UK market set for second half upturn

The continued lull in the UK buyout market masks a healthy increase in dealflow which will come through in the second half of the year, according to a new report.

The second quarter of 2003 produced a small increase in the number of management buyouts taking place in the UK, although the overall value of MBOs fell to its lowest level since the end of 2001, according to a report from KPMG’s Private Equity Group.


The report, which studies buyout transactions worth more than £10m, reported 29 deals totaling £2.013bn compared to 26 deals worth £4.79bn in the same period last year. The average value of transaction fell to £99m for the first half of 2003 compared to £155m for the first half of 2002.  


However, the report highlighted a marked improvement in dealflow which, according to Charles Milner, head of corporate finance at KPMG’s private equity unit, is set to produce a healthy increase in deal volumes in the second half of the year, which could result in a similar situation to the one seen in 2002, when there was a significant upswing in deal activity, particularly in larger volume buyouts.


“Whilst the overall figures show continuing lower levels of completed deals to the end of June, this in fact masks a significant increase in activity, which we fully expect to come through in the second half of the year,” explains Milner.


According to the report, factors contributing to the increased level of activity include more realistic pricing, improving visibility of earnings, signs of a return to more normal levels of merger and acquisition activity and the increase in secondary and tertiary transactions. “A number of larger transactions have come through recently, including Linpac, Holmes Place and Fitness First as well as the possibility of a delisting of Debenhams.”


As reported by the Centre for Management Buyout Research last week, the predicted upsurge in public to private activity has not occurred, with only eight such transactions completed in the first half of the year. “The continuing low level of public-to-private completions is not a surprise. There has been recent evidence of institutional resistance to management led offers for public companies.”


According to Milner, the forthcoming IPO of Yell will be an important yardstick for the exit market over the coming six months.  “A successful IPO of Yell will be a welcome sign of the capital markets returning as a means of exit for larger deals.”


Milner added, “The question for all those involved in private equity is whether the improved activity levels will convert into completed transactions. The signs are good but closing transactions remains an issue with all involved exercising caution borne out of recent experience.”