Troubled auctions highlight hurdles to M&A

LONDON (Reuters) - A string of drawn-out and sometimes failed auctions highlights how tough the crisis has made it to clinch deals -- and difficulties are likely to persist until markets stabilize and debt becomes more available.

Unlike the fast, hotly contested sales of the boom years, sellers of assets now find buyers are in short supply, constrained by scarce debt, and often harboring radically lower ideas of what a business is worth.

"Price expectations have not adjusted," Andrew Newington, managing partner at BC Partners, told a Reuters summit this week. "People still think their businesses are worth what they were worth two years ago."

In recent months, companies and the mergers and acquisitions (M&A) bankers that advise them have slowed down or scrapped several big auctions, ranging in value from about $1 billion to tens of billions of dollars.

In December Reed Elsevier scrapped the sale of its trade magazines division, saying it could not agree "acceptable terms," while weeks later Oman shelved plans to sell a stake in Oman Telecommunications Co, blaming weak economic conditions.

And this month embattled U.S. insurer American International Group Inc (AIG) shelved plans to sell prized Asia unit American International Assurance Co (AIA), worth tens of billions of dollars, and foreign life unit American Life Insurance Co (Alico).

All this comes as M&A overall struggles -- global dealmaking fell 30 percent last year to $2.94 trillion, while the number of canceled deals rose to a record.

DELAYED

Other sales have been delayed, such as that of Vattenfall's billion-euro high-voltage German power grid, which has been put back by months to iron out regulatory and financing issues.

In Britain, bidders for London's Gatwick airport, valued at up to about 2 billion pounds, have been given an extra month to sort out due diligence and financing arrangements.

Banks are lending smaller amounts, and scrutinizing deals much more carefully -- meaning a deal the size of Gatwick might require winning approval from 10 or more banks.

It's a far cry from the boom years. In late June 2006 Philips said it might sell its semiconductor unit, and within about six weeks reached an 8.3-billion-euro deal with a trio of buyout houses that topped offers from two rival groups.

Daniel Stillit, head of special situations research at UBS, said buyers were more risk averse, doing more due diligence and structuring deals more carefully.

"There may not be as much competitive tension in the process lending a sense of urgency and therefore it can take longer to consummate a disposal," Stillit said.

"Issues that wouldn't weigh so heavily in the past do so now and the cost of getting the process wrong is higher."

"OFF A CLIFF"

Sizing up businesses' earnings power in the face of what the World Bank warns will be the first global economic contraction since World War Two poses another big challenge.

Paul Knight, head of industrials for Europe, the Middle East and Africa (EMEA) at UBS, said buyers were struggling to estimate future cashflows using measures such as earnings before interest, tax, depreciation and amortization (EBITDA).

Because future cashflows are discounted, cash in the first few years after an acquisition looms largest in net present value calculations and is particularly hard to estimate.

"Modeling is very hard," Knight said. "For many companies cashflow was fine for the first half of 2008, then it fell off a cliff -- so what lesson do you deduce for annual EBITDA in the future and what assumptions can you safely make about demand?"

Such thorny questions might be troubling potential buyers of Rio Tinto's market-leading industrial minerals businesses, which have been on sale since November.

Paulo Pereira, a partner at Perella Weinberg in London said volatility was making all business decisions, including M&A, difficult and it would be a while before that changes.

"For that to improve you need more stability in the markets, a better financing market and improved visibility on key trends, all of which will take some time."

(Reporting by Quentin Webb; Editing by Sharon Lindores)