A Numbers Game

The buyers’ market many anticipated has failed to materialise. M&A finds out why

The buyers’ market many anticipated has failed to materialise. M&A finds out why

The buyers’ market many anticipated has failed to materialise. M&A finds out why

Predictions about a surge in buy-outs as solid companies were picked up at bargain prices proved wide of the mark. Values have held up for profitable businesses with assured revenue streams, while others have shelved sales for better times.

‘There aren’t that many deals around,’ says Rod Richards, managing partner of private equity firm Graphite Capital. ‘If you look at what seems to be on sale, businesses that have done pretty well during the recession appear to be holding their value.’

Shaun Middleton, managing director at private equity firm Dunedin, takes a similar view. ‘People running good businesses, who must be fairly switched on, wouldn’t want to sell [in the recession] and didn’t. If you don’t know whether your turnover is going up or down, it’s more difficult to price. Now people can put forward forecasts with greater confidence.’

Recent deals like Gresham Private Equity’s backing of the £32.8 million MBO of support services group Spice, along with ISIS Private Equity’s role in the £20 million buy-out of Encore Tickets, show that conditions are improving. Research by the Centre for Management Buyout Research reveals that the £5 billion of private equity-backed UK buy-outs this year has already outstripped the £4.7 billion recorded in the whole of 2009. That said, dealmakers aren’t getting ahead of themselves.

Mark Wignall, chief executive officer of Matrix Private Equity, argues that a false economy is hampering deals. ‘We’re seeing plenty of attractive companies. Although we are gaining confidence with their financial projections, we are still conscious that they are geared to the UK’s economic recovery. Buyers are thinking about the fact that in a
number of different sectors, prospects for recovery are related to what I call the government’s life support policies, especially low interest rates.’

Graphite’s Richards agrees. ‘One reason fewer companies are up for sale is the rate of interest is still fairly low. A lot of companies, even if they aren’t doing well, can still meet their interest payments. Banks aren’t forcing sales so
if your business isn’t doing well, you wouldn’t choose to [sell] now.’

Anne Somers, the CEO of ATG Media, which owns the Antique Trades Gazette, undertook an £8.5 million MBO from the Daily Mail and General Trust just before the full force of the credit crunch came to bear. ‘We were fairly solid, with good cash flow and we could demonstrate considerable upside. Nothing in our business model gave cause for concern; it was just the economic climate that was likely to make the credit committee wobble.’

Panic stations

In reality, things worked in Somers’ favour, although it didn’t feel like that at the time. ‘It ended up being slightly cheaper because of the timing,’ she recalls. ‘We had the trauma or going back to the vendor and renegotiating our position; certainly from the point of view of the MBO team it was a rocky period.’

A lot of those principles hold true today if a buy-out is to go through. Dunedin’s Middleton observes: ‘Banks will provide funding but only for the right assets. They’re making sure when they come in that they’re not going
to lose money. Good businesses will still get debt.’

The question is who wants to borrow on the terms offered by banks? Richards comments that lending multiples are around 3 to 3.5 times EBITDA and, he confirms, bank debt is clearly a lot more expensive than it used to be in terms of upfront fees and margins. In order to get round this, firms are writing debt themselves and upping the equity component to get deals done.

Now the general election is over, the hope that uncertainties around the economy will evaporate and vendors will be more willing to sell. ‘I don’t think that anyone believes everything is suddenly going to be wonderful [post-election], but it will make it easier to predict which companies are likely to be the winners and the losers over the next few years,’ says Richards.

Race against time

As for private equity firms’ appetite for buy-outs in general, Graphite’s managing partner notes there may be pressure to invest as many private equity funds raised money in the more confident years of 2005 and 2006. ‘That suggests a investment deadline of 2010 or 2011,’ he remarks. However, this may not be enough to kick-start the market, as fund managers could ask their investors for extensions. ‘Investors are more inclined to approve extensions; if they don’t, they are rather inviting firms to invest before the deadline,’ Richards adds.

For Wignall, caution is the order of the day. ‘A lot of people thought the conditions would create a vintage dealmaking environment. Much as I’d like to see that, the honest assessment is that it’s been more of a stuttering return to a fairly normal market. It’s the sensible and logical deals which are coming forward; we’re seeing some good quality, but we’re yet to see quantity.’

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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