UK buyout boom over

Latest numbers from CMBOR confirm the third quarter marked a high point for UK buyouts as fourth quarter figures show an 80% decline without a transaction of the scale of Alliance Boots.

The UK buyout market plummeted by 80 percent in the final quarter of 2007 to £2.9 billion compared with £15.4 billion in the third quarter, according to figures released today by CMBOR, the Centre for Management Buyout Research, founded by Barclays Private Equity and Deloitte.

2007 still produced record total deal value of £42.2 billion compared with £26.5 billion in 2006.

Tom Lamb, co-head of Barclays Private Equity, told PEO the numbers did not reflect some of the announced deals such as Kohlberg Kravis Roberts’ £593 million acquisition of Northgate, a services business. The third quarter also included the Boots Alliance public to private, a European record at £11 billion.

Nonetheless Lamb said the fourth quarter figures suggest quieter times ahead for buyouts. It was the least busy single quarter for UK buyouts since 2003, and puts the UK buyout market back to 1997/98 levels on a run-rate basis.

He said: “It is a real cyclical drop from a high point to a low point. The days of competing in auctions and saying you can complete in a week to get the deal done are over. It is time to be reasonably cautious, careful and thorough. That’s what investors want.”

He said the middle market would be more resilient, but there would still be a slow down: “There is always a dislocation as buyers wait for prices to drop further and sellers for them to recover.”

Buyout firms should resist the pressure to put money to work in this environment. “The notion that you have to do deals is completely the wrong mindset,” he said.

With around £35 billion raised by UK private equity funds in the last two years, Lamb said it could take several years to invest the current generation of funds compared with the two or three years, which has become the norm.

The decline in secondary buyouts is also likely to depress the market. After accounting for 12 of the top 30 exits in 2007, there was not a single secondary buyout above £250 million in the last quarter.

Exit value for the year is down by 24 percent from 2006; there was a record total exit value in 2006 at £26.9 billion compared to 2007 which is £20.5 billion. Although the total number of exits in 2007 is the highest ever recorded at 355.

IPOs of buyouts are also down – 11 of 2007’s flotations took place before the credit crunch.  Lamb said: “Until the credit markets recover, buyout funds could have a problem on both buy-side and sell-side.”

Lamb’s real concern though is at the state of the UK economy. Receiverships are up from 70 in 2006 to 95 in 2007, which is the first rise since 2002. He said: “They are like cockroaches, you find one and there are 10 others lurking. There are plenty of businesses that have for now managed to avoid insolvency through restructuring and refinancing.”

Pricing and debt levels rose in 2007; EBIT multiples have again risen for buyouts over £100 million and stand at 19.7 in 2007 and 16 in 2006. Debt to EBIT multiples are also high for larger buyouts with this ratio reaching 11.4 in 2007 compared to 9.1 in 2006.

Fundraising also fell by 33 percent from 2006 at £15.2 billion, after a record total of £20.2 billion set in 2006.