MBO activity reflects nervous markets

Despite an improved second quarter, UK MBO activity remains at its lowest level since 1995.

The UK’s MBO market is still struggling to come to terms with the current unease in the public markets, with figures published today by KPMG revealing that management buyout activity in the UK is at its lowest level for seven years.

The total value of buyout activity for the first half of 2002 stands at £7.9bn, down 38 per cent on 2001. The research, which looks at larger UK management buyouts (those with a value above £10m), shows that the total value of activity during the second quarter of 2002 rose from £3.1bn in the first quarter to £4.8bn. However, included in the figures is the £2.05bn buyout of Southern Water – accounting for almost half of the quarter’s total value.

In terms of deal numbers, there was only a marginal improvement from 25 completions in the first quarter of 2002 to 26 in the past three months. This equals the lowest deal total during any first half-year since 1995.

After the Southern Water deal, the largest UK transaction was Cinven’s £820m buyout of NCP from Cendant, which went through in late May. In June, Morgan Stanley’s private equity real estate team agreed a £499m public to private deal to acquire property company Saville Gordon Estates. The third largest deal was Doughty Hanson’s £370m of Priory Healthcare, reflecting a broader interest in the healthcare sector, which accounted for two of the four largest deals this year and four of the 26 deals completed, with a total value of £793m.

“We may have seen a modest improvement in the value of activity in the buy-out market this quarter but this was mainly due to one large transaction so we should not get carried away with talk of a recovery,” said Charles Milner, head of corporate finance within KPMG’s newly-formed private equity group.

The public to private (PTP) sector saw one deal this quarter (Saville Gordon) compared to nine deals this time last year. However, there is a pipeline of four PTPs going into Q3, worth approximately £750m – Brake Bros, Esporta, Kunick and FCX International. Said Millner: “Jittery stock markets and general uncertainty suggest no return to the overall activity levels of two years ago and no real recovery before 2003.”