The UK is set to reflect a global slowdown in deal activity, with distressed M&A likely to grow, according to predictions from KPMG.
The latest version of KPMG Corporate Finance's Global M&A Predictor forecasts a continued fall in global M&A into the second half of 2008, amid a decreasing appetite for deals and a deterioration in the capacity to get deals done.
According to Stephen Craik, head of KPMG Corporate Finance in the Midlands, the UK deal market is also reflecting the gloomier outlook. He said: "Deal activity is subdued with private equity now only accounting for circa six per cent of the merger and acquisition market, down from closer to 50 per cent at its peak.
"Private company vendors are reluctant to sell and buyers have an expectation of picking up assets more cheaply. Over the next 12 months, we anticipate a continuing decline in private company transactions but an increase in distressed M&A with corporates disposing of elements of their business in order to generate cash or the sale of whole businesses that have run into trouble."
The latest predictor - a forward looking index of 1,000 leading companies' estimated net-debt-to-EBITDA ratios and forward price earnings (PE) ratios - sees the largest fall in global forward PE ratios recorded to date.
This decrease in corporate valuations - down 10.3 per cent from 17.0x to 15.3x globally in the six months to the end of May 2008 - indicates a lessening appetite to execute deals, said KPMG. It added net-debt-to-EBITDA ratios had moved from 0.81 times to 0.93 times, indicating the capacity to drive deals through debt may soon be negatively impacted.
The report suggested 2008 deal levels and values for the remainder of the year would continue to fall away, with corporate balance sheets also weakening.
Mr Craik said: "Findings from our latest predictor reveal strong evidence that market conditions for M&A transactions will continue to deteriorate.
"We had hoped that the gradual decline seen earlier this year could be maintained but now all indicators are pointing at a marked fall in the market, across all regions and sectors.
"Last year we correctly called the top of the global M&A market, with a gradual plateau in activity offset by continued growth in Asia Pacific. Our latest forward-looking statistics suggest the next 12 months will become increasingly difficult for transactions across the globe.
"Although six months ago forward PE ratios in Europe and the US were down marginally, the Asia Pacific region saw ratios move forward strongly. This time, all regions, bar Latin America, have shown a fall in their respective forward PE ratios.
"At the same time, while balance sheet capacity remains robust, the predictor is showing deterioration in net debt to EBITDA ratios across the board."
Looking at the European markets, Mr Craik said: "European deal activity has definitely gone "off the boil" with price to earning multiples down a worrying 12.4 per cent.
"While Europe may still have the potential for mega deals, which could skew average deal values overall, the likelihood is that we will see a worsening of the situation."..SUPL: