The first half 2006 saw the UK remain far and away the most actively targeted market for European leveraged buyouts (LBOs), as well as home to the greatest number of buyers. This is despite the increased penetration of the private equity industry into Continental Europe, and a 28% fall in the number of deals targeting UK assets
In the first half of 2006, some 128 UK target LBOs were announced, down 28.5% on the 179 deals announced in the first half 2005. While that fall in real terms is steep, the UK remains a far busier market than nearest rival France. France saw a 29% increase in the number of deals, from 66 in 1H2005 to 85 in 1H2006.
Germany, where the number of deals increased from 42 in 1H2005 to 59 in the first half of this year remains a poor third, despite this 40% increase in deal flow.
In terms of acquisitions, the strength of the UK private equity community compared with that of neighbouring countries is even greater. UK based firms were behind 163 LBOs in 1H2006, well over double the 77 deals French houses backed. US firms were behind 42 deals while Germany managed just 32.
That situation was only a little changed from the first half of 2005, when UK firms were behind 196 deals, French firms 59, German firms 33 and US firms 24. (See page 20).
Within the UK LBO market the industrials sector (though a broad church) was by some way the most actively targeted in 1H2006.
Industrials deals totalled 31 in the first half of the year, ranging in size, ambition and complexity from the US$6bn public-to-private bid for Associated British Ports, which a Goldman Sachs-led consortium won over a Macquarie/3i combination, to, for example, the Barclays Bank backed management buyout of AMBI-RAD, a West Midlands-based manufacturer of tube heating systems.
Another standout trend this year looks to be the concentration on relatively heavily asset-backed buyouts.
Eight of the top 10 LBOs announced in the first half 2006 that featured either a UK buyer or target was of an asset-backed target.
Of the largest three deals, the US$6bn Goldman Sachs-led bid for AB Ports was as much an infrastructure play as a classic buyout, as evidenced by Goldman’s backers, Ontario Municipal Employees Retirement Board, a pension fund, and Singaporean state investor GIC.
The buyout of General Healthcare Group by Network Healthcare and backers Apax, London Regional Properties and Brockton Capital has a significant real estate dimension, while Terra Firma’s US$2.5bn acquisition of Morgan Stanley’s aircraft leasing firm AWAS is secured against a fleet of aircraft.
Hotels and pubs, real estate-underpinned retail companies, holiday and entertainment providers, and asset-rich cable operators are all much in evidence in a breakdown of UK deals.
That trend increasingly blurs the lines between infrastructure investors, property players and classic buyout firms.
And, with the number of buyouts shrinking, this points to an increasingly crowded marketplace, with a lot of money chasing fewer and fewer deals.
Indeed, the number of deals has continued to fall over the past 12 months. The number of LBOs featuring a UK target or buyer slipped from 210 in 1H2005 to 181 in the second half of last year and 172 in the first six months of 2006 – a 13% fall in the absolute number of transactions.
In the same period, the value of deals rose by about 22%, from US$22.5bn in 1H2005 to US$27.5bn in the first six months of 2006. The latter rise, however, is far less sustained than the fall in deal numbers.
The second half of 2005 had, in fact, produced deals with an aggregate value of US$30.6bn, about 10% higher than the most recent half-year period. Even with latest half year, the second quarter looks to have been both less busy and less valuable than the first.
That is not to suggest, however, that the market has not been active. Over the past three six-month periods the impact of the very largest buyouts, those with an enterprise value of more than US$1bn, has been broadly consistent.
Such deals have generated around 60% of the aggregate value of the market in each period – 57% in Q12005, 56% in Q22005 and 61.5% in the latest quarter. The number of deals announced in this range has varied from nine and 10 in Q1 and Q2 2005 respectively to six in the first half 2006, a statistically broad change, though in real terms much unchanged.
Despite whispers of a possible super buyout bid emerging for one or other of the UK’s biggest businesses, that scenario has yet to emerge and while the biggest deals account for a disproportionate chunk of the market, small deals remain far more typical. Deals under US$250m still account for 86% of all announcements.