Prices paid for businesses show signs of improvement

The Private Company Price Index (PCPI), produced by accountancy firm BDO Stoy Hayward, tracks the relationship between the current four-month rolling average FTSE Non-Financials price/earnings ratio (p/e) and the p/es currently being paid on the sale of private companies to trade and private equity buyers. It is calculated as the arithmetic mean of the p/es for deals where sufficient information has been disclosed.

On average, larger private companies are currently being sold for 11.1 times their historic after-tax profits, while the metric for private equity purchasers, PEPI, shows that larger private companies are being sold to private equity buyers for 11.8 times their historic after-tax profits.

BDO Stoy Hayward notes that as private companies are generally owner-managed, reported or disclosed profits tend to be suppressed by various expenses that may be non-recurring under a new owner.

While this will have been factored into the price the purchaser paid, it may not be reflected in the profits declared publicly. Consequently, the p/e paid, as calculated from the publicly available information, may be overstated.

Over the last six years, deals included in the PCPI have had a mean size of approximately £21 million and a median size of around £6 million, though the PCPI is an average measure and guide rather than an absolute measure of value.

The PCPI for the second quarter of 2009 shows improvement over the pricing dynamics for the first three months of the year, although aggregate M&A activity declined for the sixth consecutive quarter to a total of 476, from 515 transactions between January and March.

Although the decline in the volume of deals has reduced, the types of transaction taking place differ from those of 2007 and early 2008 in that a greater proportion have undisclosed values.

Debt-for-equity swaps are occurring more frequently as business stakeholders realign their interests in the equity.

Two transactions during 2009's second quarter topped £250 million with private equity involvement, bringing the total of leverage transactions in the last 12 months to five.

The first was an approach made by STT Communications Limited, a subsidiary of Singapore Technologies Telemedia, to Irish telecoms group Eircom through Eircom Holdings, the company's Australia-based parent. It was seeking to replace previous investor Babcock and Brown, currently in administration.

The second transaction was Charterhouse Capital's £553 million acquisition of energy research unit Wood Mackenzie, forming part of British buy-out fund Candover's stabilisation programme to boost cash reserves.

With an uncertain economic climate as a backdrop, the ability to support historic levels of finance raised will become more challenging, prompting companies to realise proceeds from non-core assets to cut their debt burden.

The previous route, where a leveraged organisation repaid debts by relying on business sales to a trade acquirer or refinancing through a secondary buyout, is not currently available in most instances.

Christopher Clark, M&A partner at BDO Stoy Hayward, says this is part of the reason for the lowest pricing metrics being paid during the first three months of the year.

The PCPI shows that the values attributed to the companies being bought or sold from April to June increased against the previous quarter.

Average multiples paid by trade buyers increased 10% from the January-March period to 11.1 times the companies' historic after-tax profits.

The PEPI was up 13% to 11.8 times and the average public company p/e for the Financial Times Non-Financials Index was up 9% at 9.3 times.

Pricing dynamics during the three months to June have shown improvement, Clark concludes, indicating that "as debt availability improves, acquirers can improve the pricing they are willing to pay".

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