Is there a silver lining to the low value of sterling that has hit the headlines in recent days? According to experts, our exports will be cheaper and so boost manufacturing, companies with foreign earnings will be in a good position, and we will see more tourist pounds in our shops. With regard to the export sector this has not fared as well as had been expected but this is more likely to be to do with weak demand in our export markets such as the eurozone. More about the eurozone later.

At the Business Sale Report, we think there might be another reason the cheap pound could benefit UK plc. Business owners who are thinking of selling would do well to investigate the possibility of marketing the business abroad. Overseas investors can buy larger businesses in the UK than they would have been able to do in the past. Of course, revenue would still be in sterling but if, after holding the company for a while, the currency appreciated then the investor would make a profit on the sale. Inward investment is bound to help UK plc. A recent survey by Standard and Poors has also suggested that businesses with strong overseas earnings, particularly in Asia and America, are attractive to other UK firms looking to increase revenues and hedge their currency risk.

In our view, sterling is undervalued for a number of reasons. In the first instance, the markets have become concerned about the possibility of a hung parliament, which is not necessarily a bad thing given that there is less to separate the main political parties these days, but it does create uncertainty. Markets hate uncertainty more than anything. However, once a new government is formed it simply will not survive unless it has a credible policy to cut the deficit. This should help to support sterling.

So what about the Euro? Against the pound it looks strong at the moment but the eurozone’s problems are really only just beginning. There will need to be deep cuts in public spending in Southern Europe and they will have to lower wages and prices in order to remain competitive with Germany, the strongest economy in the Eurozone. Unless Germany can power ahead with strong economic growth to offset the problems in the the weaker european countries then the prospects for the euro are not very good in the medium term.

The weak pound is also, in some part, due to the perception that we have a poor manufacturing and export base, so increased competitiveness in exported goods is not going to benefit us. This is not really true. The UK is among the leading exporters of manufactured goods in the world. Germany and China, of course, are way out in front, then comes the USA, followed by Japan. But in fifth, sixth and seventh places, in a tight group, are the UK, France and Italy. What is more some of our manufactured goods like defence, where we are a global leader, are seen as having better than average growth prospects. After all, the world doesn’t seem to be getting any more peaceful.

The weak pound has fuelled the UK’s export market to such an extent that British exporters are more confident about future export growth than their counterparts in the Eurozone, according to the latest European Business Trends report by accountants and business advisers BDO LLP.
However, while UK confidence around exports is increasing, so too is the threat from inflation. The BDO Inflation Index reveals that Britain experienced the largest ever increase in the annual rate of inflation in the fourth quarter of 2009. The BDO inflation index rose 99.2 in January, a significant increase compared to October 2009’s reading of 93.8. This compares to the Eurozone inflation index which rose to 89.6 in January from 89.2 in October. This may indicate an earlier raising of interest rates which will help underpin the value of sterling.

Also it is quite clear that the Bank of England’s remit is to target inflation and economic stability, not exchange rates. Whereas many countries have made it clear that they are very keen to keep a high value currency, no matter what. This of course is bound to attract capital inflows and speculators at the expense of the pound.

The currency issues aside, UK plc is still a very good place to do business especially when compared to other countries. Perhaps the most obvious advantage that the UK has over other European countries is its flexible labour laws, which translate into lower hiring costs, uncomplicated takeover rules, and a generally non-protectionist government that welcomes foreign ownership of UK companies.

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In another indication that the UK can expect to witness a selection of distressed businesses for sale towards the latter end of 2010, the government has been warned of a ticking time bomb of company closures and job losses when its "time to pay" scheme ends.

The £4.8 billion programme, which lets businesses delay their tax payments, has been credited with keeping some 160,000 firms afloat during the recession by preventing HMRC payments pushing them into liquidation or administration.

However, it's expected to be axed after a general election, leading financial experts to predict a wave of liquidations when companies are forced to pay their delayed VAT, national insurance and other tax bills.

Colin Burke, a partner at corporate rescue and recovery firm Milner Boardman, affirms that numerous businesses aided by the scheme have increased the size of their debts to the government.

"This leaves HMRC with no option but to take action to prevent further default and recover the arrears, thus triggering formal insolvency proceedings," he continues to the Independent.

Whereas such proceedings were evenly spread over a period in the past, Burke concludes, in this instance a backlog has been created which some fear will lead to "a tidal wave" of business failures.

