Dramatic loss of confidence postpones re-opening of M&A market 

Although the latest Predictor shows forecast net debt to EBITDA ratios coming down by 20% - indicating increased deal-making capacity - forward PE ratios have tumbled by the exact same amount, suggesting that deal-making appetite is under severe pressure.

Tony McNaught, Corporate Finance Partner at KPMG NZ says, “ While M&A markets have declined globally, typified by uncertainty of whether this is the right time to be undertaking M&A transactions, this trend has not been evident in New Zealand.”  For instance, the value of New Zealand M&A activity increased by 15% in the last 6 months ended June 2010.

Commenting on the lack of global activity, Mr McNaught says, “M&A has always been a confidence game and the latest Predictor suggests that it is currently in short supply. January’s Predictor hinted at an imminent market revival but that now looks like a false start. The loss of market confidence is directly attributable to disquiet over a possible double dip recession and the possible fall-out from sovereign debt defaults. While KPMG still expect the global market to reopen, it will now come later than we originally thought - and it is dependent on fears of recession and sovereign debt coming to nothing.”

KPMG points out that the reawakening of the M&A market for larger deals will have to be led by corporates rather than the Private Equity (PE) community. The problem for the latter is that as long as the banks remain preoccupied with their current problem loans and unsure about their own future capital requirements, debt for large LBOs will be very scarce.

Mr McNaught adds, “Unlike global predictions, smaller, mid-market deals by both corporates and PE players are however already leading the way in some markets like New Zealand with Olam’s Uruguary Farming Systems investment and Smart Technologies acquisition of Next Window as well as interest from Australian PE firms in a number of New Zealand transactions. “Further, the banks have indicated a change for the positive toward funding deal activity in New Zealand.”

The previous Predictor, released in January, showed forward PE ratios up by seven percent and net debt ratios forecast to fall by 18 percent. This indicated that the M&A market would once again be open for business. However, it is now clear that confidence has ebbed away during the past six months and prospective corporate purchasers have yet to re-open their war-chests.

From a statistical point of view, the problem arises from six months of flat or falling market prices. Although analysts raised their forecasts of projected 2010 earnings by 18% between December 2009 and June 2010, prices fell by five percent globally. This has resulted in a diminished forward PE ratio of 11.9x - down 20 percent from the 14.8x predicted in December.

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