United Kingdom
Hunt for growth drives deal volumes and pricing - Peter Hemington
Q2 of PCPI was published earlier this month and the results show that corporate and private equity deal volumes remain high despite the ongoing economic uncertainty. The total number of trade acquisitions for Q2 2012 is up 17.3% on Q2 2011 and the total number of PE acquisitions was up 26.5% year on year.
Increasing desire to complete deals is partly due to the fact that organic growth remains challenging so companies are focusing on acquisitive growth to satisfy shareholders demands for higher returns on capital. A finite pool of high quality targets is, therefore, creating significant upward pressure on valuations.
In addition, private equity firms are under continued pressure to invest funds and are facing increased competition for private companies due to the lack of suitable high growth companies available for private equity to acquire. These combined factors mean that pricing has been pushed up considerably over the last 12 months. Analysis of the data showed that private equity buyers paid an average p/e multiple in Q2 2012 of 12.0 times up from 10.8 times during Q2 2011. The average multiple paid by private equity buyers over the past 12 months was 13.9 times compared to 11.3 times for the previous 12 month period.
This pricing increase is in contrast to the FTSE Non-Financials index where pricing has fallen over the same period. This index looks at the performance of a diverse range of businesses and reflects the wider economic environment, whereas the PCPI and PEPI are skewed by a higher proportion of strongly performing, high-growth companies which command significant premiums.
In certain sectors, acquisitions have been driven by technological change, for example the Travel sector, where online booking and bespoke databases have reshaped routes to market. BDO has recently advised on three deals in this sector (Audley Travel, Iglu and Travel Republic) and companies looking to make acquisitions are increasingly responding to these sector developments.
Overall, the results from the latest PCPI show that well run companies can command premium valuations because both private equity firms and corporates are on the hunt for growth through acquisition.
If you would like to discuss the options open to you please contact Peter Hemington on 020 7893 2344 or peter.hemington@bdo.co.uk
AUGUST 2012