The Treasury maintains that suggestions the "time to pay" scheme will end suddenly run counter to what it was originally set up to achieve.

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Accountancy firm BDO has unveiled its latest Private Company Price Index (PCPI) and it shows that valuations of both public and private firms shot up in the course of last year.

From October to December 2009, the average price/earnings multiple of London-listed companies increased to 15.1, marking a 78 per cent rise on the figure recorded at the end of the first quarter of the year. It also represents the highest level since the peak of 2007's M&A boom.

Private firms are selling for 11.9 times profits, according to the data, pointing to the highest level since early 2008 and an 18 per cent increase over the last three quarters. The figure is 12.0 times earnings where private equity buyers are involved.

Christopher Clark, M&A partner at BDO, comments: "We've seen a pretty dramatic recovery in public market multiples, particularly during the second half of 2009, as well as a mini-recovery in private company valuations."

He attributes the recovery to rising public company valuations giving buyers more confidence to pay higher prices, a shortage of quality assets and a pent-up supply of private equity capital.

The number of transactions completed still fell for the eighth successive quarter, however – to 445 acquisitions. That's a 20 per cent drop on both the third quarter of 2009 and the same period a year earlier.

And while credit availability may have picked up in the course of last year, it is still only available for the very best assets – and at significantly higher margins.

Overall Clark identifies "plenty of positives" for buyers in spite of tax increases and public spending cuts on the horizon: "Improvements in the debt markets are likely to continue, and there will be a degree of catch-up following de-stocking during 2009."

Many private equity houses, which in most cases have funds with predetermined investment periods, have lost 18 months of deal activity, he concludes: "They will be looking to invest and make up for lost time, as well as realise some of their more mature investments."

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The UK’s retail sector faces another “bloodbath” on the high street next year, according to insolvency specialists. They point to decreased spending and rising unemployment as reasons to expect a wave of administrations echoing the events of early 2009.

In spite of improving sales figures and a boost in sentiment, 86 per cent of insolvency practitioners polled by industry body R3 believe this year’s drop in spending will prompt the collapse of more retailers after Christmas.

Another factor singled out for the predicted disappearance of over 20 household names is creditors “biding their time” until after the peak trading period before they call in loans. January’s VAT increase is a further cause of pessimism for retailers.

“While it would be comforting to think that the worst of the downturn is over, it’s worth remembering that insolvency peaks after a recession ends,” remarked R3 president Peter Sargent. “We urge retailers to seek advice early when there is a better chance of rescue, rather than desperately clinging on, hoping that Christmas will cure all ills.”

In the opening months of 2009, around 22 high-street retail staples went into administration, including Woolworths, music outlet Zavvi, childrenswear chain Adams and tea and coffee merchant Whittard of Chelsea. For up-to-date information on businesses for sale and in administration take a look at our news section.

–>Latest retail businesses for sale.

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During the third quarter of 2009 the Private Company Price Index (PCPI), which gives an indication of the average multiple of after tax profits at which private firms are sold for, rose again – much to the delight of anyone looking to sell a business. This is the second quarter in a row that we have seen rising multiples being paid. Please see our previous blog on business valuations rising posted in October.

Although merger and acquisition activity declined in the third quarter, for the seventh consecutive period, the multiples of profits at which business for sale are being sold for increased by 5 per cent. With the 5 per cent rise, people selling businesses were achieving an average of 11.7 times their historic after-tax profit. Of course, it should be noted that these figures relate to announced deals which have an average deal size of £15m. Smaller businesses multiples are lower overall to reflect the increased risk but if you wish to have a guide on the possible value of your business then please feel free to fill out our form for a no obligation business valuation

In addition to improvements in the PCPI, the Private Equity Price Index (PEPI), which tracks the multiples of profits that businesses sold to private equity achieve, also reported good news, rising 4 per cent to 12.3 times.

The continuing slow M&A market can be partly blamed on a more restrictive lending policies, particularly within the leveraged buyout market. This is reported to have offset the benefits an increase in corporate bank debt available to people wanting to buy a business for sale.

The increase in confidence among the corporate finance community has helped to boost the amount of money companies are being sold for. In addition, the number of exit reviews, proposals and pitches is increasing in response to a change in sentiment among business vendors. Many are realising that income and capital gains tax increases will catch up with them next year and that selling a business takes several months to complete – leading to an increase in the number of business being put on the market.

