Sage Music Centtre and Tyne Bridge

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Mike Ashley’s love of his local football team cost him £78 million last year. The founder of the Sports World retail chain led a buy-out at Newcastle United, the club he has supported since he was a boy. But the deal was not only significant for the entrepreneur; it was also a highlight for the North East’s corporate finance community.

The deal was the largest buy-out in the region during 2007, beating the £63.3 million paid for Attends Healthcare, according to the Centre for Management Buy-Out Research (CMBOR), which monitors the private equity industry.

Aside from these transactions, the region only saw 19 MBO/MBIs, down from 39 in 2006. Values also suffered, plunging more than £100 million to £205 million.

Figures released by CMBOR show that the market is far from improving, with only £3 million worth of MBO/MBIs completed in the first quarter of 2008, compared with £12.7 million a year ago.

PricewaterhouseCoopers analysis of announced deals in the North East showed that there were 190 transactions last year, worth record £3.44 billion. But some £2 billion of that was spent on Wilson Bowden’s acquisition of Barratt Developments.

Keeping it private

The region has also been hit by a lack of companies joining the public markets. PwC’s research shows that by the end of 2007 there were 23 businesses on the main market and 24 trading on AIM, but the North East has yet to see an admission this year, compared with five IPOs during the previous 12 months.

Anthony Evans, a senior associate at law firm Sintons, claims to have several companies on his books wanting to list. “Volatility problems in the market have led to some good businesses in this part of the world putting their plans on hold, but they will float when the conditions are right,” he says.

A game of two halves

Private equity is also having a bad time, with NVM investment director Jeff Holder admitting that he hasn’t closed a deal in the region in the past 12 months. He says the firm invests £2 million to £10 million a year in five or six later-stage deals across the UK: “The North East is a relatively small market, and we are driven by the quality of the deal, not the location. If the five best opportunities were in Newcastle, we would invest in the five businesses in Newcastle. There are never going to be a huge number of private equity deals in the North East.”

At the lower end of the funding spectrum, Barrie Hensby is having a more buoyant time. The chief executive of NEL, which provides up to £500,000 for North East-based growth businesses, has invested £2.5 million in the first five months of the year.

“We do have good stuff popping up out of our universities, as well as software, bioscience and renewable energy businesses – all the things that you would expect to be doing fairly well at the moment,” he says.

According to One NorthEast, the regional development agency serving Northumberland, Tyne & Wear, County Durham and Tees Valley, the local economy no longer relies on coal mining, large-scale manufacturing or shipbuilding.

It is now home to knowledge-based industries, such as pharmaceuticals, chemicals and technology businesses.

The region is smaller than Yorkshire as an M&A centre, but Evans is seeing some good deals coming out of the North East. He is part of a corporate finance team that in the past three months has worked on four deals worth a combined £100 million, including Southern Cross Healthcare’s £42 million acquisition of nursing home operator Portland.

Open market

Banks active in the region include Barclays, AIB, HSBC, Lloyds TSB and, more recently, Alliance & Leicester. But in the lower-end deal space, Hensby doesn’t face much competition.

“There is always the possibility that we might lock horns with NorthStar Equity Investors, which also only operates in the North East,” he says. “But to be honest, I can only remember one occasion when we competed for a deal, and we have certainly done a lot more co-investing than competing.”

Chris Stott, KPMG’s head of transaction services in the North East, would like to see more private equity providers in the region. “What I would like to see in the next three to four years is more private equity interest on the ground speaking to owner-managers,” he comments. “A lot of those companies are lifestyle businesses, and there are succession discussions to be held.”

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