I always stress the need for numbers in any of our reports at PEM Corporate Finance to have some narrative, some thought, some insight to go with them.  Otherwise one might conclude anything or nothing from them.

So I was interested to read a rather doom laden article in today's Insider email newsletter.   "East of England Deal Market Declines - Experian".    This is reporting on Experian's H1 2018 figures for deal doing activity nationally and around the country by region.  For the East of England it went on to report that "the value of deals struck in the East of England in the first has 2018 suffered a steep drop, according to new data released by Experian"  "Values fell significantly by 75% to £3.5Bn from the £14.1Bn announced 12 months ago."

Now on the face of it that's true, and pretty much lifted from the Experian report.  What it doesn't do is ask why.  This drop is compared to the same period last year.  So a quick look at the Experian report for H1 2017 shows that the 2017 period included two huge deals, the sale of a stake in Arm Holdings plc to Vision Fund Japan for £6.41Bn and Tesco's acquisition of Booker Group plc for £3.7Bn.  So the two largest deals in 2017 were together worth £10.11Bn.   In H1 of 2018 the two largest deals were the sale of petrol station/convenience store group MRH GB for £1.2Bn and the sale of Northgate Public Services to a Japanese buyer for £0.475Bn, taken together there were worth £1.675Bn.

The trumpeted 75% decline in deal value between H1 2017 and H1 2018 came to £10.6Bn.   In other words  80% of that decline was due to the two largest deals in 2017 being particularly big.

Can you conclude from this that the market is in decline?  Don't think so.

However over the same period there was a 23% drop in the number of deals from 324 to 249.  Given the drop by value is so skewed by those two big deals, this probably means a real slowing in volume of smaller deals.   Harder to be sure why.    This might be of more concern, although anecdotally we just don't see any slowing in activity with many companies seeking to transact, and sustained appetite from overseas buyers and financial players alike.

So you can put narrative on the value decline, but as regards the volume decline it's much more difficult to conclude as to why from this data.

Valuation is art not science

A recent finance editorial in The Guardian on the 21^st Century Fox v Comcast battle for Sky was critical of the Sky independent directors.  It felt they should be embarrassed at recent events and should realise that valuation is art not science.

Too good to miss?

Paraphrasing the argument - in 2016 the independent directors felt a £10.75 per share cash offer was too good to miss.  Surely offers 40% above the previous weeks share price don’t come a long too often.    In fairness at that time the share price had fallen from £11 in April 2016 to 769p as the market fretted about Netflix and BT.  And you can be sure that Brexit fears didn’t help either.  But at the same time based on the fundamentals including the benefits to be derived from getting Sky Italia and Sky Deutschland motoring properly UBS analysts reckoned a fair price for Sky was £13.70.   So they’d not have been sellers at that price.

Today in 2018, with the political and regulatory issues behind them the real bidding has begun and the action is around the £14.00 to £14.75 range - so far.

Price v Valuation

This is all about price v valuation.  So what are the lessons?  Well the discussions at the board are of course mostly about price.  First time around in a jittery market, amidst fears about market trends (the threat from streaming), and with a one horse race the independent directors view on price wasn’t too bullish.  They obviously weren’t feeling too confident.  Either that the value was light, nor were they sufficiently robust to turn it down and take and flak from further share price decline afterwards.  So that was all about what price to accept. 

But back in 2016 UBS valuation opinion based on fundamentals was clearly suggesting something much higher – I’d be surprised if that wasn’t also the view in the Murdoch’s camp.

Now it looks so different.  Better performance, better market sentiment, and true competitive bidding is driving a value c£7Bn higher than before!  No wonder Sky shareholders were angry in 2016.

The above is all about how it felt for the sellers, for some insight into how it might have felt on for the purchasers have a look at this blog post on the PEM Corporate Finance website on how to pitch an acquisition offer.

The need for competition to get the best price

Taking the lesson a step further this really underscores the need to sell your business at a time of your choosing and to get a competitive process going.  It also demonstrates graphically how much higher a price you might get as a result of real competitive tension between strategic buyers.