More debt would keep FTSE-350 off private equity radar

Research by KPMG found that, together, the FTSE-350 will amass a cash surplus of £198bn by 2008, making many of the country’s largest companies more attractive to private equity takeovers.

As a result of the massive cash surplus, these companies face three potential choices: to pay down debt; to increase shareholder dividends; or to fund organic or acquisitive growth. “We believe that paying down debt is the least likely option given that corporates are already conservatively financed,” said David Simpson of KPMG.

The average net debt-to-earnings ratio stood at just 0.85 for the FTSE-100 and 1.75 for the FTSE-250 at the end of 2005, compared with 7.7 times for large private equity-backed buyouts.

“While it would be inappropriate for large listed companies to ramp up debt to private equity levels, there is nevertheless an opportunity to increase the amount of leverage,” said Simpson. “This would provide huge potential firepower for UK corporates over the next few years.”

The findings of the KPMG Cash Counter survey point to FTSE-100 companies increasing shareholder dividend payments, while FTSE-250 businesses increase their investment and acquisition activity.

For more on the KPMG report, click here.