Following the collapse of a record number of corporate acquisitions and mergers in 2008, the tricky economic climate is likely to depress transaction volume next year, but attractive oppor
Following the collapse of a record number of corporate acquisitions and mergers in 2008, the tricky economic climate is likely to depress transaction volume next year, but attractive opportunities are likely to emerge for both corporate and private equity buyers, according to Mark Spinner, head of private equity at international law firm Eversheds.
‘Although the tough economic climate and reduced availability of credit is likely to continue to depress deal volumes in 2009, we believe that opportunities will exist for transformative and opportunistic M&A across Europe that will deliver enhanced returns,’ says Spinner (photo).
‘It is likely that the early part of 2009 will be notable for consolidation in the retail sector, particularly distressed deals involving chains that are badly hit by a poor Christmas trading period and the quarterly rent roll.
‘This will largely be a mid-market trend, with financial services consolidation continuing in the upper-market within jurisdictions heavily exposed to the credit crunch. The energy efficiency sector will continue to be attractive to both private equity and corporate investors, whilst oil and gas transactions are likely to decline considerably if oil prices remain at the current reduced level.’
Spinner’s colleague Robin Johnson, a partner in the corporate team at Eversheds, argues that the weakness of sterling will continue to make UK companies attractive to buyers from abroad.
‘The decline of sterling against the US dollar and euro is likely to make UK acquisitions attractive to well-capitalised corporates in the US and across the continent which, when combined with the weak UK public markets, may also lead to increased public company M&A and possibly higher volumes of hostile takeovers,’ he says.
‘As equity is a useful tool to bridge the gap on cash funding, it will be put to use in 2009 so all paper deals or deferred loan note structures will become common. We may also see a spate of hostile all-equity or paper takeovers as recession brings forced consolidation across a number of sectors.’
Johnson argues that the relative unavailability of credit will remain a limiting factor as leveraged finance is unlikely to recover until 2011, but adds: ‘Banks based in jurisdictions with a larger public sector and less corporate and individual debt, such as France, will have the opportunity to show their resilience and build market share. The focus in 2009 will be on appropriate debt/equity ratios, as a number of deals announced in 2008 that were dependent on debt failed as the debt markets seized up.’
He sees increased opportunities in the venture capital field: ‘Aggressive interest rate cuts across the eurozone will encourage wealthy individuals to invest in early stage businesses, driven by the lack of debt, low returns on cash balances and attractive pricing of investee companies.’
According to the Eversheds partners, the challenging environment for M&A is also set to change the way in which corporates work with their advisers. As budgets come under increasing scrutiny in the downturn, and the new IASB rules on how M&A fees are accounted for take effect in June 2009, forcing greater transparency, they say, clients will demand that advisers become better at predicting costs.
‘The main message for 2009 will be risk management and minimisation,’ Spinner says. ‘Deal activity may slow even further in 2009, as many companies will be concerned about liquidity risk and counterparty risk in ordinary trading, [and] boards are unlikely to consider the risk associated with deal activity. Firms that have led the way in providing cost predictability and that have invested in project management techniques will reap the rewards in 2009.’
Meanwhile, Spinner says he doubts that Barclays’ review of its private equity business and mooted spin-off for the unit will prompt many imitators. ‘There are relatively few captive PE funds, and even Barclays Private Equity is not a captive in the true sense since its last few funds have all been third-party funds that Barclays has simply ‘cornerstoned’ to about 40 per cent,’ he says.
‘The banks, however, may well seek to reduce their exposure to private equity as an asset class. One of the options being examined is reducing Barclays’ capital contribution to Barclays Private Equity from 40 to less than 20 per cent, allowing Barclays to reduce its capital retention requirements and improve its liquidity ratio.
‘In the coming months we are likely to see an increasing number of limited partners, particularly in the larger leveraged buyout funds, also seek to reduce their commitments to private equity, and it will become increasingly difficult for existing general partners to raise their next fund. Limited partners may also look at investing in more specialist funds as a way of spreading risk and ask generalist funds to refine further their investment criteria.’
