Value of UK MBOs surge

The total value of UK management buy-outs above £10m reached a record high in the second quarter of this year, with half of the £7.2 billion figure being accounted for by just two deals, according to KPMG's quarterly management buy-out survey

One of the two mega deals was the institutional buy-out of BT's Yell Group by Apax Partners and Hicks Muse Tate & Furst for £2.1 billion. The other was Deutsche Morgan Grenfell’s buy-out of Whitbread pubs for £1.7 billion. The 29 remaining deals accounted for the £3.4 billion of activity during the period.

As the larger deals dominate the scene, the number of MBOs has been declining since 1998. Only 66 deals have so far been completed this year, compared to 87 deals struck in the first half of 1998.

The KPMG survey, which also includes public to private transactions, has seen a continuation in this trend over the quarter. Nine public to private transactions worth a total of £2.5 billion took place this quarter, bringing the total for 2001 to 18.

The survey also saw three secondary and the first tertiary buy-out of Heavy Machinery Group by Bank of Scotland Integrated Finance. KPMG believes that more of this type of buy-out is likely to be seen in a market where IPOs remain a difficult route for private equity exits.

Michael McDonagh, head of KPMG private equity, London, believes that deal volume has stabilised. “I don’t think there is any signs of deal volumes increasing at the moment. Although they may bounce back a bit in six to nine months time,” he comments. He also believes that a number of houses are increasing their average deal size so they get more cash out over a fewer number of transactions.

Charles Milner, head of private equity at KPMG corporate finance, said: “Over the last few years we have seen the shape of the buy-out market change with larger deals becoming ever more prevalent. This is clearly in evidence this year with three deals passing the £1 billion mark.

“As the UK M&A market has suffered a sharp downturn and with the ongoing malaise in the capital markets, the buy-out sector is inevitably impacted with deal volumes depressed,” he added.

Milner believes that as economic uncertainty prevails the next six months will see vendors having to bring their expectations sharply into line. “We are seeing a number of transactions being revisited as vendors re-open negotiations at more realistic price levels. The bottom line is that deals continue to be closed – they are just taking longer.”