Management Buy-out activity plunges as banks tighten lending

Published on Sunday 1 February 2009 20:37

MANAGEMENT buy-outs have slumped in Scotland against a backdrop of falling bank lending, nervous managements and continuing "unrealistic"vendor-price expectations.

And MBO experts north of the Border warned that they feel the situation is very unlikely to improve during 2009.

Drew Stevenson, a Glasgow-based partner in transaction services with accountancy giant PricewaterhouseCoopers, said management buy-outs had "significantly reduced". He said the figure was "probably down 60 per cent" in the final quarter of 2008 on the same quarter in 2007.

Rather than lending money to management teams and private equity backers for MBOs, Stevenson said banks were "more focused on their own balance sheets and the credit crunch".

He added: "They are being forced by the regulators and markets to drive stronger balance sheets and to wait for loan ratios to improve. I think MBO activity will remain thin."

Experts say it is not just a case of reduced appetite in the banks for lending for MBO activity, but also apprehension among managements over taking on equity risk in this climate.

Jack Ogston, Clydesdale Bank's regional director for corporate and structured finance, said: "MBOs have slowed down considerably on the back of the general economy.

"It's fair to say that availability of bank debt for the MBO market is lower than it was hitherto. Some banks have had other well-publicised matters to address."

However, Ogston said there was also a lag factor, "with business vendors' price expectations taking some time to match the new reality".

Ogston added: "Irrespective of the economic climate, if a seller was told 12 months ago that their business was worth 20 million and now they are being offered only 15m, it is human nature for it to take time for people to get their head round that".

One MBO expert in Scotland said some incumbent managements themselves were edgy about "contributing new equity themselves and removing the comforting umbrella of a non-leveraged business in this climate".

He said: "I think it will be late 2009 before there is any recovery in MBOs, and then it will be incremental, not a bounce." one said.

Barry Fraser, M&A director with Ernst & Young, added that the fall-off in buy-outs had gathered speed in the second half of 2008. He said: "Banks, when they do choose to lend, are doing so with greater caution and reduced debt-to-equity ratios. Secondly, the downturn is now hitting the wider economy and affecting the performance of businesses.

"This is making private equity more selective when backing management teams. As a result, completing an MBO is taking longer and is riskier."