Outlook: Buyouts

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The Independent Online
ONE EFFECT of the collapse in stock markets is a virtual cessation of activity in management buyouts and venture capital. There are two main influences here. First and most important is that the flight to safety in markets means there are no takers for the high-yield bonds (otherwise known as mezzanine finance) generally used to part-finance buyouts. Bankers have become so risk-averse in the last few months that there is also a growing resistance to conventional debt financing of these deals.

This wouldn't necessarily matter if vendor prices were falling to reflect the plummeting value of stock markets. What the buyout fund loses on gearing, so to speak, it gains on lower equity valuations. Unfortunately, this isn't happening. Most big companies looking to dispose of assets are at least two steps behind the markets in this respect. They have yet significantly to lower their expectations for what these assets are worth.

Without the gearing effect of debt finance on the one hand, or lower valuations on the other, the buyout cannot be made to produce the returns investors demand. So there is a hiatus in activity. One buyout caught by this phenomenon is Pearson's attempted sale of Tussauds Group. Marjorie Scardino, chief executive, may have to lower her asking price to get it away.

There may be some exceptions, however, even in these markets. Just lately we've seen a number of attempted public-to-private transactions, the latest example of which was yesterday's announcement from the lingerie group, Sherwood, that it is considering an offer from management at 48p a share. Last week Ushers of Trowbridge announced a management bid with backing from Jon Moulson's Alchemy Partners.

In the case of these companies, of course, the market has already made the necessary valuation adjustments - and how, in the case of large numbers of smaller publicly quoted companies. Mr Moulson says he's had scores of enquiries from managements appalled at the collapse in their share prices.

Traditionally there's been a big problem with these public-to-private transactions. Ordinary shareholders have taken the view that if management is prepared to bid such and such, then the company must be worth a great deal more. Venture capitalists, on the other hand, have wondered why, if a management is worth backing, it doesn't have a much higher stock market valuation.

Even so, with valuations now so low and apparently heading lower, it may become possible to reconcile these twin doubts. But that's assuming that by the time bankers have counted their losses in financial markets, they've got anything left to lend at all.