MBOs: down but not out.

Not only do those involved experience the adrenalin hit of the deal itself, a successful MBO is capable of catapulting management teams straight into the big league when it comes to both salaries and plaudits.

Witness Chris Woodhouse, former FD of Homebase, who with John Lovering and Rob Templeman carried out the MBO that took control of the DIY chain store from J Sainsbury in 2001. In his time as commercial director of Homebase, Woodhouse helped drive profits up by 169% and cut net debt by £219m.

Woodhouse, joint winner of the 2002 Finance Director of the Year Award in last year’s Accountancy Age Awards, then went on with his colleagues to sell the DIY chain to GUS in a £900m deal earlier this year.

Since then, headline-making deals have been in shorter supply. According to the latest study from the Centre for Management Buy-Out Research, the MBO market overall is still in the doldrums. In the year to September, the total transaction value has reached £9.2bn and is unlikely to recover sufficiently in the rest of the year to match last year’s total of £15.3bn.

Only 15 deals over £100m were completed by the end of the third quarter this year, compared with 26 in 2002 and 45 in 2000, according to Mark Pacitti, private equity partner at Deloitte corporate finance.

But although the MBO market overall is heading down for the third consecutive year, medium-sized deals are holding up well. And in volume terms, these deals are bucking the trend.

‘In this very competitive segment of the market (deals in the £25m-£75m range) the nine-month total of £2.2bn already exceeds last year’s 12-month total of £1.8bn,’ says Pacitti.

Tom Lamb, UK managing director of Barclays Private Equity, which along with Deloitte corporate finance sponsored the CMBOR study, said: ‘We seem to have an ongoing tale of two markets; the mid-market has been astonishingly stable over the last four years, while the high end continues to head south.’

Charles Milner, head of corporate finance at KPMG’s private equity group, says he is pleased by the health of the mid-market. ‘The strength of the middle market is particularly encouraging, and again underlines the essential role the private equity community plays in providing finance for this important part of the UK economy.’

Unlike bigger deals, mid-market MBOs tend to be less affected by a lack of willingness on the part of banks and private equity houses. The question for potential buyout teams has been a lack of vendors. ‘Over the last two years, you wouldn’t have sold unless you had to because you’re not going to get top dollar,’ says Lamb.

Whether the good news about the mid-sized deal presages good news for the mergers and acquisition market generally is a more open question.

Corporate finance advisers are cautiously optimistic. Milner says there is funding available for the right deals and that KPMG private equity group has certainly seen more activity since the end of the summer.

‘The overall market is looking healthier than it has for a while, although this increased activity is still tempered with a fair degree of caution.

Funding is available, but both the equity investors and the debt lenders are understandably insisting on thorough due diligence, and it can still take a considerable amount of time to complete deals,’ he says.

KPMG’s figures for the third quarter of this year seem to indicate a gradual trend towards bigger deals. The average value of transactions in the third quarter was £85m compared with £67m for the second quarter.

The average value for deals in the third quarter of 2002 was £71m. Not enough of a difference to set firms’ corporate finance department on red alert, but certainly grounds for cautious optimism.

Even without the bigger deals, accountants seem to weather downturns in corporate finance better than global banks, for instance. According to this year’s Accountancy Age Top 50, the top 50 firms collectively brought in £375m from corporate finance, compared with £369.1m in 2002. Ernst & Young alone saw an increase of 11% on the previous year.

Since the sale of Homebase to GUS, Woodhouse has been working as deputy chairman of Halfords. Recently, the chartered accountant and member of the Association of Corporate Treasurers has emerged as a backer of the Baroness Retail bid for Debenhams. Woodhouse, Lovering and Templeman have put £6m of their own money into the pot.

If successful, they will control 1% of Debenham’s equity, and the three could replace the existing management team at the store.

The Baroness Retail bid goes before Debenhams’ shareholders on 10 November.

In the meantime, the Homebase MBO seems to have created a serial dealmaker in Woodhouse.

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