News & Analysis

UK buyout firms feast before the famine

The liquidity problems in the debt markets did not restrain record third quarter figures in the UK as deals were signed before the beginning August. However, big four accountant Deloitte said it expects few deals to complete in the next quarter.

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UK buyouts hit a record high of £38.5 billion ($78.5 million, €55.6 million) invested in the first nine months of this year, according to data provider the Centre for Management Buy-out Research. The results for these three quarters have been undermined by a pessimistic outlook for the next three months, as larger buyout firms adjust to the inevitable change in debt financing, said Mark Pacitti, corporate finance partner at accountant Deloitte.

The amount invested in the three quarters is 45 percent higher than the £26.5 billion invested in the whole of 2006. The three months until the end of September produced the second highest quarter on record with £14.9 billion invested. The figures were a slight slowdown from the £19.7 billion deployed in the second quarter. These are the only two quarters to have exceeded £10 billion in UK history.

Pacitti said the third quarter had been propped up by deals underwritten before the problems in the credit markets caused banks to deny leverage to buyout firms. These included Terra Firma’s £2.4 billion acquisition of EMI and Permira, CVC Capital Partners and Charterhouse’s merger of the Saga and the AA.

“In the last two to three weeks of September few deals completed and we expect very little dealflow in the £200 million plus market in the fourth quarter,” he said.

Yet these record figures are likely to comfort the buyout firms which helped generate them, as the leverage to which they have grown accustomed is unavailable.

Debt to ebit multiples in deals worth £100 million or more have risen by 18 percent in the last year, up to a 10.7 ratio compared to 9.1 in 2006. By contrast, debt in mid-market deals of between £10 million to £100 million had remained at the steady multiple of 5.2. This has even dropped from the 6.8 multiple for 2005.

“Once dealflow returns we expect to see a 10 to 15 percent correction in debt multiples for the larger deals, while the mid-market should remain steady,” Pacitti said. The return of dealflow is unlikely to be before 2008, he said.