McKenna & Co's venture capital team has had a busy start to 1995 including advising Legal & General Ventures on the management buy-out (MBO) of the yarns and fabrics division of Coats Viyella which had a total funding value of £102.5 million – easily the largest buy-out of the first quarter. This was in contrast to a relatively slow start to the year for the MBO market as a whole with only seven buy-outs over £10 million being completed during the first quarter.
Nevertheless our view is that 1995 is still poised to be an interesting year for the industry for a number of reasons:
– During 1994 market figures show a record number of buy-outs (81) which comfortably exceeded the previous record number achieved during 1989 (although 1989's deals had a higher aggregate value). The trend in terms of numbers, therefore, is up when looked at over an eighteen-month period.
– A large number of venture capital backed vehicles achieved a successful exit via a listing on a buoyant stock exchange during the early part of 1994. This should have helped provide handsome returns to those investors who had previously invested in venture capital funds. Venture capital managers should, therefore, have found it easy to return to the wholesale market to raise fresh funds for investment. Indeed, more than £2 billion was raised by independent funds during the first two thirds of 1994. There is currently no shortage of venture capital funds waiting to be invested.
– A number of banks which had previously deserted the MBO market have not returned and are willing to lend to management teams.
– Although the economic indicators remain confusing, those companies which have weathered the recession (particularly those which are export-driven) could be tempted to expand by way of acquisition. This should accelerate the process of spinning off non-core businesses acquired as part of larger groups. This should in turn provide opportunities for management teams.
– For companies which are still experiencing difficulties and are in need of further capital, venture capital institutions are more likely to invest in recovery situations than previously. We have been involved in several such situations which have involved complex banking, Stock Exchange and Takeover Panel issues.
Rail privatisation should also give 1995 buy-outs a boost. The Government is determined to make substantial progress in privatising the first eight 'fast track' rail franchises by the end of the year. McKennas is already advising a number of bidders interested in different franchises.
Do not be deceived, therefore, by the slow start of 1995. The number of deals completed could still be plentiful and there could be a high number of buy-outs which fall into the 'very large' category.
Indeed, there are rumours afoot in the market that a number of large transactions continue to be under active negotiation but have proved difficult to complete.
This could easily be explained by the growing tendency of vendors to indulge in protracted auction processes before completing any transaction. In this regard, McKenna & Co was fortunate in being able to complete the Yarns and Fabrics buy-out for Legal & General in less than six weeks from start to finish.
Michael Draper is a partner at McKenna & Co specialising in corporate finance.