Fall in consultants’ share prices, debt and management discontent put them on the menu
Numerous private equity groups are circling listed UK consultants in search of a bargain.
Sources close to the sector have said groups including 3i, Duke Street, Bridgepoint, Cognetas and Warburg Pincus have run the rule over a sector that they believe is undervalued by the City.
One source said: “Consultants have been rated downwards over the past 12 months; the question for private equity is whether the rating is unfair and whether there’s a bargain to be had.”
David Brockton, an analyst at Arbuthnot Securities, has reduced his price-to-earnings (p/e) ratio for the sector from 18.3 in 2007 to 6.9 at the start of 2009 (see table below).
The ratio is a way to value a company and is calculated by dividing market capitalisation by forecast post-tax profit. A higher ratio means investors pay more for each unit of income.
He said: “The sector was massively de-rated in 2008 and the average share price fall was 40% across it owing to worries over its rate of growth.”
White Young Green was singled out by one source as the best deal. Following a profit warning in November, Arbuthnot put a p/e ratio of 2.2 on the company.
It said: “Its share price fell 83% last year, there are concerns over its £68m debt and its chief executive left. The ingredients are there for a private equity deal.”
Scott Wilson was also singled out as a target because its board is understood to be dismayed by its low share price and de-listing has been discussed.
Both companies declined to comment.
The source said: “A low share price is demotivating for management who have shares and options. A private equity owner that could invest in growth must be a temptation.”