How would you characterise the M&A market at the moment?
Right now the majority of deals are progressive refinancings as opposed to mergers and acquisitions, and the M&A deals we are noticing are mostly divestments from quoted companies, or large trade buyers purchasing from other large corporates.
It has been relatively quiet for the past year, but we have seen some improvement in the North West, and 2010 was better than 2009. In the early part of 2010 I had expected to see lot more divestments, but (I think that) it’s really only now that PLCs are looking to divest non-core subsidiaries.
With the speed and severity of the recession, remedial action often had to be taken by these companies to stay strong, with cost cutting and consolidation. Now that they have their subsidiaries in a better position they can go to market with more attractive businesses to sell.
Is it getting any easier for businesses to fund deals?
Yes, I think there is evidence of improvements in bank funding, but senior debt is still nowhere near the kind of level it was before.
In the deals we’re seeing there is quite a bit of private equity. Right now asset-based lending is also very popular. There have been quite a number of combination deals recently, involving private equity and asset-based lending. As a result the conventional mid-market private equity deal, with a single investor plus senior debt, is less common.
Is deal flow being held back by the reluctance of vendors to sell at lower valuations?
It really depends on the vendor. For some there is a lack of appreciation of how multiples have changed. This tends to be a feature amongst owner-managed businesses. However with owners at retirement age looking to sell, there is perhaps a greater acceptance that economic activity is unlikely to improve substantially. They understand that they are unlikely to see a great uplift in their valuation within the next two to three years.
At a corporate level there is a bit more realism. They realise that multiples have reduced quite substantially from their peak, and the market has to change for valuations to return to what they once were.
Personally, I don’t think valuations will improve until there is a consistent level of economic growth and a greater availability of bank debt.
How would you access the current confidence in the economic climate among businesses?
I think there is a certain amount of caution amongst business owners. They’re going for more managed and stable growth, rather than growth for growth’s sake. Instead they are investing in things like capital equipment as a secure venture.
A lot of people would like to see growth but accept that it will have to happen in a more sustainable way with finance they can depend on. Up until 2007 corporates acquired quite aggressively and suddenly now have a number of subsidiary businesses that don’t fit as soundly as they would have wished. Because of this, they are now looking to divest and acquire specific businesses that will add value to existing products, or open up new markets.
It’s no longer the case of seeing a good business at a good price, they now realise it has to fit it in with existing core businesses. It’s a more strategic rationale than the previous aggressive acquisitions.
How would you advise companies who are thinking about selling off failing companies? Is it a good time to sell?
I would say that if the fit isn’t there then it probably is a good time. Selling is a good way of freeing up management and finance that can be better spent focusing on core businesses. In not selling you run the risk of spending more time on non-performing businesses than your existing core businesses.
Peadar O’Reilly, Regional Director, Venture Structured Finance