08 April 2010

Add ons didn’t add up in 2009

European private equity houses, who wanted to create value in their portfolio through add-on acquisitions in 2009, saw their efforts mostly thwarted, according to an annual study released today by European private equity house Silverfleet Capital, a firm that specialises in this field.

Silverfleet Capital’s European Buy & Build Monitor, published in conjunction with mergermarket, found that the number of European add-on acquisitions fell dramatically in 2009 by almost 50% to 203, the fewest since 2004. Total value dropped too, to a shade over £3bn, well down on the £23.4bn recorded in 2007 and the lowest since 2003. Whilst these numbers reflect the fall in M&A activity generally, the data also shows that add-on activity as a proportion of total M&A also fell.

Neil MacDougall, managing partner at Silverfleet Capital said: “Companies that should have been in a position to make acquisitions faced several hurdles including a lack of quality assets, a lack of financing for acquisitions and vendors who had not adjusted their valuation expectations which remained too high. Also those portfolio companies saddled with high leverage and an uncertain future have given many management teams little leeway to consider acquisitions.”

Those that did manage to make add-on acquisitions did so with more equity and less leverage. Silverfleet Capital recently syndicated a part of the equity of German headquartered Kalle, which it acquired in August 2009 as a buy and build platform for consolidation of the sausage casings market, thereby significantly increasing the amount of additional funding available for add-on acquisitions, as the very high cost of a committed acquisition facility meant that it was uneconomic to put one in place.

So what will 2010 bring? Despite the frustrations of the last year, many businesses are now starting to see improvements in the market. As the economy has stabilised, visibility on company performance has improved.

MacDougall remains convinced that buy and build is a key strategy for value creation. “Even in 2010, private equity firms are having to pay full prices for platform companies and the lower entry multiples of add-ons and the synergies they bring will be essential to achieving an acceptable IRR for investors. We therefore expect that as the M&A market picks up and the banks gain in willingness to support strong businesses, the proportion of add-on acquisitions will recover in 2010-2011.”

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