Multiples for good quality private companies involved in UK M&A deals increased in 2010 and are likely to continue to rise this year, driven by interest from both trade and private equity buyers, various research shows. One survey suggests Private equity firms on average paid 12.2 times multiples for companies in 2010, compared to 11.6 in 2009. Meanwhile, trade buyers paid an average 11.7 times multiple for private companies last year, up from 11.2.
“Trade and private equity buyers appear to have been gearing up to make further acquisitions over the past few months and improvements in pricing are likely to tempt sellers back into the market,” said Lawrence Price, Director at Rockworth. “Increasing stability and confidence within buyers’ businesses has meant that in the UK m&a is seen again as a route to growth. With increased appetite for quality deals multiples are increasing. Some estimates suggest that in the UK m&a valuations will rise between 10 and 20% this year.
Further evidence comes from Thomson Reuters who report that British companies have more than doubled their dealmaking so far in 2011 to a four-year high of $86bn (£53.6bn).
BP impact on UK M&A statistics
BP’s $9bn investment in oil and gas fields owned by India’s Reliance Industries and Ensco’s $8.6bn takeover of the American firm Pride International, to form an offshore drilling group, are among a slew of significant energy-related deals that have contributed greatly to the surge in mergers and acquisitions between January and the middle of March.
After three years of vastly reduced deal activity, companies have finally begun to spend the cash they hoarded during the downturn, while private equity firms have stepped up takeovers as they rush to meet investment deadlines.
As a result, mergers and acquisitions involving at least one UK party has increased by 164% so far in 2011 from the seven-year low of $32.5bn for the same period last year, when firms hoarded the cash they had, struggled to raise finance to make new acquisitions and held off on selling assets because valuations were low.
“There has been a significant increase in UK M&A activity as the huge number of transactions that have been bottlenecked in the past few years begin to get released,” said Henry Jackson, managing partner of OpCapita, the London-based investment firm previously known as Merchant Equity.
“Banks are more willing to lend and rising asset prices mean companies are happier to sell,” added Jackson, whose previous investments include the MFI retail chain.
UK M&A being driven in part by Private Equity funds maturing
Furthermore, private equity firms, which are typically required to return unspent cash when a fund turns five, are rushing to spend their money after a period of low activity. This is pushing up the volume and value of private equity transactions.
“Financial sponsors [private equity firms] have money burning a hole in their pocket and are being especially aggressive. There are a number of firms that are coming to an end of their investment period and have recently been bidding aggressively. We believe these deals were significantly overpriced as the bidders decided to accept lower returns to get the money out of the door,” Jackson says.
The value of private equity deals in the UK – a subset of the overall UK M&A market – has nearly tripled to $24.6bn this year, compared with the same period in 2010, according to Thomson Reuters.
Advent International’s $1.5bn takeover of the Priory care home and clinics chain and Arcus European Infrastructure’s proposed $1.34bn acquisition of Forth Ports are among the bigger private equity deals reported this year in UK m&a listings, according to Thomson Reuters.