A booming IPO market, a lack of sellers and general election uncertainty have played their part in private company M&A activity having its worst quarter since 2007, according to analysis by BDO LLP in Birmingham.
Although private equity deals rose slightly from 74 to 81 (9% increase) in Q2 2014, trade deals continued their nose dive from 355 to 296 (17% decrease), resulting in deal volumes plunging to levels lower than those experienced during the recession.
The BDO PCPI/PEPI index tracks the relationship between the Enterprise Value (EV) to EBITDA multiple paid by trade and private equity buyers when purchasing UK private companies. In the last quarter, private equity EBITA multiples increased from 8.75x to 9.8x, driven mainly by larger acquisitions. Meanwhile, trade multiples fell to 8.8x from 10.2x.
Roger Buckley, an M&A partner at BDO in Birmingham, said: “The private company M&A market stalled in the last quarter despite the increasing willingness of private equity firms to recognise value and pay a premium for quality businesses.
“The issue is lack of supply and it remains to be seen whether sellers will be tempted into the market ahead of the looming general election to avoid the future tax uncertainties that this generates.”
The manufacturing sector remains strong in the Midlands, accounting for almost a fifth of deals completed so far this year. But bucking the trend UK-wide by showing consistent growth has been pharmaceuticals and life sciences, highlighted locally by the acquisition MicroCal by Worcestershire-based Malvern Instruments.
This year the deal value in the sector has risen significantly, especially for specialist outsourcing companies, and all signs are indicating that this will be one of the strongest years on record.
Roger Buckley added: “Pharma & Life Sciences companies are coming under increased cost and regulatory pressure and this is driving deal flow. The majority we are currently seeing are trade purchases. The interesting developments over the next 12 months will be when private equity and trade buyers start to fish in the same pond, which will give valuations an even bigger boost.”
BDO was named the most active financial adviser in the Midlands in 2013 and H1 2014 in the Experian Corpfin league tables.
