M&A ACTIVITY CONTINUES TO FALL BUT LENDING CONFIDENCE COULD BE RETURNING, SAYS BDO STOY HAYWARD LLP
Despite its fifth consecutive decline, quarterly sales of privately owned UK mid-market companies fell only marginally in Q1 2009. Company prices however, contracted by a substantial 12 per cent, according to BDO Stoy Hayward LLP’s latest Private Company Price Index (PCPI).
Impacted by a lack of debt funding for mid-market deals, the volume of private company transactions last quarter, at 493, was in line with the 494 deals recorded in the index in Q4 2008. However, the figure is still at its lowest level seen for over 10 years and is down by 57 per cent compared to the 1159 deals seen in the same period in 2008.
The majority of deals that occurred in Q1, (402 deals) were trade sales (sales to non-private equity firms), which were down by 11 per cent from Q4 2008. On the other hand, transactions involving private equity buyers (91 deals) fell by only one per cent over the same period.
According to BDO Stoy Hayward’s latest figures, company prices also continued to fall. The PCPI, which tracks price/earnings (p/e) multiples paid by trade buyers for private companies, fell by 12 per cent in Q1 to 10.1 times (sold for 10.1 times their historic after tax profits) from the 11.5 times seen in Q4 2008.
The Private Equity Price Index (PEPI), the equivalent metric for private equity purchasers, saw a decline of 10 per cent to 10.4 times from the 11.6 times seen at the last quarter of 2008. The average public company p/e ratio for the FTSE Non-Financials companies (FTNF) was 8.5 times, down six per cent between Q4 2008 and Q1 2009.
Despite falls in both deal volumes and private company prices, the M&A community is beginning to pick up on a conveyed message from a number of lending institutions that they are now open for business, according to Paul Russell, corporate finance partner at BDO Stoy Hayward in Southampton. He said: “There appears to be more optimism in the marketplace as the combination of government and banking initiatives begin to kick-in. Nevertheless, it will take some time for the appetite of banks to fund leveraged transactions, to fully feed through to the execution of deals in the pipeline. Given the higher capital cost of funding transactions from equity however, it is not surprising that deal pricing is down.
“Whilst the reduced volume of deals and prices remain a frustration, there are reasons to be cautiously optimistic about the future. An increasing number of blue-chip funders are actively seeking investment opportunities and whilst we acknowledge that a return to the peak in the market, evidenced in 2007 will be a long way off, the foundations are being laid for a return to normal, albeit conservative, level of funding.”
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