An M&A odyssey

Transaction values picked up during the last quarter of 2009, but the dealmaking heights of 2007 remain a long way away.

Transaction values picked up during the last quarter of 2009, but the dealmaking heights of 2007 remain a long way away.

Transaction values picked up during the last quarter of 2009, but the dealmaking heights of 2007 remain a long way away.

As the punch-drunk UK economy stumbled out of recession in the last quarter of 2009, merger and acquisition activity – albeit unsteadily – appeared to drag itself up from the canvas.

Call centre business Elite Telecom was among the companies that completed a deal in the fourth quarter of last year. It acquired public sector telecoms provider CAN Networks for £1.3 million, although the deal took three months to arrange due to a distinct lack of risk appetite on the part of Elite’s bank.

CEO Matt Newing explains, ‘They wouldn’t let us do the deal under our current structure. They told us that if we wanted to do the deal, we would have to pay our existing debts and then re-borrow money to fund the transaction. Of course they wanted to whack up interest repayments several more points above LIBOR as well.’

Faced with the prospect of renegotiating the loan agreement and paying additional arrangement fees, Elite decided to pay off its existing debt to the bank and Newing provided a short-term director’s loan out of his own pocket to finance the deal. ‘I think it’s absolutely diabolical,’ he says. ‘Banks say they want to lend money, but they don’t.’
The deal was in stark contrast to Elite’s £3 million acquisition of GP Telecom in 2008. ‘The funny thing is, banks were queuing up for that deal; they couldn’t give their money away quickly enough. Now we have to jump through hoops. It’s a completely different environment.’

Exclusive research by M&A and corporate finance information specialist Zephyr into completed – as opposed to announced – mid-market deals between 2007
and 2009 shows exactly how tough conditions have become for dealmakers.

The number of deals has fallen by 54 per cent since the giddy dealmaking heights of 2007, while deal values fell 65 per cent to £136 billion. The proportion of straight acquisitions, compared with buy-outs, increased from 81 per cent in 2007 to 87 per cent two years later (see chart, page 59).

Mark Lucas, head of corporate finance at RSM Tenon, says, ‘There are fewer buy-outs because there isn’t the debt to fuel them. Leverage has just not been available.’

Equity to the fore

David Roberts, a partner of law firm Olswang, says that debt-starved firms are being forced to inject more equity into deals: ‘Private equity firms have tended to use as little equity as possible. Banks have changed that process. The more capital that firms have to put in, the lower their returns.’ Interestingly, institutional buy-outs (IBOs) account for 25 per cent of total transaction value in the past three years, but only 5 per cent of deals.
One investor that has stayed active during the UK’s economic crash is LDC, the private equity arm of Lloyds Banking Group. It managed to complete 11 deals in 2009, five more than its nearest rival, according to the research.

The firm currently has 65 portfolio companies, with a combined turnover of £3 billion. Carl Wormald, a director at LDC, says, ‘We’ve always invested throughout the cycle. This should be a vintage year for private equity; there is a significant reduction in valuations and vendors are now more comfortable with prices.’

Mash up

The upheaval in the funding environment has led some firms to explore alternative deal structures. Olswang’s Roberts says that larger private equity firms are following the example of their venture capital brethren by taking a minority stake in companies, which can allow for a partial exit for a business owner in certain instances. ‘A partial exit enables the founder of a business to cash out some of his shares, while at the same time receiving the management [and expertise] that private equity houses bring to bear on a business,’ he comments.

The recession has seen a growing number of high-net-worth individuals come onto the M&A market, hunting for bargains. RSM Tenon’s Lucas says, ‘There’s a lot of money around that is trying to find the right home. We’re seeing more interest from individuals who would like to access private equity deals but don’t know how to. With higher taxes on the horizon, tax relief for private investors via the Enterprise Investment Scheme (see page 18) can facilitate deals.’

RSM Tenon worked on just such a deal when the emergency car rental company Car Crash Line was bought out of administration by a group of high-net-worth individuals. After the company tumbled into administration, a group of investors was identified within 24 hours, thereby saving 170 jobs.

Going to market

Naturally, the tried and tested ways of obtaining finance without a bank haven’t vanished altogether. Roberts says, ‘A number of [public companies] will be tapping capital markets for a war chest. There will be more rights issues and secondary offerings this year to shore up balance sheets for acquisition finance.’

As for alternative finance providers, Peter Ewen, managing director of Venture Finance, observes that many asset-based lenders have gone back to their roots: ‘Before the credit crunch, there was a tendency for asset-based lenders to provide cash flow facilities, but that has waned as ABL providers go back to what they know, which is lending against assets,’ he says, noting that advisers are also showing a greater willingness to recommend ABL facilities to enable a transaction to go through.

Tech Deals

While M&A activity across most sectors has been subdued, the area of software and IT services remains a fertile ground for dealmakers, reporting an 11 per cent rise in the number of transactions to 127 from 2007 to 2009.

Elsewhere, it was an altogether different picture. The number of construction deals in 2009 fell 56 per cent from its peak in 2007 to 65, while the total value decreased by 95 per cent to £570 million. Manufacturing inevitably suffered as deal volumes fell by 45 per cent to 147 in 2009.

Regionally, companies in London were the most sought-after targets between 2007 and 2009, accounting for 23 per cent of deals by volume (1,814) and 37 per cent by value (£122.5 billion).

Dealmaking in the North suffered the most, where the number of acquired businesses fell 56 per cent from a peak of 87 in 2007 to 38 two years later.

The region that managed to resist the recession most successfully was the North West, with a decline of only 23 per cent, from 245 local acquisitions in 2007 to 189 in 2009.

Deals originated from overseas acquirers remained a flat 23 per cent from 2007 to 2009 (see chart, right). US companies were by far the biggest acquirers of UK businesses, accounting for 7 per cent of all acquisitions, while developing countries have yet to make a mark in the UK market. The BRIC (Brazil, Russia, India and China) economies, for instance, accounted for less than 1 per cent of deals.

For Roberts, this may be about to change: ‘In 2008 there was a big increase in M&A activity from India including the acquisitions of Corus and Virgin Radio. But there were six or seven Indian floats that performed poorly
on AIM in 2009 and that stalled the Indian invasion.
‘India’s GDP [gross domestic product] is expected to grow 9 per cent this year and their economy is looking further afield for the first time.’

While overall M&A deal values are still down, the research indicates that there has been a sustained increase in total deal values over the course of the year, from £15 billion in the second quarter of 2009 to £62 billion in the
last quarter.

For Neil Sutton, head of corporate finance at PricewaterhouseCoopers, the resurrection of the market is all about the increase in banking appetite: ‘Senior debt is more available now. A year ago, you would need to put three banks together to do a £100 million deal; that’s beginning to change. There’s definitely more confidence.’

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Nick Britton

Nick Britton

Nick was the Managing Editor for 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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