Buy-outs fell in the first quarter of 2007 despite headline-grabbing bids, but there are few worries that this will herald a long-term slump in the market.

Buy-outs were big news in the first quarter of 2007, with several high street names, including Alliance Boots and Sainsbury’s, the subject of buy-out bids led by private equity firms.

But despite the column inches, few of these mooted mega buy-outs made it past the negotiating table, with potential deals such as the bid for Sainsbury’s by a consortium led by private equity firms CVC Capital Partners, Blackstone and TPG Capital falling through.

The lack of high profile megadeals contributed to the total value of buy-outs dropping by more than 50% in Q1. Buy-outs worth £3.4 billion were completed in the first three months of 2007, compared to £9.3 billion in Q4 of 2006, according to the Centre for Management Buy-out Research.

For Tom Lamb, co-head of Barclays Private Equity, Q1’s results are a surprise. “It is astonishing to see how little private equity activity there has actually been in the first quarter given the frenzy of press coverage surrounding a succession of high profile ‘take-private’ candidates such as Sainsbury’s, Alliance Boots, Pearson, Kingfisher, Whitbread, Compass, and Cadbury,” he said.

Nevertheless, Lamb is not worried by the relative lack of activity. “The slow down in the first quarter is not necessarily a reflection of the year to come, 2005 and 2006 showed a similar drop, both of which turned into record years,” he said.

“Such a strong end to the year as we saw in 2006 is bound to distort the first quarter of the following year, [but] it is worth noting that much of the value of the final quarter was down to a few mega deals, including United Biscuits at £1.6 billion. It remains to be seen whether the private equity houses will actually pay a sufficient premium to allow some of these larger take privates to actually happen.”

Q1 also proved to be quieter in the small to medium-sized market. Buy-outs of less than euro150 million [£102 million] remained close to 2006 levels, with volumes marginally up at 37 but values slightly down at euro1.6 billion, according to research from corporate finance adviser Corbett Keeling.

Note of caution

Corbett Keeling also noted that debt and equity providers are becoming more cautious about deal structures and seeking a greater stake in businesses. Deals completed without mezzanine finance have seen the average equity content rise from 38% to 49% of funds provided. Where mezzanine is used, equity content has remained steady at about 40%, with mezzanine providing 14%.

Jim Keeling, joint chairman of Corbett Keeling, admitted this caution may seem counter-intuitive to the confidence in the sector generally, and while he is not able to explain this, he does not see it as a cause for concern.

“One could draw comfort that if they’re [debt/equity providers] being sensible about the [deal] structures we won’t get a collapse in confidence so readily,” he said. “If those structures were going through the roof I would be much more worried whether the bubble would burst.”

Indeed, Keeling is confident that sub euro150 million buy-outs will increase in the coming months, given the general willingness of funders to back deals, the benign economic conditions and the number of entrepreneurs seeking to put their business up for sale and cash in. This backs up the sentiment in the market; in the survey, 50% of respondents said they expected buy-outs at this level to increase in Q2.

This is reflected across the board, according to Keeling. “There is a lot of optimism in the marketplace at the moment and as a result a lot of big deals [euro150 million plus] happening,” he said. “When the big deals happen, that fuels the optimism and it’s a virtuous circle.”

Adrian Balcombe, a corporate finance partner at Deloitte, is also optimistic about the market and expects the “fervent” activity seen since the New Year to come to fruition and complete in the next three to six months. “We are seeing some signs of restraint in the private market with deal multiples going down for mid-market deals,” he said. “However, multiples continue to rise for large deals suggesting that the total 2007 deal value could be blown out of the water by one or two high profile mega deals.”