M&A activity in the UK is recovering from its slump at the end of 2007, according to a new report.

Accountancy practice PKF has revealed that deal activity in the final quarter of 2007 was worth £37.4 billion, up from £26.1 billion in the previous three months.

The Deal Drivers UK report, which it produced in association with mergermarket, concludes that this recovery is likely to continue as several strategic multi-billion pound transactions are expected to close.

Private equity buy-outs followed a similar pattern to the overall market and showed a rise in activity. In the first half of 2007, a total of 190 were concluded worth just under £40 billion, compared to 144 transactions worth £25.8 billion in the second half of the year.

Overall for the year, UK-centred private equity deals accounted for 46 per cent of total Western European deal value and 28 per cent of volume, highlighting the UK’s continuing importance within the region.

UK private equity exit deals remained steady in 2007 but, while the number of divestments increased from 167 to 185, their value declined 18 per cent on the previous year.

PKF head of corporate Hugh Mathew-Jones said: “Arguably the outlook for conducting M&A is more challenging than a year ago, but domestic and overseas players continue to drive deals forward, particularly in the mid-market where private equity is also focusing its attention.

“Undoubtedly, the balance of power has shifted from sellers back to buyers and financing deals is markedly different from 12 months ago, but a more cautious and considered approach is not necessarily a bad thing. There may be less heat in the market, but prospects for UK M&A look as enticing as ever.”

Deal flow slowed more in some sectors than others in the second half of 2007. The property sector experienced the severest downturn, with deal value dropping to just 6.7 per cent of first half levels as a result of the US subprime crisis. Twenty four deals worth £7.4 billion were concluded in the first half compared to just nine deals worth £495 million in the second.

UK manufacturing M&A reached record-breaking levels in 2007 with 190 transactions worth £14.3 billion. This represented a 10 per cent and 12 per cent increase on 2006 value and volume figures respectively. While the second half of the year saw a distinct slowdown, fourth quarter figures reflected a recovery with 43 transactions totalling £2.3 billion, marking a distinct improvement on the 36 transactions worth £274 million the previous quarter.

The Deal Drivers UK report examined M&A activity in five sectors – hotels & leisure, business services, food, real estate and manufacturing.