Consolidation to boost AIM while private deal values hold up

THERE may be fewer stock market flotations this year but the move to consolidation could help boost the financial markets.

According to accountancy firm Baker Tilly 2009 will be a year for consolidation and mergers particularly those listed on AIM.

The prediction comes after the junior stock market endured its worst year since 1998 with only 115 admissions constituting 38 initial purchase offerings (IPO) raising average funds of £24m.

A total of 10 companies transferred from the main market and there were 43 admissions.

In 2007, there were 284 admissions constituting in IPOs raising average funds of £34m, with 35 introductions, six transfers and 61 re-admissions.

However, Baker Tilly said that despite the poor year there were more IPOs on AIM than on almost all other growth company markets.

As at December 31 there were 1,550 companies on the market compared to 1,694 for the same period in 2007.

Total funds raised in 2008 amounted to £4.3bn compared to £16.2bn in 2007, a fall of 73%.

Chilton Taylor, head of capital markets at Baker Tilly, said: “The current year is likely to be marked by few IPOs but with further delistings, mergers and a consolidation of companies within the AIM market, which ultimately could be healthy for the market as it will help lead to renewed strength in 2010.”

Meanwhile, the private sector also holds some hope with prices holding at a constant.

Although research by business advisory firm BDO Stoy Hayward shows that the number of sales fell in the fourth quarter to its lowest level since 1998, the price paid for private firms by trade buyers remained the same as quarter three’s index of 11.5 times the company’s historic after tax profits.

BDO’s Private Company Price Index (PCPI) show comparable multiples on sales to private equity was 11.6 times – up only marginally on the previous quarter’s 11.2 times.

It said that stability in the indices however could be more indicative of vendors being unwilling to publish the actual value of their deals than company prices holding up across the market.

The proportion of non-disclosed deal values rose from a two-year average of 36% to 66% this quarter.

Though it is common practice for principals not to disclose the transaction data for the acquisition of distressed assets, it is likely that the volume of accelerated or turnaround transactions has increased in recent months.

Christopher Clark, corporate finance partner at BDO Stoy Hayward said: “There will always be a market for high-quality assets and as such, competition for the reduced number of stellar businesses will keep their values steady.

“The further reduction in volume is, in part, a result of the postponed disposal of less attractive companies – whether that be for the short or medium term is likely to be determined by accessibility to debt funding.”

Mr Clark continued: “We are yet to see a positive impact on deal activity from recent government legislation to tackle the turbulent financial markets.

“While base rates, and consequently LIBOR, have come down, a rise in the interest margins and fees charged by banks is neutralising any potential benefit to businesses. The key to reigniting the market for company acquisitions is to incentivise banks to lend funds rather than simply adjusting the price at which credit is available.”

 

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