PCPIQ3. Private Company Price Index

Transcription

1 2013 PCPIQ3 Private Company Price Index

2 2 PRIVATE COMPANY DEALS HIT FIVE YEAR HIGH AS CONFIDENCE RETURNS Optimism is already being noted in the Private Company Price Index (PCPI). The PCPI EV/EBITDA ratio rose to 11.1 a rise of 4.2 from the previous quarter and the highest reading for five years. The rise backs up the trend seen in the deal volumes, and sees a reversal of last quarter s results where the Private Equity Price Index (PEPI) ratio leapfrogged the PCPI. With confidence returning in the market, private companies are being more bullish and commanding higher multiples perhaps spurred by the higher multiples paid by private equity. Furthermore, back in July the value of global M&A deals exceeded 150bn the highest July figure for five years yet still contained relatively low levels of activity from British corporates. It is this global surge and returning market confidence which may finally be encouraging UK corporates to spend the huge warchests they have built up during the cautionary recessionary years. In line with the improving economy, deal volumes rose in Q a pattern which was repeated in the third quarter in 2012 and However, whilst a 2.8% rise on the previous quarter, the year-on-year figures still paint a depressing picture: just 484 deals were completed in the past quarter: a fall of 10.9% - higher than the previous quarter s year-on-year decline of 9.6%. Trade deal volumes saw an identical slump to Q2 with a 13% decline to 405 (Q3 2012: 466). However, whilst this might be depressing reading, the continued growth of the economy (GDP expanded by 0.8% in Q3 2013) coupled with the higher levels of optimism amongst business owners (the BDO Business Trends report noted that UK business confidence is at its highest point since the Coalition Government came into power) deal volumes should be boosted in Q4. A rise in deal volumes in the final quarter of the year is a rare phenomenon. There are also encouraging signs that activity will continue to remain positive to the end of Recent data from Dealogic showed that whilst worldwide M&A values rose by 13% to $2.02 trillion in the first nine months of 2013 compared to 2012, the number of acquisitions fell by 20% suggesting there is still significant untapped potential within the midmarket. Furthermore, with more businesses gaining awareness of the Funding for Lending Scheme coupled with a Government which is becoming more supportive of transactions, the potential for an upsurge of activity at the end of the year remains high. The PEPI ratio showed a slight decline this quarter to 9.8 after reaching a four quarter high of 10.5 in Q2. Whilst disappointing and suggestive of a market which remains repressed, the ratio still remains higher than for the same quarter in Reuters also reported at the beginning of October that the value of European private equity buyouts for Q was at its highest since Q4 2010: the value was up by 129% to 19.7bn. Whilst the value of Q3 deals was driven largely by megadeals such as the 3.3bn buyout of Germany s Springer Science & Business Media, a number of UK-based deals are on the verge of completion and set to bolster the UK PE market in Q4: Dr Martens announced recently that it had been sold to Permira for 300m, whilst British theatre group Ambassador looks set to change hands with a number of private equity firms mulling a purchase in the controlling stake of the company. With continuing economic uncertainty in the Eurozone and the United States remaining in a troubled state, the UK is being viewed as a prime target for investment. Regional markets are benefitting particularly, with the north of the country noticing a rise in deal activity over the past quarter. Deals such as the 716m secondary buy-out of R&R by the French Private Equity firm PAI Partners and the 3m invested by local-pe firm NVM to support the management buy-out of Cleveland Biotech have both provided a boost to the region, with the IPO of Bargain Booze (the 611-strong chain of off licenses in the north of England) reaping owners ECI Partners a 4.5x money multiple as it realised a market capitalisation of 66.7m on admission on AIM. Indeed, the off-license trend has continued into the on-license market: Richard Caring sold his 51% stake in Côte Brasserie to CBPE for 100m, whilst Risk Capital Partners completed its acquisition of a majority holding of Red Hot World Buffet at the end of August. Whilst some of the indicators may be slightly repressed this quarter, all indicators point to an M&A market which is returning to growth. UK GDP rose at its fastest rate in three years in the third quarter (0.8%), with the construction market which was hit hardest by the economic crisis expanding by 2.5%. Consumer confidence is up and recent CEBR research indicates that homeowners expect their properties to be worth 2% more in 12 months time almost double the expected gain in July s survey. Whilst many risks still remain, it does appear that we are seeing a cautious return to recovery which should hopefully see the PCPI and PEPI indices reach even higher levels over the coming quarters.

