Preliminary end-of-year figures for 1997 saw the UK buyout market breaking the GBP10 billion (ecu 15 billion) barrier for the first time, according to the Centre for Management Buyout Research (CMBOR).
CMBOR valued the market at GBP10.4 billion, 33% up on the previous record total from 1996 (Table 1). The number of transactions recorded rose by 20, or 3%, over the 1996 record to an all-time high of 660 (Table 2).
A decline in deal numbers during the second half of the year, down 44 compared with completions during the first six months of 1997, was counterbalanced by an increased incidence of larger deals, resulting in a GBP1.4 billion jump in market value during the second half.
These figures, significantly higher than previous estimates, reflect the current UK trend towards mega-buyouts. According to CMBOR, 1997 saw 16 transactions valued at over GBP100 million each, compared with ten in 1996: one of these was Nomura’s GBP700 million acquisition of bookmaker William Hill, which CMBOR, unlike fellow market statistics watcher KPMG Corporate Finance, classified as a buyout. CMBOR explains that different classifications, together with its extensive recording of smaller (under GBP10 million) transactions, accounts for the wide discrepancy between CMBOR’s preliminary total for the year and KPMG’s, which valued the market at GBP7.14 billion.
In parallel with the increase in numbers of larger transactions, entry prices for larger transactions continued to rise during 1997. Historic EBIT multiples rose to 15.4 for deals valued at GBP25 million or more, and to 11.1 for deals in the GBP10-25 million bracket. Externally initiated deals – buy-ins and institutional buyouts (IBOs) made up 57% of market value and accounted for 35% of transactions by number. Private vendors continued as the source for the majority of buy-ins while, overall, private company sales marginally exceeded corporate divestments as a source of deals. CMBOR comments that this reflects concern over future taxation policy as well as a desire on the part of private company owners to take advantage of current pricing levels.
After a slow start, buyout exits recovered during the second half, but ended 1997 12% short of 1996 levels; buy-in exit levels, by contrast, rose 14% to 57 during the course of the year. Overall, 28 flotations of buyouts and buy-ins were recorded, compared with 40 the previous year.
Other trends identified by CMBOR include an increase in the number of leveraged build-up (LBU) transactions, and, based on preliminary figures, a rise in debt: equity ratios to the highest levels since 1989.
1997 was characterised by exceptional levels of fund raising for both UK and pan-European buyout funds. CMBOR points out that the GBP10.6 billion raised in 1996 and 1997 (which excludes allocations by captives) is double the amount of equity required to fund UK deals during the same period.
This “wall of money” is a major factor driving UK private equity houses’ expansion into Continental Europe. CMBOR predicts that the buyout markets in France, Germany, Sweden, Italy, the Netherlands and Switzerland will all prove to have achieved record values for 1997. UK investors have been responsible for a substantial proportion of this activity particularly in France and Germany. In this context, CMBOR notes that entry prices and leverage in pan-European deals also increased during 1997 and comments that there are concerns in key markets such as Germany that non-domestic players are offering prices out of line with local market conditions.
More “mega-deals” are expected during 1998 as major divestment programmes continue. Meanwhile, driven by competition, high prices and the sheer weight of money in the UK market, UK private equity houses are likely to continue their push into mainland Europe, where they look set to dominate the larger buyout market for the foreseeable future.
CMBOR expects to publish final 1997 buyout statistics by the end of the first quarter this year.