After a protracted downturn, the UK private equity marketplace has been considerably more active in the second quarter of 2013, indicating that it may have finally turned the corner.
Figures from Corpfin and BDO place the number of private equity deals in the second quarter of 2013 at 91, up from 86 in the 2nd quarter of 2012, and the highest number of PE deals for the past five quarters.
Moreover, if we look at the ratio of Enterprise Value (EV) to Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) of companies that have been bought by private equity groups, we see that this is sitting at an average multiple of 10.5, the highest level for a year.
Companies like ECI Partners are among those heading up the revival in this area. The investment fund has been carefully weighing up its burgeoning courage in the M&A sector against low income growth from interest on safer investments. Its confidence levels have now reached sufficient levels that acquisitions are becoming the preferred option.
The travel sector in particular has always held a strong pull for the company. After holding off on pursuing new acquisitions due to the uncertain economic climate, the fund went back into gear earlier this year with the purchase of Amber Travel, an over-55s tour operator. With a turnover of £67 million in the year to the end of September 2012 and itineraries across 40 countries, Amber Travel looks to be a strong opportunity, with growth of 20 per cent predicted over the coming year.
Rob Lawrence, director of Acquisition Finance at Lloyds Bank commercial division, which provided the senior debt to support the transaction, added that the company presents a “resilient business model”, that is “well placed to continue growing in its niche travel markets”.
However, it’s clear that Amber Travel is something of a safe bet, and is indicative of the hesitant approach that looks set to continue for at least another year. A string of cancelled deals - such as Britvic and Barr, and the Borealis Infrastructure Management Inc. and its Kuwaiti-British partners’ plan to take over the water utility Severn Trent - confirm that although growing, market confidence has still some distance to go before it reaches the bullish outlook seen in the years before the recession.
The picture is a little greyer for acquisitions by trade buyers (average deal size of £36 million / median deal size £12 million), which have dropped to 471 in the 2nd quarter of 2013, down nearly 10 per cent on the 521 trade deals completed in Q2 of 2012.
BDO’s Private Company Price Index (PCPI) indicates that the average Enterprise Value (NV) to Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) multiple for trade deals was just 6.9 for the 2nd quarter of 2013, down from 9.4 in Q2, 2012. Historically, this multiple is very low, and in recent years has only been matched by the 6.7 multiple recorded in Q2 of 2009.
It seems that the upturn in the economy is taking longer to trickle down into the private trade deals marketplace, partly contributed to by trade buyers continuing to experience problems in getting access to finance.
However, there are several factors supporting the theory that the private deals marketplace is also on the turn.
An increase in foreign confidence is often one of the first signs of a return to growth and tends to precede a stronger domestic uptake in acquisition activity. Figures released by Dealogic show that investment banks - mostly US-based - have earned £6.6 billion from private equity deals so far this year, the highest level since the same period in 2007 when revenue was £8.7 billion. And according to the Office for National Statistics (ONS), foreign investment in UK companies rose by 68 per cent in the first quarter of the year, with around £3.2 billion pumped into British businesses through the M&A market.
The UK economy is improving, with unemployment down by 57,000 in the year to June 2013 and retail sales up by 2.2 per cent. Service sector statistics from the CBI show that activity reached its highest level since 2007 and confidence increased for its fourth consecutive quarter. The CBI has just upped its UK growth forecast to 1.3 per cent in 2013, 2.2 per cent for 2014 and 2.5 per cent for 2015.
The stars are all in alignment for some very lucrative private acquisition opportunities for a short window period. The low multiples being paid right now by trade buyers will not last as competition increases. We know that private equity players are moving back into the market with gusto, building market momentum. Big deals are being done overseas, particularly in the US and Europe, and foreign companies are already targeting the UK. Confidence is returning to the British economy.
As BDO’s Peter Hemington commented, “expect to see companies shaken from their stupor and the deal environment to improve across the board.”
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