3 3 PCPI v PRIVATE EQUITY Q Q Private Company Price Index EV/EBITDA Private Equity Price Index EV/EBITDA Q Q Q Q Q Q TO Q VOLUME OF DEALS COMPLETED Trade acquisitions Private Equity acquisitions Q Q Q Q Q Q Q Q Q Q Source: Corpfin

4 4 insert image here TIM CLARKE M&A Partner If you combine the prices paid by both private companies and private equity this quarter the overall picture indicates that valuations are at their highest for several quarters. The UK is seen by investors as a stronger growth market than some of its competitors, with private company growth at the heart of the recovery. This is driving up their attractiveness to both PE and Trade buyers, a significant proportion of which are coming from overseas. Although the overall outlook for 2014 remains positive there are uncertainties on the horizon. There remains a great deal of UK Government stimuli, such as QE and more recently the Help to Buy mortgage scheme, but this cannot last forever. Add to this the uncertainty a forthcoming election in 2015 could bring and the increasing pressure that the Bank of England is under to increase interest rates. Conditions currently are favourable for continued M&A activity for the foreseeable future however.

5 5 MAKING THE MOST OF THE PCPI/PEPI The PCPI has been updated for 2013 to incorporate Enterprise Value to EBITDA multiples as the method of valuation, replacing the previously used Price to Earnings ratio. These changes have been made to incorporate the level of debt in deals and to use a less subjective measure of profitability. Historical data has been incorporated to ensure comparability and to identify trends. The PCPI/PEPI tracks the relationship between the Enterprise Value (EV) to Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) multiple (EV/EBITDA) paid by trade and private equity buyers when purchasing UK private companies. The private company EV/EBITDA is calculated from publicly available financial information on deals that complete in the quarter. At present, the Private Company Price Index (PCPI) indicates that, on average, private companies are being sold to trade buyers for 11.1 times historic EBITDA. The PEPI indicates that, on average, private companies are being sold to private equity buyers for 9.8 times historic EBITDA. As private companies are generally owner-managed, reported or disclosed profits tend to be suppressed by various expenses that may be non-recurring under a new owner. This will have been factored into the price the purchaser paid, but may not be reflected in the profits declared to the public. The effect of this is that the EV/EBITDA paid as calculated from the publicly available information may be overstated. The PCPI/PEPI is calculated as the arithmetic mean of EV/EBITDA for deals where sufficient information has been disclosed. Over the last four years, the included deals for the PCPI have had a mean Enterprise Value of 37.3m and a median Enterprise Value of 12.0m. The included deals for the PEPI have a mean Enterprise Value of 93.9m and median Enterprise Value of 35.0m. The PCPI/PEPI is an average measure and a guide, not an absolute measure of value, as there are many other factors that can have an impact on value. IF YOU WOULD LIKE TO KNOW MORE ABOUT HOW TO USE THE PCPI/PEPI TO VALUE YOUR COMPANY, PLEASE CONTACT YOUR LOCAL BDO REPRESENTATIVE.

6 CONTACT US BIRMINGHAM BRISTOL/CARDIFF GATWICK/GUILDFORD IPSWICH LONDON NOTTINGHAM READING BIRMINGHAM EDINBURGH GLASGOW LEEDS MANCHESTER NORTHERN IRELAND SHEFFIELD SOUTHAMPTON This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. November 2013 BDO LLP. All rights reserved