Deal activity is static but values well down

Jul 21 2010 by Paul Mankin, The Journal

DEAL activity in the region during the second quarter of the year remained static with 32 transactions completed. Disclosed deal values, however, were significantly down on the previous quarter to just under £76m.

Earlier in the year it was widely predicted that we would experience an increase in global deal activity but this has not happened. One of the main reasons for this is the continuing volatility in the financial markets.

Only three transactions with disclosed deal values greater than £10m were reported in the North East during the period.

Private-equity activity was still largely absent in the region, although Barclays Private Equity acquired a minority stake in Wilton Engineering Services for £16m in June. MGT Capital Investments acquired a 49% stake in Moneygate Group for £3m in April. Subsequently Moneygate made three acquisitions in as many months.

In May, Eutechnyx became the first of five recipients during the quarter of investment from the £125m Finance for Business North East Fund. The fund was set up with the aim of helping around 850 companies create 5,000 jobs in this region over the next five years

Vertu Motors continued to consolidate the UK motor retail sector by acquiring four dealerships in June. The company was established in November 2006 and listed on AiM a month later.

The North East has been devoid of IPOs for over two and a half years. The last IPO in the region was e-Therapeutics which listed on AiM in November 2007.

This was preceded in June and April of the same year by eaga and Wellstream respectively which both joined the main market. Since then we have lost eight North East plcs including Northern Rock, Chieftain, ScS and Tolent.

The market for IPOs globally started decreasing significantly during the credit crunch crisis and then collapsed in September 2008 after the announcement of Lehman Brothers bankruptcy. Since then there have been a number of high-profile IPO aborts and delays due mainly to the price expectation gap between new investors and the existing financial investors.

Nevertheless over the past few quarters there have been successful IPOs on the London markets and there have been signs of renewed interest in flotations in the region.

The businesses which could be seen as the most credible candidates for an IPO are companies in industries which have a well-defined strategy, have weathered the recession well and have proven they can service their debt.

Although market sentiment remains positive, particularly in certain sectors, market volatility is still creating pricing uncertainty across the deals market. However, with the traditionally quiet holiday period coming up, the next few months should see some stability return to the UK market. This in turn should be conducive to deal flow picking up towards the end of the year.

:: Paul Mankin is corporate finance partner at PricewaterhouseCoopers, Newcastle. Call: 0191 269 4318 or email paul.mankin@uk.pwc.com