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Stars aligned for continued growth of UK ‘take-private’ deals, says BDO

By Paul Bryant – Research by BDO shows take-private deal value more than tripling in one year to GBP14 billion in 2018/19, up from GBP 3.7 billion the year before.

By Paul Bryant – Research by BDO shows take-private deal value more than tripling in one year to GBP14 billion in 2018/19, up from GBP 3.7 billion the year before.

John Stephan (pictured), head of global M&A at BDO says that while much of the jump in total take-private deal value can be attributed to a handful of very large deals – such as Thoma Bravo’s acquisition of cyber security firm Sophos for USD 3.9 billion and the Apax-led consortium’s acquisition of telecoms company Immarsat for USD 3.3 billion – activity has also been healthy in the small and mid-market, with a dozen or so take-private deals announced in the last four months alone.

“We certainly saw a lull in activity in the wake of amendments to The Takeover Code in 2011 which followed unhappiness over Kraft’s takeover of Cadbury,” says Stephan. “PE firms were clearly put off for a while by things like the removal of bidder anonymity, having to declare and stick to their post-deal intentions, and new restrictions around break fees and exclusivity.

“But with the passage of time the industry has adapted to that new environment. Today, activity is being driven mostly (but not exclusively) by value considerations – which are working very much in favour of take-private deals.”

Public-private valuation gap narrows …

While public markets have historically tended to value companies higher than private markets, BDO’s research shows the gap has narrowed. Valuation of the FTSE All-Share increased three per cent over the last four years from 12.4x EBITDA to 12.8x EBITDA, while private deal values increased by 10 per cent from 9.5x EBITDA to 10.4x EBITDA over the same period. 

Stephan says: “The valuation premium associated with buying a public company is not as daunting for PE as it historically has been, so many firms are taking the view ‘maybe we should look at this again’.” 

A number of factors are at play behind this valuation story.  

The amount of capital raised and ‘dry powder’ accumulated by PE companies has made them deal-hungry. According to Stephan: “Our view is that there is a shortage of good private assets in relation to the amount of PE capital looking for a home. This has driven private deal prices up and has in turn led to more PE companies looking for targets in the public markets.” 

He continues: “On top of this, we have seen a lot of M&A activity from strategic trade buyers, who compete with PE for deals. This has also contributed to private deal values being bumped up even further.”

And then, highlights Stephan, there are the UK-specific factors of Brexit uncertainty depressing public market prices of domestically-focussed stocks, and the weak pound making UK valuations more attractive to overseas PE companies.

… but other drivers also contributing

Stephan stresses that the take-private trend is not just a story about valuation, overpriced private assets and unloved publicly listed stocks: “There is often a strategic angle to this, in particular PE’s strengths when it comes to buy-and-build strategies.”

He continues: “We think it is trickier to execute a buy-and-build strategy as a listed company, especially for small and mid-cap stocks. For larger caps looking to raise capital for acquisitions, public markets work really well. But at the smaller end, probably sub GBP100 million market cap, it’s fair to say the lower liquidity in the shares makes it more difficult to use them as an acquisition currency, and it’s a bit trickier to raise money for a series of acquisitions.” 

He says that public markets are loathe to give these smaller companies a ‘war chest’, and that they tend to want to fund specific transactions and see them bedded down before executing the next one.

In contrast, Stephan says ‘being inside the tent’ gives PE a distinct advantage as a buy-and-build partner. PE firms will work closely with management teams to develop the strategy, look at acquisition targets with management, and even contribute skills and experience at the deal table. He says: “Having a PE partner is far easier than having to go back to your broker and try to raise money on public markets very quickly when you already have a deal lined up.” 

Another factor steering PE firms towards more take-private deals, says Stephan, is the ease of the research function. Deal origination teams can work more efficiently simply because a lot more information is available on public companies. “Working out whether a company is worth looking at in more detail is just so much easier,” he says. “Origination teams can quickly filter potential deals by almost any factor or metric they use – sector, margin, growth rate etc. They have access to additional information through broker research, more detailed websites, and more detailed accounts.”

A burden is lifted

A partner in a mid-market London PE firm, which has been active in take-private deals, also sees robust conditions prevailing.

“The businesses that we would take private typically have only one research analyst writing reports on them (usually their broker or NOMAD), so the amount of information and analysis available to investors is not ideal,” remarks the partner, who asked to remain anonymous. “This can lead to pricing inefficiency where the good work of management teams doesn’t always get reflected in public market valuations. And this can certainly frustrate management and increase their tendency to look seriously at take-private deals.”

He says the direct costs of being listed can turn management off, as well as the additional investor-relations workload such as roadshows and visits to institutional investors: “We have found that those teams that do go private feel as if a burden has been lifted from their shoulders. While the reporting requirements to PE owners is also onerous, it’s not quite like-for-like in comparison to public markets.”

Stephan concludes by stating that overall deal values and deal numbers are not wholly reflective of the level of activity in PE take-private deals: 

“Remember that not all of these deals get over the line. We see quite a few deals, which have progressed some way but the PE house just can’t match the price premium demanded by the target, their independent directors, or their advisers. It’s a buoyant market at the moment, and we think one which will become increasingly popular for PE firms.” 

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