Falling Price Expectations For Trade Deals and Pressure on Private Equity Driving High Volumes

BDO LLP publishes the latest results for Q4 2011 from its Private Companies Price Index (PCPI) and Private Equity Price Index (PEPI):

• The PCPI has seen price/earnings (p/e) multiples paid by trade buyers for private companies fall from an average multiple of 11.7 times in 2010 to 10.6 times in 2011. This fall in pricing appears to have helped deal volumes with lower pricing making acquisitions more attractive.
• The PEPI rose from an average in 2010 of 12.2 times to 12.8 times in 2011 confirming the findings of the BDO Private Equity survey published in November which found that 82% of PE managers are prepared to pay a scarcity premium for good quality businesses.
• In total 2,071 deals were completed in 2011, of which 83% were trade deals and 17% were private equity deals. This represents an overall 7% increase on the 1,928 completed deals in 2010; however the relative split between trade and private equity deals has remained very similar.
• During 2011, business services, manufacturing, retail and media & communications deals accounted for over 60% of all transactions completed with business services making up the largest number of deals due to the breadth of the sector.  The relative mix of deals by sector remained fairly consistent with 2010.
• Retail experienced the largest increase in deal volumes in 2011 with a 27% increase on 2010 driven largely by the higher levels of distressed M&A activity being seen in this sector. PE managers do not expect this trend in retail to continue over the next 12 months with 78% of managers polled in November’s BDO Private Equity survey predicting it to be the least active sector in 2012, distressed deals aside. This is in contrast with the business services and technology sectors which PE managers predict to experience an increase in activity. 
• The state of the Eurozone economy remains a concern for M&A volumes generally with the impact of austerity measures in this region being likely to bring difficult challenges for the UK economy.

 Despite macroeconomic challenges during the past year, falling price expectations for trade deals and the incentive for private equity to invest, have driven transaction volumes higher.  Private equity continues to have an overhang of funds to invest and many corporates are holding relatively high levels of cash on their balance sheets.  These two factors should continue to support deal volumes going into 2012.

Christopher Clark, M&A Partner, BDO LLP commented: “It is encouraging to note that the total volume of deals completed in 2011 demonstrated significantly higher activity levels to 2010 both in terms of trade acquisitions and Private Equity acquisitions.

 “While trade acquisitions continue to dominate, it is clear that private equity backed transactions are stabilising at higher volumes. Against a background of uncertain macro-economic factors, this may suggest that both corporate activity and private equity acquisitions are being driven by micro-economic necessity, namely returning corporate financial health on one hand and the overhang of funds to invest on the other.  If this is a determined trend, we shall see it at the mid-year point.

In terms of relative value, the results from the second half of 2011 have highlighted a reverse of a recent trend whereby the UK equity market has traded at higher multiples than those paid by either private companies or private equity funds. The last time this occurred was in the midst of the financial crisis in Q2 2008. With the current equity market continuing to reflect macro-economic concerns rather than fundamental value, we seem to be witnessing a disconnect  with the private sphere.”

Historic comparatives:

	Q3 2010	Q4 2010	Q1 2011	Q2 2011	Q3 2011	Q4 2011
Trade acquisitions	372	330	419	371	471	461
PE acquisitions	83	78	98	68	89	94
PCPI	10.7	12.0	9.0	10.8	10.6	12.1
PEPI	13.0	11.2	10.8	10.8	15.0	14.5

 

                                    2010                2011

Average PCPI               11.7                 10.6

Average PEPI                12.2                 12.8

- Ends –

Notes to Editors

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