Credit is still available for sensible deals, but the terms are tougher.
After the frenetic pace of consolidation in the first quarter of 2008, mergers and acquisitions in the broker market appear to have all but ground to a halt as the economy heads towards recession. But there are some positive signs. Here are five reasons why the situation may not be as bad as it seems.
1. First quarter of 2008 was exceptional
In the first quarter of 2008, there was an exceptionally large number of smaller acquisitions below £40m in value. It has been 10 years since there was a similar level of activity in relation to deals of this size, according to analysis by Corbett Keeling, which advises on mergers and acquisitions.
The large number of acquisitions in the first three months of the year was due to the rush to complete acquisition before the changes to capital gains tax, which abolished taper relief, were introduced in April.
2. Smaller acquisitions are still taking place
Oval recently made two smaller acquisitions and has more in its pipeline, while Bluefin has indicated that it has more deals to come.
IMAS, a financial services corporate adviser, says the number of acquisitions has fallen back to 2005 levels – one or two a month. Whether it will remain at this level or slow further remains unclear. The economic situation will be a major factor.
Large acquisitions are still taking place. Aon’s £900m acquisition of Benfield has been given the green light by regulators. AXA acquired SBJ earlier in the year. Further major deals could also take place this year, such as the sale of the bulk of IAG’s UK businesses and the disposal of Royal Bank of Scotland’s insurance arm, following interest from private equity.
3. There is still credit available for the right deal
Oval’s £115m refinancing deal demonstrates that banks are still willing to lend, although credit terms are tightening and a sound business case is needed. Banks will be more likely to provide financing for individual acquisitions, rather than a war chest for a series of purchases.
Club-style debt facilities backed by a number of banks (such as Oval’s refinance) are more difficult to pull together than has previously been the case. Banks will want to see that the acquisition is a sensible one and that the management has a good track record. Oval’s management is well known and has produced good results.
“Borrowers need to show that the acquisition stacks up,” says Sebastian Kafetz, relationship manager at Lloyds TSB Corporate Markets.
4. Prices have come down
More realism is returning to the market in terms of the prices paid for brokers. In the past year, prices had soared to as much as 15 times the broker’s earnings before interest, tax, depreciation and amortisation (EBITDA). The high valuations had been fuelled by the prices some buyers were willing to pay for strategic acquisitions, the availability of credit and the expectations of sellers. The tightening of credit terms has dragged down prices to more sensible levels. IMAS says typical valuations are 1.7 times brokerage, which would equate to about four times EBITDA.
5. Foreign buyers are eyeing the market
There are indications that investors from Japan, Singapore, Hong Kong and the Middle East may be tempted to acquire UK brokers now that prices have declined.
• Smaller value broker acquisitions are still taking place.
• Financing is available for sensible deals.
• Broker valuations are returning to realistic levels.
• Foreign businesses are considering acquisitions in the UK.