Uncertainty slows M&A activity – PwC

CONTINUING economic uncertainty conspired to quell the M&A marketplace during the second quarter of 2010, a new study has suggested.

The reduced activity was despite signs of improving liquidity and some particularly strong deal-making activity in the Midlands during the first quarter, PricewaterhouseCoopers (PwC) said.

The adviser’s latest Debt Market Update shows that while the number of corporate deals nationally fell by 40% to just 21 during the second quarter, the average value was £453m – almost double that achieved in the previous quarter.

According to PwC, the lower than expected volume of deals was due to continued uncertainty among borrowers, lenders and investors, influenced by the continuing eurozone debt crisis and renewed economic doubts.

Despite the air of caution, the report suggests banks are demonstrating they are more willing to lend than they were this time last year and lender confidence continues to move in a positive direction.

Matt Waddell, head of corporate finance at PwC in the Midlands, said: “Demand for new debt was weaker than expected during the second quarter, due to the re-emergence of caution in the marketplace, and this was disappointing after the comparative buoyancy of the first three months here in the Midlands.

“However, lender confidence continues to improve and this suggests that while the need for caution remains, a more sustained upturn in M&A activity may not be too far away and we could start to see signs of this in the final quarter of the year.”

The Midlands saw some strong mid-tier deal-making during Q1, with Halfords completing its £73.2m acquisition of private equity-backed Nationwide Autocentres and the Deb Group’s sale to Charterhouse Capital Partners for £325m.

He said: “The summer is always a quieter time for deal-making. However, pipeline activity in the region suggests that more is on the way and as long as concerns surrounding the continuing economic uncertainty do not trigger a crisis of confidence among lenders and borrowers, normal levels of activity should resume in 2011.”

The Debt Market Update also considers the debt restructuring market and concludes that payment defaults and new formal restructuring discussions are substantially lower than a year ago, with only five companies incurring a payment default entering into formal negotiations in Q2 2010, compared to 30 in the same period last year.

PwC said this could indicate that the worst of the restructuring cycle is over. However, with a large proportion of loan agreements due to expire in 2010-2014, the so-called ‘maturity wall’ is ensuring debt maturity is a continued area of focus for companies.