Climate change

<p>Readers will only be too aware of climate change, readers of the Independent possibly to the point of boredom. But this week I want to talk about change in another sort of climate&mdash;the commercial one.</p>
<p>The credit crunch has had industry-wide ramifications, and may yet touch retail and publishing. What interests me is the fall-out from tumbling valuations. The correction in share prices is very visible. However there has been plenty going on behind the scenes; debt valuations, for example, have also been on the slide. The boom in the private equity sector has resulted in deals being done in the past year or two at valuations which now seem a little, shall we say, exuberant. The retailer Fat Face, for instance, was sold (again) earlier this year for &pound;360m, and its debt is now trading at 82% of par (implying that debt holders expect only to receive &pound;82 for every &pound;100 they have loaned).&nbsp;</p>
<p>Countrywide, the estate agent, is at only 60%. The FT reports (26th November) that Guy Hands overpaid for EMI. Other private equity-funded deals have failed to come to fruition.</p>
<p>The most notable example of late is of course Delta One's pursuit of Sainsbury's.</p>
<p>So as we close 2007, the likelihood is that financial buyers&shy;&mdash;and mainly private equity houses&mdash;will not sustain inflated company valuations in 2008 to the degree they did earlier this year. Clearly, if you are the holder of business assets, and looking for a sale, this is a matter of some grief. However, in &ldquo;glass half-full&rdquo; mode, I see an advantage in that companies can once more engage in the ancient art of M&amp;A (mergers and acquisitions)&shy;&mdash;the sport from which they have been increasingly sidelined by the swaggerers in the private equity world. While there is plenty of academic research to suggest that too many acquisitions are done for the wrong reasons and do not create economic value, I prefer to be more optimistic and see that this change in the commercial environment will enable more companies to move up to European or global scale.</p>
<p>The final spice in this cocktail is the unexpected&mdash;and hurried?&mdash;change to the UK's capital gains tax regime. This is a jolt to any entrepreneur who might have lusted after cashing in his chips. The benefits of doing so before next April have just stepped up by several notches. This adds a fresh imperative to the M&amp;A scene. So for two very different reasons, the climate for buying and selling companies has changed dramatically.</p>