Mid-market buyouts drive deal flow in UK

The overall value of UK buyouts* in the first half of 2010 has already overtaken the 2009 full year transaction value by 45%, reaching £8.1bn compared to £5.6bn according to the latest provisional data published by the Centre for Management Buyout Research (CMBOR) and sponsored by Barclays Private Equity.

Highlights

• 87 private equity-backed buyouts were completed in the first half of 2010, with a combined value of £7.9bn; already 67% higher than the £4.7bn total value recorded for the whole of 2009 with 120 private equity-backed deals.

• The average size of private equity-backed buyouts in 2010 has more than doubled since 2009 from £39.5m to £91.2m. This is the highest average buyout size ever recorded with the exception of 2007 which was £133.7m.

• The second quarter has been a tougher deal environment than the beginning of the year, with total deal activity almost halving in value: there were 47 transactions with a combined value of £5.2bn in the first quarter and only 40 deals with total value of £2.7bn in Q2.

• Buyouts in the upper mid-market size range (£100m to £500m) accounted for over half (55%) the total value of private equity-backed deals so far this year, compared to a third of the deal market in 2009 (34%). 20 deals were completed in this deal value range in the first half 2010, contributing a quarter (23%) of all deals by volume, compared to only 9 in this range in 2009.

• Secondary buyouts have dominated the UK market this year, accounting for 60% of the market by value (£4.8bn combined value). The combined number of secondary buy-outs in the first half of 2010 is already higher than the number of secondary deals in the whole of 2009, with 21 and 14 transactions respectively.

• The exit market has declined further in the second quarter with 24 realisations recorded compared with 46 in Q1. This compares to 109 exits in the whole of 2009. The largest exits in 2010 were the sale of Marken to a consortium led by Apax and the sale of Pets at Home to KKR which both took place in the first quarter.

• Private equity buyouts as a percentage of overall UK takeover activity reached an all time high at 84% by value and almost half of all transactions (47%) by volume in the first quarter of 2010. This is in contrast to levels of only 28% by value and 30% by volume in 2009.

* The figures provided in the first paragraph above the ‘highlights’ section refer to all UK buyouts (including those without a private equity sponsor). All remaining figures in the release relate only to private equity transactions.

Christiian Marriott, Director at Barclays Private Equity commented:

“After a strong start to the year driven by a surge in large secondary buyouts, there has been a slowdown in momentum, although 2010 will still show the market recovering from the lows of 2009.The value of private equity-backed buyouts in the second quarter is just over half the value in the first quarter, driven by a range of factors that delayed timetables and created uncertainty in the buyout market. With volatility in global equities, a looming general election and uncertainty around future capital gains tax, it is not surprising that the momentum in UK buyouts has flagged.

“The exit market has remained quiet in 2010 in line with 2009 activity levels. A number of large flotations were anticipated this year but renewed stock market turbulence has held back the IPO market, with only two private equity-backed IPOs taking place so far. We may however see a gradual increase of sizeable flotations in the second half of 2010, particularly where firms are willing to reduce debt levels before or after IPO, with some potentially well received listings in the pipeline.”

Average deal size more than doubled

• Average deal size has increased considerably in 2010 to £91.2m compared to £39.5m in 2009. During the first half of this year however, average deal size in Q2 has decreased from £110.4m in Q1 to £68.7m in Q2.

• The lower mid-market (£10m - £100m) has provided the largest number of deals over the first half of 2010 with 35 transactions in total. However, the upper mid-market (£100m - 500m) holds more than half of 2010 deal value at £4.4 bn. Large buyouts (over £500 million) remain scarce but the three deals in this range have contributed over £2.4 billion to overall private equity backed buyout value in the UK this year.

• The average proportion of equity in deals during the first half of 2010 remains high at two thirds (63%) and in line with levels seen last year (62%). This is in sharp contrast to deals between 1999 and 2008 where the equity proportion in deals averaged less than 50%. The average proportion of debt used in buyouts in 2010 has stayed low at 33%.

Retail sector dominates deal value

• There were ten buyouts in the retail sector during the first half of 2010, the largest sector by value, with a combined value of £2.5 billion accounting for 32% of the total. This compares to 12 deals in the Retail sector in 2009 with a combined value of only £277m. The two largest deals in the retail sector were KKR’s acquisition of Pets at Home in March and the sale of DFS to Advent International in June.

• Despite having increased since last year, the value of UK private equity-backed deals in the retail sector in 2010 is still much lower than in 2007 where private equity backed transactions in the UK made £13.4bn in value, due largely to KKR’s buyout of Alliance Boots.

• The Business and Support Services sector carried out the largest number of deals (19) in 2010, contributing £1.8bn. The largest deal in this sector was the secondary buyout of Marken in March.
Private and family vendors provide most buyouts

• 31 private equity-backed UK buyouts in the first half of 2010 were from family and private vendors with a combined value of £1.7bn, representing 21% total deal value. This is three times the value of deals from this source in 2009 which stood at only £0.5bn.

• Secondary deals provided by far the most activity by value, accounting for 58% of the market at £4.8bn total value so far in 2010.

• The surge in secondary buyouts was most prominent in the first quarter when there were 12 secondary buyouts with a combined total of £3.7bn, accounting for 70.5% of total deal value in that quarter, dominated particularly by the buyouts of Marken and Pets at Home. Secondary deal activity declined sharply in Q2 with only nine deals totalling £1126m and accounting for 41% deal value. The buyout of DFS by Advent International was the largest of these in the second quarter, accounting for approximately two thirds of the secondaries total value.

• There have been six Public to Private (PTP) deals so far this year compared to only nine in the whole of 2009. The value of deals from PTP however has decreased dramatically since 2007 from a high of over £18 billion that year, down to only £471 million in the first half of this year.

Exit market remains slow

• The number of exits has remained low with 70 recorded so far this year. The volume of exits has almost halved since the first quarter, falling from 46 exits in Q1 to 24 in Q2.

• By volume, the majority of exits have occurred through trade sale transactions. The number of exits of private equity-backed firms falling into receivership has fallen sharply with 21 cases recorded so far in 2010 compared with 56 last year. There were only six of these in the second quarter.

• Exits via stock market floatation have remained very low with two private equity-backed IPOs in Q2 2010 – Jupiter Fund Management and Cambria Automobiles with market capitalisations at commencement of trading of £755m and £50m respectively. There was only one private equity-backed IPO in the whole of 2008 and 2009 which was the flotation of Gartmore on the London Stock Exchange in Q4 2009.