Q2 Private Company M&A Volumes Lowest on Record – BDO

General election uncertainty, a booming IPO market and a lack of sellers have played their part in UK private company M&A activity having its worst quarter since 2007. This is in stark contrast to the surge in UK growth which recently prompted the IMF to raise its economic forecasts for the second time this year.

The PCPI/PEPI index tracks the relationship between the Enterprise Value (EV) to EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) multiple paid by trade and private equity buyers when purchasing UK private companies.

The second quarter of 2014 saw deal volumes plunge lower than those experienced in the depths of the recession. Trade deals continued their nose dive from 355 to 296 (17% decrease), albeit private equity deals rose slightly from 74 to 81 (9% increase).

Private equity EBITA multiples increased from 8.75x to 9.8x, driven mainly by larger acquisitions.

Roger Buckley, Partner at BDO, said: “The Private company M&A market stalled in the last quarter despite the increasing willingness of private equity firms to recognise value and pay a premium for quality businesses. The issue is lack of supply and it remains to be seen whether sellers will be tempted into the market ahead of the looming general election to avoid the future tax uncertainties that this generates.”

One sector which is bucking the trend by showing consistent growth has been pharmaceuticals and life sciences. This year the deal value in the sector has risen significantly, especially for specialist outsourcing companies, and all signs are indicating that this will be one of the strongest years on record. Notable recent deals include Inflexion’s sale of Phlexglobal, a document management software business, to Bridgepoint Development Capital, as well as the sale of Pharmalink Consulting, a leading regulatory affairs consultant, to US-listed Genpact. Pharma & Life Sciences companies are coming under increased cost and regulatory pressure and this is driving deal flow.

Martin Gouldstone, Pharmaceutical & Life Sciences Advisory Director at BDO, said: “Over the last six months the current crop of ‘inversion’ deals – in particular, Pfizer/Astra Zeneca and Shire/Abbvie, has set pulses racing in the pharmaceutical industry. In fact, the majority of the pharmaceutical deals we are currently seeing are trade purchases, driven by the increased application of technology (namely mobile tech & software data aggregation and platforms) into the value chain.  With private equity having focused their attention on niche contract research organisation services, the interesting developments over the next 12 months will be when private equity and trade buyers start to fish in the same pond, which will give valuations an even bigger boost”.

Contributing Advisors