UK firms' appetite for mergers increases despite growing funding constraints

However, this enthusiasm has not been reflected in actual deals, which fell both in number and by value both in the UK and internationally during the first six months of the year, KPMG said. At the same time, firms' "capacity" for takeovers was likely to fall over the next 12 months, as firms' net debt as a proportion of earnings decreased, it said.

Andrew Nicolson, KPMG's head of UK M&A, said that there were "real pockets of strength to be found" in the market for mergers and takeovers, despite the continuing impact of low oil prices and of "political instability in some regions".

"With the debt markets more accessible than they have been for some time, our view is that the capacity for deals by UK corporates is showing little sign of diminishing," he said. "Couple this increasing buoyancy with a more stable economy and a greater convergence between vendor and purchaser price expectations, and all the signs are there that UK deal volumes will increase steadily over the coming months."

KPMG publishes a 'predictor' tool every six months, which forecasts worldwide M&A trends by both sector and region based on financial data from 1,000 of the world's largest companies by market capitalisation. Its assessment of overall market confidence is based on the rise or fall of companies' price/earnings (P/E) ratios; while its assessment of the capacity of companies to fund future acquisitions is based on their ratios of net debt to earnings before tax, depreciation and amortization (EBITDA).

According to its latest report, UK firms can expect to see an average 13% increase in their forward P/E ratios over the coming year, although net debt/EBITDA is expected to fall by 7% over the same period. Market confidence was lower across Europe as a whole, with an average 8% increase in forward P/E ratios anticipated by June 2016; and in the US, where a 6% increase was predicted.

Worldwide, the potential for mergers over the next year is strongest in the defensive and healthcare sectors, which reported a 7% rise in appetite for M&A, and in the telecommunications sector, which reported an 8% increase, according to KPMG. However, many energy companies had put planned acquisitions on hold as a result of falling oil prices, which had had a knock-on effect on market capitalisation and profits, KPMG said.

However, KPMG's head of energy M&A, Andy Cox, said that market conditions could also result in "opportunistic buys". For example, Royal Dutch Shell announced in April that it was planning a $47 billion takeover of rival oil and gas exploration company BG Group.

"In the broader market, for those corporates with the capacity to transact, this year will present opportunities to uncover some great value in the market," Cox said.