Deal activity improving after a year of record declines
Mar 10 2010 by Iain Laing, The Journal
PAUL MANKIN of PricewaterhouseCoopers looks back at a tough deal market in the North East over the last quarter of 2009 and looks for reasons to be more optimistic this year.
The recent past has been an extremely challenging time for the merger and acquisition (M&A) community, with frozen capital markets and tough economic conditions causing a rapid decline in deal activity.
Looking back over the whole year in the UK, Dealogic reported the lowest volume of mergers and acquisitions activity in five years and total deal values were almost halved to £108bn from £205bn in the previous year.
Deal volumes in the North East remained stagnant as the year progressed, with only 27 transactions completing during the fourth quarter of 2009.
Overall volumes were down to their lowest levels since 2003, with only 115 transactions completing during the year, and disclosed values showed further decline from their 15-year low of last year to a figure of only £436m. Recently reported deal values for the region have appeared significantly higher.
This apparent disparity can be explained by the fact that public finance raisings, such as rights issues, are not included in the figures.
More than half of the recorded value in the North East for the whole of 2009 is accounted for by the disposal of Teesside-based PD Ports by Babcock and Brown Infrastructure, which took place in the final quarter.
As part of a complex recapitalisation package, the port was acquired for a nominal sum by Brookfield Asset Management while assuming over £300m of its debt.
Distressed M & A buoyed the overall volume of transactions during the year, with a number of high- profile local businesses being acquired from the administrators, including Premium Bars & Restaurants in the final quarter.
Premium Bars & Restaurants, which changed its name from Ultimate Leisure two years ago, went into administration in August last year. The company listed on AIM in 1999 but trading was suspended in December 2008. The Orchid Group, which is backed by transatlantic private equity house GI Partners, acquired 43 businesses from the group which included the Living Room, Blu Bambu and Sea.
Many commentators are now predicting an increase in deal activity during the first six months of 2010. We are seeing early signs of recovery, led by the increased activity in large-scale global and domestic corporate transactions.
This demonstrates that corporates and investors are starting to rebuild their confidence in economic prospects, but I also believe we will see a fundamental shift in the market away from highly leveraged private equity deals towards a greater proportion of strategic acquisitions by well-funded corporate players.
Interestingly, we are seeing the early recovery in M & A markets being characterised by some very high quality assets coming to the market – far from being distressed, these assets are sales of market-leading businesses of significant scale.
We are entering a test period for M & A. Successful completions will depend on vendor price expectations coming into line with acquirers’ views. If the majority of these deals close, it may well signal a more buoyant 2010.
Locally, market conditions remain tough. However as we enter 2010, optimism is beginning to grow, and although completing transactions will continue to be challenging, I am cautiously optimistic.
Paul Mankin is corporate finance director at PricewaterhouseCoopers, Newcastle. For further information telephone 0191 269 4318 or email paul.mankin@uk.pwc.com
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