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Private equity - M&A Index Sector Analysis Q4 2010

26 October 2010

The momentum built up over Q2 and Q3 2010 slowed in the fourth quarter, with volumes down.


The U.S. and Western Europe continue to dominate private equity activity, accounting for around three quarters of deals by value and volume. The next biggest contributor is Asia Pacific, and there is very little activity in relative terms in CEE, MENA, India and Latin America. The geographical picture today is in fact very similar to that of 2007, at the height of the market.

In Western Europe, the UK continues to play a significant role, with deal activity high in Italy, France and the Netherlands. Germany remains underweight as it has done throughout the year, which is a surprise given the size and strength of its economy. Its Q4 position was improved by the EUR1.25bn secondary buyout of clothing retailer Takko in the days before Christmas.

Secondary buyouts account for about half of all Western European deal activity, but dominate in the UK, France and Germany. In the Netherlands, new money activity has been reliant on disposals by corporate sellers owned by PE funds, while mainstream corporate sellers remain thin on the ground.

What the figures don’t show is that we have seen more high-profile broken auctions in Europe this quarter than previously. That suggests that the higher prices obtained for assets earlier in the year may not be indicative of a new norm, meaning sellers may need to readjust price expectations.

In our Q3 report we noted the high public-to-private activity in the UK, which we did not expect to continue. Our prediction proved to be correct with only one P2P deal in Western Europe this quarter, which was itself announced in Q3. In the the new takeover rules prohibiting deal protection measures and ‘bear hugs’ will have a significant impact on the waysponsors pursue targets. While the rules won’t deter sponsors, they will exacerbate the current position that means P2Ps are more expensive at an early stage and carry higher deal execution risk.

In the US there remain a healthy number of mega deals. Primary buyouts and dominate the larger end of the deal table and are the most common deal types, with secondary buyouts and P2Ps relegated to a minor role.

Overall, 2010 has seen a decent return to activity levels. Fund cycles have driven activity, with secondary buyouts the norm. The debt markets opened up again, with sponsors now confident that financing
can be put together for deals at the
EUR1bn-plus level, and perhaps much higher. There is a feeling that the recovery has stuttered in Western Europe, but
the picture in the U.S. is healthier.

We expect more of the same in 2011. Corporates may go on the hunt for PE-owned assets, which we have started to see in recent weeks, and with more corporate M&A activity predicted, corporate sellers may come back to market.

The AIFM Directive has now been unveiled but we don’t see this having a major influence on deal activity in the year ahead. It will increase cost to some extent, with additional disclosure and other requirements, but the asset-stripping rules will be more of an irritant than a prohibition.

Sponsors now have enough firepower at their disposal and debt packages can be constructed for the right assets. The issues for the year ahead will be the paucity of attractive assets, and valuations.

Download the full report

Download the Allen & Overy M&A Index Q4 2010 (pdf)

Download the Allen & Overy Global M&A Highlights 2010 (pdf)