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MBOs—Down but not out

Finance Blogger: Anthony Harrington Anthony Harrington

While the MBO figures in the UK for the fourth quarter of 2009 have still to emerge, what is beyond dispute is that the overall value of UK buyouts for the first nine months of 2009 has tanked by comparison with the same period in 2008. According to figures from the Centre for Management Buy-Out Research (CMBOR) at Nottingham University, the numbers are down by more than three quarters (77%), at just £4.3 billion, by comparison with £18.3 billion.

A good part of the reason for this, CMBOR notes is the flight of private equity (PE) firms from the MBO arena. The volume of PE-backed buyouts in the UK, CMBOR says, “fell to the lowest level for a quarter of a century, with only 31 deals completed.” If there is a surprise here, it is probably that the level was as high as 31 deals, since in general bank appetite for leveraged transactions (and MBOs are nothing if not leveraged deals) all but vanished during the credit crunch. Moreover, there is near-universal agreement that the PE model at the top end of the scale is, for the foreseeable future, pretty well bust.

In the UK, for the first nine months of 2009, PE-led MBOs amounted to just 26%, by value, of all takeover activity over the period. By way of contrast, for the same period in 2008, PE deals by value amounted to 62% of all takeover activity. That is a precipitous drop in anyone’s eyes and it doubtless meant that a number of management teams out there who would have had a shot at getting an MBO proposition picked up and driven forward by a PE house, found themselves going nowhere in 2009.

However, the iron law of statistics means that given a large population of owner-managers and family firms, some small proportion of those owners will want to retire immediately, irrespective of how unfavorable the economic conditions might be. This determination to call it a day now, rather than to soldier on for a few years hoping for the economic climate to improve so that the owner can get a better price, makes for some flexibility in the pricing of the deal.

In those kinds of instances, given that the company has a good track record, it is not impossible to find a bank willing to provide sufficient senior debt to get the deal away—particularly if the owner-director is prepared to “roll over” some of the debt.

If the owner leaves some debt in the business, rather than seeking to cash in everything immediately, the buyout team clearly needs to raise less cash. That is good for them, but it can also be good for the owner. The rationale here is simple. If you are selling your business for a lump sum, you can’t put the money in a suitcase under the bed. It has to be reinvested, so why not reinvest it in a business and a management team that you know in depth and detail? (If the answer is, “Because I know they’ll make a hash of it,” then it would be more than a bit cynical to sell the business to that particular management team in the first place!). Look to see a good deal more vendor-led or rollover transactions through 2010.

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Tags: leverage , MBOs , private equity , stocks and shares
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