UK businesses have £198bn to fight private equity

Britain’s top quoted businesses will generate £198bn in surplus cash between 2006 to 2008, money it will need, says KPMG’s Cash Counter, to defend itself from private equity takeovers.

The Cash Counter is the UK financial consultant’s latest analytical offering to the finance community, based on estimates from City analysts to calculate a post tax operating cash flow.

The results demonstrate that the FTSE 100 will accumulate £173bn by 2008, and the FTSE 250 £25.3bn. Such money has three main uses KPMG argues: debt repayment, organic or acquisitive growth, and increased shareholder dividends.

David Simpson, a partner in KPMG’s corporate finance practice, said: “Effective balance sheet structuring has never been as important for plcs as it is now. We believe that paying down debt is the least likely option given that corporates are already conservatively financed and indeed reducing debt further would only serve to increase their attractiveness to private equity bidders.”

On the contrary to paying down debt, the research predicts debt levels will actually increase. At the end of 2005, net debt to earnings for the FTSE 100 stood at just 0.85 times and for the FTSE 250 it was 1.7 times. This is way behind the average multiple of 7.7 times for large private equity-backed buyouts.

An efficient balance sheet is the best way to fend off such advances argues KPMG, with debt leveraging an essential part of that strategy. Failure to pursue this course of action will leave companies open to private equity. Simpson says: “Whilst it would clearly be inappropriate for large listed companies to ramp-up debt to private equity levels, there is nevertheless an opportunity here to increase the amount of leverage. This would provide huge potential firepower for UK corporates over the next few years.”