Preliminary estimates of third quarter UK buyout activity published by the Centre for Management Buyout Research (CMBOR) give a total market value of GBP11.4 billion (ecu 16.2 billion) for the year to date – already substantially above 1997’s record GBP10.7 billion full year value.
Estimated at GBP3.6 billion, 1998’s third quarter was the second highest in value terms since 1989. However, the number of completions recorded, 135, was the lowest since the third quarter of 1995.
Further evidence that the overall market figures are distorted by a small number of very large buyouts emerges from CMBOR’s analysis of deals valued at less than GBP50 million: although 120 such transactions were recorded in the third quarter, they accounted for only GBP800 million of market value for the period. Entry PE ratios for larger deals reached 18.3 in the third quarter, compared with 13.5 in 1997.
Buy-in activity now appears to be declining, with only 42 MBIs recorded in the three months to September, the lowest total since the first quarter of 1996. The average size of MBIs, which rose to GBP59 million from GBP50 million in the third quarter, has increased consistently since mid-1997, when MBI deals averaged GBP11 million.
Growth in average buyout values has been extremely modest by comparison; these averaged some GBP12.7 million in the third quarter, an increase from GBP12.1 million in the preceding three months. Buyout numbers fell slightly to 93, two fewer than in the previous quarter.
As expected, levels of public-to-private deal activity remained high; eight going-private transactions completed during the quarter, taking the tally for 1998 to date to 22 – more than the total recorded for the previous six years.
Flotation activity has been extremely sparse in 1998, and only one buyout was listed during the third quarter, taking the total to six for the year to date.
Falling exit levels are beginning to give rise to serious worries about future performance. Tom Lamb, UK managing director of Barclays Private Equity, CMBOR’s co-sponsor, suggested the UK buyout market may be heading for an “exit pile-up”.
Capital of GBP32 billion has been deployed in more than 1,900 buyouts and buy-ins in the UK in the last three years, whereas total funds raised in the new issue market have averaged only GBP7 billion annually over the past five years. Tom Lamb observed that the trade sale market is now also declining sharply, as one would expect during the current phase of the economic cycle.
Given the high entry PE ratios seen recently in the buyout market, the recent stock market corrections pose a further threat to future returns. The consensus is that earnings growth rates will be lower than most observers predicted earlier this year; as a consequence, Tom Lamb said, “many investors, particularly in the mega-deals, may struggle to match their entry PE ratios on the way out”.
Chris Ward, head of private equity at Deloitte & Touche Corporate Finance (CMBOR’s co-sponsor), predicted a further decline in market activity in the coming months. He pointed out that recent market growth has been driven solely by large deals and added: “The temporary closing of the high-yield market and the caution of some banks will mean that larger deals at frothy prices are going to become harder to justify”.
As a result, Chris Ward envisages a “period of stand-off until corporate vendors’ pricing expectations return to levels that are sustainable on the basis of fundamentals rather than financial engineering”.
Table 1: UK Buyouts and Buy-ins, 1996-1998
Quarter Buyout Value Buy-in Value Total Value
No. (GBPm) No. (GBPm) No. (GBPm)
1996 QI 102 1,097 41 1,955 143 3,052
1996 QII 131 782 65 604 196 1,385
1996 QIII 106 639 49 644 155 1,282
1996 QIV 95 1,135 53 970 148 2,105
1997 QI 121 911 67 1,716 188 2,626
1997 QII 123 948 55 613 178 1,561
1997 QIII 104 995 53 1,179 157 2,173
1997 QIV 97 1,605 68 2,530 165 4,135
1998 QI 106 1,075 66 3,239 172 4,314
1998 QII 95 1,155 46 2,327 141 3,482
1998 QIII 93 1,180 42 2,500 135 3,600
Source: CMBOR/Barclays Private Equity/Deloitte & Touche