Transactions down but values hold

The third quarter of 2008 saw a marked reduction in the number of deals that completed in the UK. However, for those that did, prices held steady. The Private Company Price Index (PCPI) p/e ratio for sales of companies to trade acquirers was 11.5 times, up marginally on the previous quarter's 11.3 times. Similarly, the Private Equity Price Index (PEPI) p/e ratio was 11.2 times which remained relatively unchanged from the previous quarter's 11.1 times.

To recap, the PCPI, compiled by BDO Stoy Hayward, tracks the sale prices of large businesses as a multiple of their after tax earnings. However, as owner managed profits tend to be understated to avoid taxation then the multiples will tend to be overstated as the information is gleaned from publicly available information. The (PEPI) tracks deals done by private equity buyers.

By comparison, the FT Non-Financials Index (FTNF) fell 11 per cent this quarter from 12.4 times to 11.0 times, most noticeably hit by the turmoil in the markets caused by the collapse of the banking sector in the second half of September.

The principal reason why the average multiples of public listed companies fell and those of private companies, by comparison, did not is that multiples in the public markets move in real time whereas there is invariably a time lag between an M&A transaction being agreed in outline, based on multiples at the time, and the completion of that transaction after due diligence and detailed legal negotiations have concluded.

The recent upheaval in the financial markets will have postponed or killed many deals but, while this has affected volumes, the effect on values will not be seen in the indices until Q4 2008.

Given that volumes have reduced, the static pricing observed in the private company arena suggests that vendors who do not need to sell are holding out for reasonable prices rather than feeling forced to sell at a discount into a turbulent market. The total number of deals in Q3 2008, at 567, was 35 per cent down against Q3 2007 with the volume of trade sales falling by 36 per cent over the year and private equity deals dropping by 28 per cent.

Graph 1 illustrates the number of transactions per month over the last two years.

The second half of 2007 saw the first signs of the slow down in the market for large (>£250m) deals as banks became reluctant to lend to each other and the required syndication, or risk sharing, of debt became almost impossible to facilitate. The impact was felt less in the mid-market as the majority of transactions were comfortably financed by individual lenders without the need for banks to club together pre deal or syndicate post deal.

Since Q3 2008 however, the seizure in the banking market has meant that all deals have been affected, irrespective of size.

Graph 2 illustrates the total number of trade and private equity deals per month in 2007 and 2008 for the large (>£250m) and mid-market (£50m-£250m) segments.

Due to the rapid contraction in the funding markets, only deals of real quality are still being transacted. This indicates that buyer, investor and financing appetite remains even though the required returns are understandably higher and the approval processes are more tortuous.

Given the inflationary impact of energy prices, labour rates and financing costs we see the next year being characterised by a growing number of companies being hit by the wider economic malaise and defaulting with their lenders. This will result in a significant increase in the volume of accelerated M&A deals which is good news for buyers seeking to increase market share by acquiring undervalued assets.

While many of these deals will not be reflected in the PCPI and PEPI, as they are often not reported or there is no multiple available, the few that are reported will form a drag on the indices over the coming year.

Share this article

Latest Businesses for Sale

View more businesses for sale