More deals on the horizon as the economy improves - City Comment
14 November 2013
As any advisors in the recruitment sector – and indeed the wider economy – will testify there has been a paucity of M&A deals over the past few years.
Thu, 14 Nov 2013 | By Philip Ellis, principal, Optima Corporate FinanceAs any advisors in the recruitment sector – and indeed the wider economy – will testify there has been a paucity of M&A deals over the past few years.
Not only has this been caused by the extended recessionary period, it has further been compounded by low interest rates, which have enabled many businesses to service their debt.
This has resulted in banks not being forced to call in loans, and therefore political pressure, combined with concerns over public perception, has encouraged the banks to allow businesses to continue to trade. The upshot of this is a plethora of so-called zombie companies.
In the last 12 months there have been some notable private equity transactions, many of which have focused on the oil & gas sector, but let’s not forget Baird's investment in professional recruitment group The SR Group and also tech recruiter Nigel Frank International's funding from ISIS and HSBC.
These are positive signs for the recruitment industry and underline the view that there is medium-term value in recruiters at present, giving private equity the confidence to invest.
But where are the trade buyers?
There has been a notable lack of sizeable trade acquisitions by comparison to the private equity deals. Undoubtedly private equity is hungry for deals and has significant levels of cash, which it is mandated to invest and the preference of many private equity players is for large international deals, of the types we have seen complete.
Corporates have an appetite to be acquisitive, having not been active for some time. The relative difficulty in obtaining debt finance (other than debt secured on the sales ledger) accounts for the shortage of deals in part, but equally relevant is the fact that many potential SME and mid-range vendors felt that valuations were too low to warrant selling. This appears to be changing as advisers are reporting an increasing level of sale mandates. Many of these businesses are too small to warrant private equity bids, so UK trade buyers will be the most like acquirers.
We expect that in 2014 most deals completed will be by UK trade buyers, even though the aggregate value of acquisitions may be more heavily weighted to private equity who are likely to complete fewer deals but of greater value.
Coming out of a recessionary period, trade buyers will retain a degree of caution for a while and we expect to see relatively conservative deal structures for a period of time. Owners seriously considering a sale should maximise their prospects of attracting a buyer by doing whatever they can to prepare the business for sale. Lifestyle businesses do not necessarily make attractive acquisition targets, even if they have provided the current shareholders with an attractive income.
So overall we see private equity signalling confidence in the market into the medium term, owners of SME and mid-range businesses recognising that respectable valuations can now be achieved and trade buyers keen to enhance their growth with acquisitions, all of which point to an increasing volume of deals, which itself is likely to continue to enhance valuations. The inevitable caveat is that any macro level shocks might yet expose the current recovery as being uncomfortably fragile.
Not only has this been caused by the extended recessionary period, it has further been compounded by low interest rates, which have enabled many businesses to service their debt.
This has resulted in banks not being forced to call in loans, and therefore political pressure, combined with concerns over public perception, has encouraged the banks to allow businesses to continue to trade. The upshot of this is a plethora of so-called zombie companies.
In the last 12 months there have been some notable private equity transactions, many of which have focused on the oil & gas sector, but let’s not forget Baird's investment in professional recruitment group The SR Group and also tech recruiter Nigel Frank International's funding from ISIS and HSBC.
These are positive signs for the recruitment industry and underline the view that there is medium-term value in recruiters at present, giving private equity the confidence to invest.
But where are the trade buyers?
There has been a notable lack of sizeable trade acquisitions by comparison to the private equity deals. Undoubtedly private equity is hungry for deals and has significant levels of cash, which it is mandated to invest and the preference of many private equity players is for large international deals, of the types we have seen complete.
Corporates have an appetite to be acquisitive, having not been active for some time. The relative difficulty in obtaining debt finance (other than debt secured on the sales ledger) accounts for the shortage of deals in part, but equally relevant is the fact that many potential SME and mid-range vendors felt that valuations were too low to warrant selling. This appears to be changing as advisers are reporting an increasing level of sale mandates. Many of these businesses are too small to warrant private equity bids, so UK trade buyers will be the most like acquirers.
We expect that in 2014 most deals completed will be by UK trade buyers, even though the aggregate value of acquisitions may be more heavily weighted to private equity who are likely to complete fewer deals but of greater value.
Coming out of a recessionary period, trade buyers will retain a degree of caution for a while and we expect to see relatively conservative deal structures for a period of time. Owners seriously considering a sale should maximise their prospects of attracting a buyer by doing whatever they can to prepare the business for sale. Lifestyle businesses do not necessarily make attractive acquisition targets, even if they have provided the current shareholders with an attractive income.
So overall we see private equity signalling confidence in the market into the medium term, owners of SME and mid-range businesses recognising that respectable valuations can now be achieved and trade buyers keen to enhance their growth with acquisitions, all of which point to an increasing volume of deals, which itself is likely to continue to enhance valuations. The inevitable caveat is that any macro level shocks might yet expose the current recovery as being uncomfortably fragile.
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