LONDON (Reuters) – Sales of British private companies plunged in the third quarter due to the intensifying bank crisis, but deal valuations held steady as owners resisted selling out cheaply, a study released on Monday showed.
Accountants BDO Stoy Hayward said the figures showed the effects of the credit crunch had reached mergers and acquisitions (M&A) among “mid-market” firms, typically worth millions or tens of millions of pounds.
But it predicted a surge in deals next year as companies seek to stave off collapse.
Survey author Jon Breach said mid-market M&A had previously held up better than big takeovers, since smaller deals are financed by individual banks rather than syndicates of lenders.
But the picture deteriorated in the third quarter as interbank lending rates spiked and fears grew of counterparty defaults.
“Banks are obviously absolutely paranoid about taking on new risk at the moment,” he said.
The survey found private company sales dropped 35 percent compared with the same period in 2007. But prices paid by trade buyers were little changed from the previous quarter at 11.5 times historic net profit.
“Where somebody is selling from a position of strength they will only do something if they believe they are getting a decent multiple in the deal,” said Breach, an M&A partner at BDO.
BDO forecasts Britain’s looming recession will prompt a rash of distressed sales next year.
“The people who will benefit are the people who are liquid and who are sitting on cash,” Breach said, adding that private equity houses were increasingly willing to buy companies entirely using their own funds, hoping to refinance in the debt markets a few months later.
Private equity’s lack of debt financing was reflected in the average price it paid, which at 11.2 times earnings was in line with industry buyers. Historically, private equity firms could afford higher prices because of cheap debt.
While the credit crunch has sparked a rash of crisis deals among banks, it has sent the value of global M&A tumbling 25 percent this year, according to Thomson Reuters data. Debt-dependent private equity deals have slumped 71 percent.
(Reporting by Quentin Webb; Editing by David Holmes)