Privately owned company prices hold steady but deal volumes in sharp decline

Sales of privately owned UK mid-market companies fell in Q4 2008 for the fourth consecutive quarter, to its lowest level since 1998, according to BDO’s latest Private Company Price Index (PCPI).

As access to acquisition finance continued to be limited, the total number of deals in Q4 2008, at 494, was down 26 per cent on the third quarter and was less than half the number seen in the same period in 2007, where 1035 disposals took place.  Trade sales fell by 52 per cent and private equity deals dropped by 70 per cent between Q1 and Q4 2008.

Despite the sharp fall in deal volumes, private company prices held constant according to BDO’s latest figures. The PCPI, which tracks price/earnings (p/e) multiples paid by trade buyers for private companies remained the same as Q3’s index at 11.5 times (sold for 11.5 times their historic after tax profits).  The Private Equity Price Index (PEPI), which shows comparable multiples on sales to private equity was 11.6 times, up only marginally on the previous quarter’s 11.2 times.

Stability in the indices, however could be more indicative of vendors being unwilling to publish the actual value of their deals than company prices holding up across the market. The proportion of non-disclosed deal values rose from a two-year average of 36 per cent to 66 per cent this quarter. Though it is common practice for principals not to disclose the transaction data for the acquisition of distressed assets, it is likely that the volume of accelerated or turnaround transactions has increased in recent months.

Christopher Clark, Corporate Finance Partner at BDO said: “There will always be a market for high-quality assets and as such, competition for the reduced number of stellar businesses will keep their values steady. The further reduction in volume is, in part, a result of the postponed disposal of less attractive companies – whether that be for the short or medium term is likely to be determined by accessibility to debt funding.”

Clark continued: “We are yet to see a positive impact on deal activity from recent government legislation to tackle the turbulent financial markets. Whilst base rates, and consequently LIBOR, have come down, a rise in the interest margins and fees charged by banks is neutralising any potential benefit to businesses. The key to reigniting the market for company acquisitions is to incentivise banks to lend funds rather than simply adjusting the price at which credit is available.”

ENDS

Notes to editors:

For more information contact Stephanie Aneto in the BDO press office on 020 7893 3073, Email: stephanie.aneto@bdo.co.uk

About BDO:

1. The PCPI/PEPI tracks the relationship between the current four month rolling average FTSE Non-Financials price/earnings ratio (p/e) and the p/e currently being paid on the sale of private companies to trade and private equity buyers. Figures for the number of deals have been rebased from previous to reflect an increase in access to information.

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