This is unsurprising given the lack of liquidity in the debt markets and uncertainties in the economy.
Financial buyers are few and far between in both public and private deals, and trade buyers are capitalising on this. In some sectors financial buyers see real value opportunities in listed companies at present market capitalisations, but are unable to raise debt finance. Real estate and IT are good examples, with an exception in relation to IT being KKR's acquisition of Northgate. Some sectors among listed stocks are more fully valued, but still attractive, such as oil, energy-related sectors and natural resources. Private equity house Candover won a battle with US trade buyer Halliburton for Expro International in a deal that exemplified both this and also the scope that trade buyers have to compete aggressively with private equity in this environment. The largest deal in the natural resources sector, which may take some considerable time to play out, is BHP's interest in Rio Tinto, a global deal that has its centre of gravity in the UK.
Another situation in the energy sector illustrates the trend for non-UK companies to take advantage of the ease with which UK companies can be bought by non-UK purchasers. The continental European utilities have an interest in buying British Energy, the UK nuclear energy producer. Another is Gazprom's disclosed interest in Centrica (which owns the bulk of the UK gas distribution industry). The number of infrastructure funds that have been and are being raised by investment banks and private equity sponsors are sure to guarantee continuing interest and activity in sectors that offer suitable assets. Last year saw a large number of the UK's airports (including the problematic Heathrow and Gatwick) come under Spanish ownership when Ferrovial acquired BAA. Tata of India is a good example of an ambitious acquirer from a BRIC economy, keen to acquire well-established leading British businesses such as Jaguar, Land Rover and British Steel (Corus). Both deals appear to be fuelled by a vision of globalisation rather than necessarily being justified on the basis of historic financial performance alone.
Pensions remain centre stage for any deal that has a major UK component, especially in situations in which the UK pension schemes are substantially underfunded. They have played a central role in a number of deals over recent years including private equity's interest in WHSmith, the failed takeover attempt at Sainsbury's, and the KKR/Pessina acquisition of Boots. The strategy in the latter case was to deal with pensions as a secondary issue once a deal had been struck with the target. Recent changes to the pensions regulations, allowing the regulator much more freedom to invoke its "moral hazard" rights, have made this strategy one that is unlikely to be adopted in the future. We have even seen transactions such as Pension Insurance Corporation's acquisition of Telent (formerly Marconi) take place entirely for pensions-related reasons.
The financial services sector has seen relatively little M&A activity following the credit crunch and the acquisition by the RBS, Santander and Fortis consortium of ABN AMRO last year - a notable exception being Santander's acquistion of Alliance & Leicester. Northern Rock was an embarrassing public debacle for the UK government and authorities that saw the first run on a UK bank for several generations and a failed sale process despite government support. Most banks are concentrating on their balance sheets, with rights issues and other capital-restructuring activities (such as Texas Pacific's failed proposal to take a minority stake in Bradford & Bingley) being to the fore. The shockwaves from the collapse of Bear Sterns were felt strongly in the UK and concerns about a repetition of this linger. Once confidence and liquidity return, financial services remains a sector in which many commentators expect a considerable amount of consolidation.
There has been some activity in the mid-market, where a few private equity sponsors have been able to raise more modest amounts of debt on a club basis (the syndication market having dried up) with a small number of banks. However, there remains a gap in most sectors between seller expectation and purchaser comfort levels. One particular feature of this is a very considerable drop in the number of secondary buy-outs (where one private equity sponsor sells to another). Often these deals were carried out largely to realise profits and re-leverage the business. Given that prices may struggle to achieve the first objective and the debt markets are unable to contribute to the latter, these transactions may take a while to come back. Instead, many mid-market private equity sponsors are concentrating on improving performance and small add-on acquisitions and disposals for their portfolio companies, which helps to explain deal activity at the mid and smaller end.
One feature that has not been prevalent in the UK, unlike in the US, are "busted deals". The main reason for this is that in public company transactions, financing conditions or broad material adverse change conditions are effectively not allowed. This is a practice that has also been imported into private transactions.
There is cause for optimism in the medium term for private equity deal activity in that fund raising by private equity sponsors was, until late spring, running at record rates across Europe. The managers who have raised those funds are keen to put them to work once values have stabilised and debt is available. As the economy started to recover following the last equivalent downturn in the early 1990s, mezzanine debt providers stepped in to fill the gap between the amount of equity that sponsors could put into a deal, while maintaining acceptable returns, and the amount of senior bank debt available at reduced EBITDA multiples. Many expect to see the same happen this time, as and when there is greater consensus that an up-turn in the market is imminent (which may, of course, not be for quite a while). The pick-up when it happens could be quite rapid.
Meanwhile, many in the industry think that the most compelling opportunities for private equity houses in the market, outside those few sectors that I have mentioned, are buying debt (which on a leveraged basis is widely expected to yield equity-like returns) and distressed situations. These strategies are strictly for the brave or experienced, or both.
All of this means that many M&A lawyers remain reasonably busy in the City, although the picture is mixed. Those that are busy are helping trade buyers and sellers and dealing with the myriad of generally complex legal issues that this challenging market is presenting.
The medium-term outlook at the time of writing looks uncertain, but few expect a return to last year's activity levels for some time to come. In the longer term, factors such as globalisation, consolidation, depressed public company valuations and the strength of the private equity industry mean that all M&A lawyers will one day be busy!