Dealmakers look to the second half of 2008. Rupert Cornford reports.
Regional dealmakers are contemplating one of the toughest years this century as the total value of North West deals in the second quarter of 2008 slumped to its lowest level since 2005.
According to recent figures from The Centre for Management Buy-out Research, the value of regional transactions reached £210m in the three months to June, less than half the £535m achieved in quarter one and the lowest quarterly figure since the fourth quarter of 2005.
A flurry of activity in the first three months of 2008 – led by the capital gains tax changes – propped up transaction values but the subsequent period has seen many people’s pessimistic expectations come true with a dearth of transactions making it across the line.
According to Paul Lupton, head of corporate finance at Deloitte in the north, two issues continue to blight the efforts of the corporate finance community and demonstrate how much the market has changed.
“While buyers have adjusted their prices down since the credit crunch first hit, vendors have still not caught up, causing delays in the deal process,” he said. “Funders are also conducting more due diligence to ensure the viability of each opportunity, which takes more time and increases the risk of new issues arising or deal fatigue setting in.”
John Walker, director of Barclays Private Equity in the North West, believes the rest of the year will remain challenging. “We should expect to see sluggish behaviour in the market as private equity houses struggle to deploy resources as fewer UK businesses put themselves up for sale.”
It’s true that fewer business owners are deciding to enter into processes, but for those who choose to their decisions could change the landscape of the second half significantly.
The Endless-backed management buyout of Lancashire-based Crown Paints in August – thought to be worth about £70m – is one example; and the recent agreement by Macclesfield-based Bodycote to sell its testing division to New York-based private equity firm Clayton, Dubilier and Rice for £417m is another.
Jonathan Boyers, head of corporate finance in the north at KPMG, worked on the Bodycote deal. “In general, corporates are facing tough decisions on where to focus their resources – financial and managerial – and this will lead to disposals of businesses that are not viewed as top priority.”
The number of transactions driven by restructuring decisions is expected to increase in the second half of the year, and while the mid-market has seen deal value slump towards the bottom end, these two deals will restore some degree of faith to those feeling worse for wear after the first six months of 2008.
There are others, too, which continue to defy the negativity.
The north of England recently came out on top in a regional survey of deals done in the equity gap.
The study by Corpfin Worldwide explored all transactions completed between May 2007 and April 2008 with an enterprise value of between £5m and £15m. This highlighted a particularly competitive offering in Manchester and Leeds, where 18 deals completed compared with just 13 in London and eight in the south of England.
Peter Armitage, partner at Key Capital Partners, believes the shift in focus of private equity firms has left investment opportunities open at the bottom end.
He said: “In the north, more deals have begun to incorporate an element of private equity investment, probably derived from the fact that there is greater awareness among the wider community of the role this method of funding can play in developing a growing business.”
“Advisers in the north also tend to be highly experienced in the equity gap space – logical when you consider the region’s history of manufacturing, which was a prolific area for buyouts when the private equity industry was in its formative period.”
So what hope for the rest of the year? With current trends it is unlikely the values achieved in the past two to three years will hold up, but the number of deals at the lower end of the market is likely to boost confidence.
The market, however, remains unusually quiet and there is no getting away from the fact that fewer opportunities are presenting themselves. Is it a period of adjustment, or the beginning of the end? Well, that depends who you talk to but as the summer holidays come to an end and dealmakers look at their pipeline for the rest of the year there will be mountains to climb and issues to be resolved, and it will be as testing as it has been for a very long time. “I would be surprised to see the market pick up significantly in quarter three and four,” said Lupton.