Business Sale Report has seen a 20 per cent increase in listings in the past quarter! To contact the sellers of these businesses then please subscribe.

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According to latest figures released by KPMG this week, around half of MBO deals completed over the last three months have involved distressed companies.

The other interesting fact born out by the data is that average deal size has shrunk dramatically from the same period last year. The average MBO deal size over the past quarter was valued at £43 million, compared with £150 million in the third quarter of 2008.

However, senior KPMG partner, Michael McDonagh, said that he was surprised at the low number of distressed deals given how long the recession has had a grip on the UK economy. “The research shows that we are still some way off seeing the private equity market throw its weight behind distressed opportunities.”

KPMG’s view for the next year? McDonagh is betting there will be an increase in deals starting this final quarter of 2009, followed by a further increase in activity early next year.

And what kinds of companies are going to attract the most attention?
According to McDonagh, “What some might describe as dull but dependable businesses with good earnings visibility, particularly with contracted revenues, are far more likely to attract debt support and therefore private equity bidders.”

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A recent PwC survey showing that the pace of business failures has slowed is an indicator that the state of the UK economy is beginning to improve. The fact that growth in UK unemployment has also slowed helps to confirm this view.

However, insolvency experts have warned that the number of corporate failures could spike again as the UK comes out of recession. Experience of past recessions has shown that the sudden rise in failures is due to companies simply taking their eye off the key factor: cash.

National insolvencies which include all administrations, liquidations, and company voluntary arrangements in August totalled 1384, which is the lowest month since September 2008. Mike Jervis, partner at PwC Business Recovery Services said, “ We are finally seeing a tail off in the huge numbers of insolvencies this recession has brought.” but he added that he expected the high levels to continue into 2010.

The number of insolvencies – including administrations such as that of Coffee Republic but also company voluntary arrangements such as JJB sports and Focus DIY reached 1,977 in March 2009 – a ten year high.

The PwC survey also asked its Turnaround Director Panel, who consist of over 300 independent senior executives who can be introduced to a troubled business and take on an executive role in its turnaround, how they saw things improving. 67% of the respondents believed that over half of current turnarounds they were involved in would be successful and 85% of them believed that their key trading indicators have levelled off or are starting to improve.

However, there are still concerns that many companies are denying that they are in trouble. 56% of respondents are still finding that companies are unwilling to accept help. The credit crunch has not improved significantly as 86% of respondents were finding it the same or harder to raise new funds compared to last year.

In the survey opinions were very divided over the use of pre-packs. Many of the panel believed that it was a useful tool in the right circumstances. However some felt that it was unacceptable and morally questionable suggests there is still work to be done on making sure that there are appropriate safeguards in place to ensure the best deal for creditors. More information on the benefits of pre-packs click here and the code of practice..

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Prices paid for businesses show signs of improvement as debt/funding availabilty increases. Higher business valuations are likely to follow.

Average multiples paid for larger private businesses in the second quarter of 2009 were up 10% over the first quarter, according to the Private Company Price Index.

The Private Company Price Index (PCPI), produced by accountancy firm BDO Stoy Hayward, tracks the relationship between the current four-month rolling average FTSE Non-Financials price/earnings ratio (p/e) and the p/es currently being paid on the sale of private companies to trade and private equity buyers. It is calculated as the arithmetic mean of the p/es for deals where sufficient information has been disclosed.

On average, larger private companies are currently being sold for 11.1 times their historic after-tax profits, while the metric for private equity purchasers, PEPI, shows that larger private companies are being sold to private equity buyers for 11.8 times their historic after-tax profits.

BDO Stoy Hayward notes that as private companies are generally owner-managed, reported or disclosed profits tend to be suppressed by various expenses that may be non-recurring under a new owner.

While this will have been factored into the price the purchaser paid, it may not be reflected in the profits declared publicly. Consequently, the p/e paid, as calculated from the publicly available information, may be overstated.

Over the last six years, deals included in the PCPI have had a mean size of approximately £21 million and a median size of around £6 million, though the PCPI is an average measure and guide rather than an absolute measure of value.

The PCPI for the second quarter of 2009 shows improvement over the pricing dynamics for the first three months of the year, although aggregate M&A activity declined for the sixth consecutive quarter to a total of 476, from 515 transactions between January and March.

