For one week only: tax rise sparks a sale stampede

Capital gains will be hit harder on 6 April and buyouts are booming as business owners seek a fast exit. By Mark Leftly
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The Independent Online

Garvis Snook, the chief executive of construction company Rok, is the biggest bargain hunter in the industry, snapping up businesses at the rate of seven a year. Every week, one, sometimes two, entrepreneurs approach Mr Snook in the hope of getting anything up to £30m for the heating, plumbing or building maintenance firms that they have built up over the years.

Even for a man so regularly courted, Mr Snook has been overwhelmed by the number of cash-hungry executives asking for his telephone number in recent months: "I was getting one or two approaches a day either side of Christmas, right up until the end of February," he says, chuckling with slight embarrassment.

Such hawking has been happening across the UK. Private business owners vaguely considering selling up or retiring were jolted into action by Alistair Darling's pre-Budget report on 9 October. The Chancellor announced the near doubling of capital gains tax (CGT) from 10 to 18 per cent from 6 April, meaning millions of pounds could be wiped off business owners' future windfalls. Entrepreneurs couldn't believe their ears. "The announcement hit them pretty badly," says a private equity source. "They were in shock, saying 'why is the Government doing this to us?' "

Once over the shock that the same government would reverse a low-tax incentive that it had also introduced, minds were concentrated on a frantic rush to sell up in less than six months. CGT-inspired activity has pushed deal value to a predicted £5bn this quarter, according to the Centre for Management Buy-out Research – a huge boost to the UK market after the credit crunch sparked a 60 per cent decline in buyouts in the last three months of 2007.

This week, bankers, corporate advisers, private equity buyers and trade sellers of businesses worth up to £200m – those buyouts small enough not to be harmed by the debt market squeeze – will be sweating as they hope to complete the last of these deals by Satur- day 5 April, the last day when 10 per cent CGT will apply.

Most sales have been made up of owners accelerating their exit strategies. Typically, says Christiian Marriott, a director at Barclays Private Equity, a sale had been "on the horizon a year to 18 months away". Some documentation, a broad sales process and up-to-date figures had been prepared, making the initiation of an auction process or a straight sale much easier.

There are many examples. The minority private shareholders of Williams Lea, the documents business, sold their stake to majority owner Deutsche Post World Net for £200m this month; a source suggests that the disposal was originally planned for next year.

The 5 April deadline was also "part of the decision", says a deal source, in the timing of this month's sale of beds retailer Dreams to Exponent, the private equity outfit. And although the auction of Sanctuary Spa, the beauty spa and bodycare brand, started months before Mr Darling's announcement, owner HgCapital and the management were aware of the deadline when they completed a £75m sale to PZ Cussons, the soap maker, in January. Sanctuary, run by Alice Avis, the former M&S director, admits, though, that the timing was fortuitous rather than planned.

There have been problems with this buyout rush. Barclays' Mr Marriott, whose team is striving to complete a tax-driven deal this week, says potential buyers have had to be careful not to get so caught up in the frenzy that they end up with unsuitable businesses. "We have made a big effort to go through our processes as quickly as possible without sacrificing the quality of due diligence."

Entrepreneurs, panicking at the idea of a tax hike, have also tried to offload businesses that were not ready or suitable for a sale. Patrick Stevens, a tax partner at Ernst & Young, says: "When some- one is an anxious seller, they get a bad price. What you want is for someone to come along and say, 'you have got a great business, let me make you a rich man'."

One corporate adviser points to the owner of an IT firm who decided in February to sell out to management. There was no time to run an auction, so rushing through a sale might have had the benefit of saving 8 per cent tax, but could also have lacked the competitive tension to get the owner the £20m he wanted. The sale was canned but should go ahead later in the year. The adviser says: "This deal was thought about late in the day. You don't chuck it together in the hope of saving 8 per cent now, when you could be better prepared later and get a 15 to 20 per cent premium."

A venture capital source says he looked at two businesses in the £10m to £30m range that had been put up for sale as a result of the tax change, but ruled both out. One had a "hole in its financial forecasts", while the other was only successful because of the owner's control over the business; take him out and the buyer would have had little of worth left.

There are industries that have been notable for their lack of activity. A leading deal maker in media says that although there was "an awful lot of noise and bluster" about CGT, there have been few transactions in the sector because of low valuations. "The media market is down about 35 per cent. People would be crazy to sell in the prevailing market conditions just because of an 8 per cent CGT increase."

Conversely, if there is little hope of a medium-term market revival, some businessmen have concluded they might as well take that hit but not a tax increase as well. John Mitchell, a director at adviser Humberts Leisure, is trying to complete three tax-driven deals in the holiday parks sector this week, and says: "I can't see things getting much better for the next year or two. So owners would still be better off selling now than waiting."

The holiday parks sector also shows how private equity has taken advantage of the situation to bolster the "buy-and-build" strategies for its portfolio companies. Graphite Capital this month bankrolled its Park Holidays UK business to buy two holiday parks in Devon for between £10m and £20m. The owners are believed to have wanted to sell out ahead of April.

So it has been a busy time for small and mid-market players. But there are fears that buyouts will drop dramatically in the next quarter, with no deadline to focus the minds of ponderous sellers. "A lot of advisers are busy trying to get tax-driven businesses sold," says a private equity director. "But after that the pipeline is very, very thin."

An old fear: after the feast, the famine.