CMCSA) $40 billion purchase of Sky.
Fears that Britain could crash out of the EU without a deal have intensified since November, when Prime Minister Theresa May struck a withdrawal agreement with Brussels that has since met with fierce opposition from UK lawmakers.
Brexit concerns have hit the UK M&A market in recent weeks and were blamed for the collapse last month of a potential 2.9 billion-pound takeover of British shopping centre owner Intu Properties (L:INTUP) by a consortium including Canadian property giant Brookfield.
Even so, some bankers believe the UK's looming departure from the EU could spur bids for British companies if there are sharp sell-offs in sterling and equities that make London-listed firms look particularly cheap.
"Our focus for the UK market is: are there going to be dislocations in equity and FX markets because of Brexit and as a result are there going to be opportunistic approaches to UK-listed companies?" said Hernan Cristerna, co-head of global M&A at JP Morgan. "What we're very focused on is engaging UK clients on defence advice to be prepared."
Brexit aside, another factor that could stifle dealmaking is regulation and political interference in deals in the UK and elsewhere in the world.
Britain's reputation as one of the most open M&A markets in the world took a hit in July when the government proposed new far-reaching powers to scrutinise and block deals for UK assets by foreign buyers on the grounds of national security.
The proposals, which have not yet come into force, follow similar crackdowns on foreign investment in other countries including the U.S., France and Germany.
"Generally, we've seen industrial policies and protectionism on the rise across different geographies and anti-trust regulators taking longer to approve deals, so we are in an increasingly challenging regulatory environment," said JP Morgan's Cristerna.
"There is some concern that to get regulatory and political approval for some of these large transformative deals will be harder, so I think a lot of our clients are shying away from them."