Reasons to be cheerful in region

Jun 17 2009 by Peter McCusker, The Journal

THE CORPORATE FINANCE EXPERT

CURRENT times in the M&A market are interesting to say the least and perhaps more accurately, challenging.

As well as a drop in the volume of transactions in the region, their nature has also largely changed during the last year or so with a notable increase in the proportion of deals that represent a non-core disposal, frequently triggered by parent companies seeking to improve their liquidity.

For example, last November we advised on the buyout of pharmaceutical manufacturer Fine Organics in Teesside where an opportunity arose for management to buy the business due to its parent company, German conglomerate, Evonik Industries, deciding to reshape its group.

One factor behind the January buyout on which we advised at County Durham’s Quantum Specials – itself a strongly performing business – was a wish for cash by one of its investors, global pharma company, Phoenix Medical Supplies.

However, even in the eye of the banking storm – the aftermath of the collapse of Lehman Brothers last autumn – Quantum Specials attracted a good deal of investor interest.

Looking ahead, it will be interesting to see how business owners respond to the changing fiscal situation. When the new 50% tax rate, for those earning over £150,000, comes into force next April the differential between income and capital gains tax will be unprecedented and, given the state of public finances, it is eminently possible that this gap may be narrowed by a rise in CGT in the short term.

So, it won’t surprise me if a number of entrepreneurs, who may have selling on their medium- term agenda, bring their plans forward. This would see tax concerns drive the M&A agenda to some extent for the second time in as many years.

Reasons to be cheerful include a return of the banks’ appetite to lend, albeit at relatively modest levels. Given the majority of deals in this region, even at the best of times, were built on sensible lending multiples, I don’t expect this more noticeably careful funding environment to threaten transactions.

Also, the longer the relative stability we have experienced over the last few months continues, the more confident business people will feel.

This will benefit the region’s M&A market, and wider economy of course, and allows me to say I’m pretty optimistic of what the future holds and I’m delighted to be open for business.

Rod Wilkinson, head of KPMG corporate finance in the North East