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UK MBO market shows modest improvement - but confidence remains low

Deal activity has shown a slight upturn in Q2 2002 from the three previous quarters, although still well down on this time last year. Deal volume is up 53 per cent on the previous quarter, although the vast majority of this increase can be attributed to the £2.05bn institutional buy-out of Southern Water. KPMG's MBO survey charts this increase but expresses caution about its sustainability.

The research, which looks at larger UK management buy-outs (defined as those with a value above £10m), shows that the total value of activity during the second quarter of 2002 rose from £3,140m in the first quarter to £4,790m. However, included in the figures is the £2.05bn buy-out of Southern Water - excluding this transaction the total value of activity fell. Compared with the total value of deals in the corresponding quarter of last year, the market has contracted by 33 per cent. Nevertheless, the rate of decline is slowing when you consider that Q1 this year was 44 per cent below the total value of deals for the same period last year.

Charles Milner, Head of Corporate Finance within KPMG's Private Equity Group, says: ‘We may have seen a modest improvement in the value of activity in the buy-out market this quarter but this was mainly due to one large transaction so we should not get carried away with talk of a recovery. Confidence still has to return.  The private equity market is ready - the capital is there for investment, but caution rightly prevails at the moment.'

In terms of deal numbers, there was only a marginal improvement from 25 completions in the first quarter of 2002 to 26 in the past three months. This equals the lowest deal total during any first half-year since 1995.

Commenting on the subdued volume, Milner says: ‘One telling factor is that deals which traditionally took three to six months to put together, can now take nine months or even longer - a reflection of the heightened caution inherent in all elements of the investment process.'

On a brighter note, there were several significant deals this quarter with five exceeding the £250m mark. These were Southern Water, NCP (on which KPMG Corporate Finance acted for the management team), Saville Gordon Estates, Priory Healthcare and Westminster Health Care (the latter two were advised by KPMG on due diligence and tax structuring).

The health and medical sector contributed four of the 26 deals this quarter, accounting for £793m in total value. Milner adds: ‘We see this trend in healthcare as having been influenced by the government's prioritisation of this arena and healthcare assets will remain a focus. The financial services sector has also remained relatively buoyant.'

The public to private (PTP) sector of the marketplace only saw one deal this quarter, Saville Gordon Estates (value £499m), compared to nine deals this time last year. The total value for that quarter was £2,465m. However, there is a pipeline of four PTPs outstanding as at 30 June, worth approximately £750m - these are Brake Bros plc, Esporta plc, Kunick plc and FCX International plc.

In conclusion, Milner commented: ‘The average size of the top ten deals in this quarter has outstripped the previous three quarter periods, demonstrating a return to the market of larger deals.  However, jittery stock markets and general uncertainty suggest no return to the overall activity levels of two years ago and no real recovery before 2003.'

Copyright © 2002 KPMG Corporate Finance

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KPMG Corporate Finance - global independent advisors to the middle market www.kpmg.co.uk