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Private equity to play increasing role in M&A

Private equity as a proportion of European M&A activity has risen by 219 per cent in terms of the number of transactions and by 329 per cent in terms of their value since the start of 1996 until the middle of this year. And the proportion of private equity funded transactions, as a percentage of the total number of M&A transactions, has increased from seven per cent in 1996 to over 13 per cent last year. These figures relate only to transactions that fell in the GBP100 million to GBP2.5 billion bracket. The findings were featured in a report recently published by Cinven which not only concluded that private equity participation in the European M&A market has grown dramatically but that it expects this growth to continue.

Continued growth is anticipated in view of the fact that shareholder-value-driven strategies have recently been embraced in many continental markets. The relative infancy of the concept in mainland Europe means the bulk of restructuring and consolidation in these markets is still to come. The report, which looked in particular at the UK, France and Germany, noted that further structural and regulatory changes within continental markets will drive M&A activity in the coming years. The case of Germany was highlighted: the abolition of capital gains tax on the sale of corporate assets, not expected until the start of 2002, is expected to spark significant restructuring within major quoted German companies.

The report notes: “Cinven believes that this development in itself will prove one of the single most significant factors facilitating the divestment of cross shareholdings, which remain commonplace across corporate Germany. Such a situation would unquestionably give rise to unprecedented M&A activity focused primarily on asset divestment in central Europe.” (Earlier this year, following in the footsteps of many others, Cinven announced that its Frankfurt office was open for business.) The report also notes that, as the drive for greater industrial focus and consolidation results in an ever-increasing level of non-core asset divestment by major corporates, private equity firms will be better placed than many trade buyers to take advantage of this situation. This is because trade buyers may be suffering from a depressed share price if their industry is no longer fashionable and trade buyers can find themselves prevented by regulatory restrictions that a private equity investor is not governed by.

Added to all of this there is a growing recognition for and understanding of private equity and its uses in continental corporate circles, helped both by headline buyout stories such as Finalrealm and Rover, and by the positive stance taken by many European governments to encourage private equity investing at the venture stage.

While the growth percentages of private equity involvement in European M&A transactions (see earlier figures) is impressive, these figures are set against five years of consistent year on year growth in the M&A market. Within the GBP100 million to GBP2.5 billion range used in the Cinven report, the total number of transactions has risen from 255 in 1996 to 631 in 1999 – that is, by 78 per cent. The aggregate value of these transactions per year also rose by 92 per cent from GBP145 billion in 1996 to GBP279 billion in 1999.

The average value of private equity deals grew by 35 per cent from

GBP216.8 million in 1996 to GBP291.6 million in 1999. And for the first six months of 2000 the average deal size weighed in at GBP329.4 million. This increase was caused by 17 of the total deals in the GBP100 million to GBP2.5 billion range in the first six months of this year having a value in excess of GBP500 million. Two of these 17 transactions, Finalrealm and Avecia, were each worth over $1 billion. The aggregate value of private equity funded transactions for the first half of 2000 is GBP12.2 billion.

The UK remains the largest single segment of private equity funded M&A activity in Europe. In 1996, 57 per cent of private equity funded M&A in the GBP100 million to GBP2.5 billion bracket was undertaken in the UK, with the figure slipping to 52 per cent in 1999. In absolute terms this represented 13 deals with a combined value of

GBP3.2 billion in 1996 and 40 deals with a combined total of GBP12.2 billion in 1999. This compares with the picture in France, where just two deals with a combined value of GBP325 million were recorded in 1996 , rising to eight deals with a combined value of GBP2.1 billion recorded last year. This latest figure meant that France accounted for 19 per cent of non-UK European private equity transactions last year.

Despite the great things expected of the private equity market in Germany, this market yielded just five transactions with private equity involvement in the GBP100 million to GBP2.5 billion range in 1999, although Germany did manage eight such deals the year before. However, in the first six months of 2000, Germany had already matched its performance for the whole of 1999.