Although the decline in the volume of deals has reduced, the types of transaction taking place differ from those of 2007 and early 2008 in that a greater proportion have undisclosed values.

Debt-for-equity swaps are occurring more frequently as business stakeholders realign their interests in the equity.

Two transactions during 2009’s second quarter topped £250 million with private equity involvement, bringing the total of leverage transactions in the last 12 months to five.

The first was an approach made by STT Communications Limited, a subsidiary of Singapore Technologies Telemedia, to Irish telecoms group Eircom through Eircom Holdings, the company’s Australia-based parent. It was seeking to replace previous investor Babcock and Brown, currently in administration.

The second transaction was Charterhouse Capital’s £553 million acquisition of energy research unit Wood Mackenzie, forming part of British buy-out fund Candover’s stabilisation programme to boost cash reserves.

With an uncertain economic climate as a backdrop, the ability to support historic levels of finance raised will become more challenging, prompting companies to realise proceeds from non-core assets to cut their debt burden.

The previous route, where a leveraged organisation repaid debts by relying on business sales to a trade acquirer or refinancing through a secondary buyout, is not currently available in most instances.

Christopher Clark, M&A partner at BDO Stoy Hayward, says this is part of the reason for the lowest pricing metrics being paid during the first three months of the year.

The PCPI shows that the values attributed to the companies being bought or sold from April to June increased against the previous quarter.

Average multiples paid by trade buyers increased 10% from the January-March period to 11.1 times the companies’ historic after-tax profits.

The PEPI was up 13% to 11.8 times and the average public company p/e for the Financial Times Non-Financials Index was up 9% at 9.3 times.

Pricing dynamics during the three months to June have shown improvement, Clark concludes, indicating that “as debt availability improves, acquirers can improve the pricing they are willing to pay”.

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One of the possibly unintended consequences of the chancellor’s recent Budget 50% tax rate hike is the encouragement of private and family businesses to keep their profits within the business.

Although withdrawing money from a company attracts corporation tax at 25%, if that then goes into a personal account it is taxed at 40% to 50% for higher rate tax payers (the 50% rate effective for those earning over £150k from April 2010).

Keeping the funds in the business is a viable choice for those who don’t need the money right now personally. The business can invest the money, upon which any profits are only going to be taxed at 25%.

If and when the business gets sold, the owners will only have to pay an 18% tax on the capital gain, with only 10% payable on the first million pounds.

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Last year saw a wave of consolidations across the media and technology sectors, and my view is that 2008 will see this trend continue, perhaps even more dramatically.

My hot category picks are:

• Mobile � particularly location-based devices and applications
• Energy and green technology
• Micro devices and nanotechnology
• Online video
• Social media
• Search engine optimisation

Many medium to large companies are struggling to keep up with new areas of specialist technology and organic growth strategies are just not keeping up. My colleague attended the Library House Mediatech event in November last year and quoted one of the speakers announcing that M&A is the new R&D, which sums up the prevailing attitude succinctly.

So you have a number of these switched-on companies keeping close tabs on smaller tech and media businesses ( including start-ups ), with a view to taking over the specialist technology and the trained specialists with it. Experts in the hot tech areas are increasingly hard to find, and buying a tranche of them in a single acquisition is sometimes an easier option.

Larger technology businesses have particularly highly active over the past six months. Witness Microsoft snapping up in November of UK-based Multimap, one of the world�s leading internet mapping businesses. Or Warner Bros recent acquisition of the UK�s largest independent interactive games publishers, TT Games. Nokia Siemens is about to swallow up Apertio, the telecoms data platforms provider.

Mid-cap companies are also starting to enter the arena in quantity and this is where I predict a new wave of merger activity over the next twelve months. ESRI (UK), the GIS ( geographic information solutions) company has just taken over the geospatial division of Tadpole Technologies. Ingram Micro has announced it is buying Paradigm Distribution, the point-of-sale (POS) technology company.

Pressure to create scale is also coming from the VCs who have backed the myriads of technology and media start-ups over the past two years, and are happier seeing no more than a handful of businesses dominate each sub-sector.

Whether the credit crunch continues or not, the driving forces behind the technology and new media industries are too strong to prevent a storming round of consolidations throughout 2008.

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