Brexit gloom could turn to boom for buyout firms

Photos (L-R): Getty Images, Park Holidays UK, Alamy

Yes, no, maybe: Odeon cinema chain has been sold, Park Holidays sale was shelved and the Hollywood Bowl bowling chain deal has been pushed back

Private equity dealmaking fell to a seven-year low across Europe in the period between 24 June and August 2, according to data provider Dealogic.

Buyout firm HIG Europe pulled the sale of German chemical company HCS Group for which it hoped to get about €500 million, people familiar with the matter said. This was due to differences over pricing between the seller and the buyers alongside concerns over the macroeconomic environment, one of the people said.

Advent International’s planned sale of Dutch pharmaceutical business Mediq was also pulled, with the firm instead deciding to take a €200 million dividend out of the company in a so-called dividend recapitalisation. A number of large-cap buyout firms including CVC Capital Partners and Clayton Dubilier & Rice submitted bids which fell short of Advent’s price expectation, a person familiar with the matter said.

Caledonian Investments also abandoned the sale of UK caravan park operator Park Holidays, after potential acquirers voiced concerns about the impact of Brexit on consumer spending, people familiar with the matter said.

Axel Beck, co-head of financial sponsors group at JP Morgan, said: “What we have seen is that UK transactions have markedly slowed down. Very few sponsors are selling at the moment, particularly portfolio companies which have heavy exposure to the UK market.”

Law firm Baker & Mckenzie has estimated that the Brexit vote and ongoing economic uncertainty will cost Europe $ 600 billion in lost mergers and acquisitions activity over the next five years.

Cheap and cheerful

But a fall in seller expectations could lead to a pick-up in activity, according to Chris Kellett, head of private equity in Germany at law firm Clifford Chance.

He said although valuations had been high for the past couple of years and were not falling, many in the market felt prices should be lower. He said: “There are questions over the direction the world economy is heading and people are becoming more risk aware. Buyers will be hoping for valuations to reset.”

If valuations fall, then buyout firms could be well-placed to take advantage of the change over the coming months given they are sitting on high amounts of uninvested capital and continue to have access to cheap debt.

Some deals that have been postponed are likely to return to the market after the summer, according to some advisers.

Michael Abraham, co-head of financial sponsors at UBS, said: “A few processes will kick off in September which had been planned to come to market before summer. At the end of the day, if you want to sell your business, unless you are in a position where you can say ‘I’m going to wait for X years’, who knows whether the market is going to be materially better in six months’ time, 12 months’ time or even two years’ time.”

Cinven is expected to relaunch its sale of European web host supplier Host Europe, which was put on ice following the UK referendum. The business has exposure to the UK and Cinven wanted to assess what impact Brexit might have on its UK operations before selling it, a person familiar with the matter said.

The initial public offering of Electra-owned bowling company Hollywood Bowl, which was scheduled to run in July 2016, was also pushed back following the UK’s decision to leave the EU, but the firm is still planning on floating the business sometime towards the end of summer, a person familiar with the matter said.

Currency conditions

Both buyers and sellers are likely to be watching currency movements closely as the weak pound could offer buying opportunities to foreign institutions.

A number of deals have already been struck with foreign buyers including Terra Firma’s £921 million sale of cinema chain Odeon to AMC Entertainment Holdings – an American group owned by a Chinese conglomerate – and Japanese group SoftBank’s $ 32 billion deal for chip designer ARM Holdings.

Abraham noted the impact the fall in the value of sterling had on the Odeon deal: “I do think on something like [the recent sale of] Odeon that the currency depreciating perhaps gave it [the deal] that last push. Maybe there was a bit of a price differential and the currency depreciation caused the bridge.”

Karen Frank, co-head of the Europe, Middle East and Africa financial sponsors group at Barclays, said: “USD buyers looking at European assets can purchase at a discount, if they can embrace the forward macro.”

It is a trend that advisers expect to continue, particularly when there is more certainty over what the UK’s exit negotiaion will look like and when the value of the pound stabilises.

But others warned this might not be so compelling for buyout firms wishing to buy UK assets.

Eamon Brabazon, co-head of financial sponsors at Bank of America Merrill Lynch, said “the current 15% sterling depreciation story sounds compelling” but added that as it remains early days in the Brexit saga and private equity has a long-term investment strategy, some buyout firms “may not be willing to take a fluid FX bet”.

The main concerns revolve around fears that sterling might depreciate further as a consequence of a punishing renegotiation between the EU and the UK or that the Bank of England might begin pumping more money into the economy.

Phillip McCreanor, head of UK M&A at Lincoln International, added: “If there is further monetary stimulus in the market, what could look like a very good deal today if you are a dollar or euro denominated fund today could look quite expensive if we see further devaluation of sterling.”

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