News - Midlands
Under the Hammer
The perception that every disposal of quality corporate assets involves a beauty parade of hungry venture capitalists (VCs) is both widespread and plausible.
The City has a veritable wall of investment money to lend and, as big ticket deals remain a rarity, auctions seem the logical route for vendors to maximise their returns.
The US-style process has become rapidly more popular in the last 18 months, and is regularly seen in the mid-market, rather than just at the previous £3100m-plus level.
But a large number of major transactions are still successfully completed in the traditional way.
Mark Advani, who heads the Birmingham office of ISIS Equity Partners, says two of his team's last four deals were entirely off-market and the others were very restricted sales.
"As a buyer, auctions are obviously a nightmare. You could spend months going through two or three rounds, only to discover that you've tied up staff on non-productive work," he says.
"There is a huge temptation to bid, have a look-see and then make up your mind later, but that doesn't work. You have to decide which four or five of the dozens of companies available you really want."
However, Advani accepts that the current balance is unlikely to continue.
"I do see more auctions ahead. If you are selling the best assets, whether to a VC or a trade buyer, then a tight auction must be the best way of attracting the maximum price," he says.
The theory was demonstrated when ISIS sold its stake in Fat Face Holdings to Advent International in 2005.
The price for the clothing, footwear and accessories retailer has never been confirmed, but is thought to be around £3100m.
Advani - who had led the original investment five years earlier - decided to grant exclusivity to one PE provider, from a shortlist of three.
"One said the money would be there in two weeks, the others said four, so we went for the first and they completed in just over a fortnight."
The auction debate brings much talk of angles, but Advani's view is mischievously dismissive.
"It doesn't disguise the fact that the price will be the decisive factor," he says. "People talking about angles are just looking for an excuse to pay the most."
But Paul Franks, Gresham's investment director in Birmingham, disagrees.
"If you don't have an edge, how well do you know the management? Or perhaps how the business would fit into your portfolio?" he asks. "Then the auction just becomes a case of last man standing, which doesn't work 95 per cent of the time."
Franks thinks victory can be achieved in the most competitive disposals with the correct research.
"We backed Olaer Industrial Products' management buyout (MBO) from Expamet International last year, which was a really aggressive auction involving about 20 people," he says.
"We'd spotted the business early though, knew it was coming up for sale and were well in the running even before the information packs went out."
Another Gresham transaction in 2005 - the exit from insurance claims management specialist ANSA - underlined the merits of old-style trade disposals.
"We identified one strategic buyer which was prepared to pay a premium for the certainty of an off-market deal," says Franks.
"We received three times our investment in one year, and management didn't have to go through the distraction of an auction."
At Close Brothers Private Equity (CBPE), investment director Ted Bell also believes in flexibility.
"The best thing to do with auctions is avoid them wherever you can," he says. "The Holy Grail of investment deals is still off-market ones, but equally you can't afford to be formulaic when selling".
"We've completed exits via auctions and via a single buyer. It depends what is best for each company and management."
Bell speaks of being "honest and correct", which aren't the first words you expect to find in the lexicon of corporate finance.
However, CBPE's strategy clearly pays off. "We have won major deals when the auction process fell apart and we were seen as the benign alternative," recalls Bell.
"In the case of Moody International - a $55m buyout - they didn't come to us initially, but our reputation for playing straight eventually attracted them."
Bell says the ability to parachute in quality management can be another critical factor in winning deals via a competitive auction.
"We'd worked with Mike Snapes at European Golf Brands, and knew he was just what Nottingham-based Hillarys Blinds wanted," he says.
"They were doing £35m or £36m, but he really put the burners under the business and three years later they were doing £313m or £314m."
The speed at which the auction trend has grown has created the impression that the Midlands' VC community is enjoying a boom, but LDC's investment director Chris Hurley believes it's an illusion.
"Mid-market deals fell 15 per cent last year, and all deals were down 20 per cent. Anecdotally, I believe this is the result of the obsession with auctions and we are working in a false market," he says.
"Everyone in corporate finance always says they're busy, but you can have all Birmingham working on the same deal, which soaks up a lot of resources."
Hurley says advisers need to recognise that auctions are an option, rather than a must.
"We are seeing a lot of busted auctions because the corporate finance people keep trying to force deals through the mangle that just can't be done.
"Six rounds of an auction then everything falls apart, and the would-be vendor has achieved nothing for their time and money."
Hurley accepts that funders must also adapt their strategies to the market's changing nature, but has a different interpretation of Advani's caveat about price.
"Seeing angles as excuses might just be a truism. You understand a business so well and have realised its true value that you are prepared to pay the most."
Martin Draper, regional director of LDC, says that while auctions have loing been a feature of the mega-deal market, they are far thinner on the ground at smaller company end.
He adds: "However, bouyant market conditions and the weight of available funding are making protracted auction processes a more commone feature of the mid-market landscape.:"
It's easy to assume, of course, that paying top dollar must clinch any deal, but James Arrowsmith, MVM's investment manager in the Midlands, shares the view of CBPE's Bell that perception can be as critical.
"We sold a business through an auction when several financial institutions were bidding, but we didn't choose the one offering the highest price because it had a reputation for cutting the price along the way."
He believes managing vendors' expectations can be equally crucial.
"Everyone has to try to discern the difference between value and price, which isn't easy, especially if someone sees just one chance to sell a business they have spent many years building."
However, Arrowsmith accepts that even professionals can be overcome by an adrenalin-pumping desire to do the deal.
"When you are selling a business, you focus on building momentum, but deals do develop a life of their own and you can find yourself being swept away," he admits.
"You always need to maintain a sense of distance and remember that running an auction process well can add massive value for the vendor."
The VC community's concern that advisers have become obsessed by auctions is shared by Eversheds' head of corporate, Stephen Kitts.
He says: "It seems those who win disposal mandates automatically think an auction is the right way to go, but everyone needs to be very clear and careful about the decision.
"Auctions can be fantastic, but can be wholly inappropriate. Management teams need to be educated to realise that an auction will not automatically get them a fabulous return."
As Insider went to press, his point was underlined by his latest transaction, working with the buy team on a £370m disposal.
"The auction didn't deliver, so the company then decided to establish a collaborative relationship with a single VC," says Kitts.
"It is a successful business, but the deal was complicated by both its corporate structure and the market which it serves."
Inevitably, as auctions become commonplace, advisers adopt more sophisticated techniques of managing the process on behalf of management.
Martyn Pilley, corporate finance partner at RSM Robson Rhodes, floats the concept of the virtual auction.
"We've had successful sales with just one buyer. If everything goes just right, they may not even know that they are the only buyer," he says.
Pilley recalls how one Birmingham plc used an auction to value its own business ahead of an MBO.
"They went out to potential trade buyers, whilst working on a possible buy-out, then benchmarked the company against the prices on offer and did the MBO," he says.
Pilley also recently encountered an intriguing reversal of the VC philosophy that suggests the best pickings lie off-market.
"I spoke to a private equity house which would rather be in an auction, than trying for off-market deals," he says.
"They would at least get the initial information and have a detailed starting point. They might then be happy to pay top price, rather than haggle over a potential off-market deal that could go nowhere."
Even the most experienced and high-profile advisers can come unstuck during auctions though.
Ben Johnson, who heads the private equity team at East Midlands lawyers Geldards, says it is common for completion timetables to disintegrate as negotiations proceed.
He says: "The key issue for the auctioneer is maintaining the competitive pressure on the preferred bidder.
Often though, the pressure is lost and the deal then collapses because the under-bidder is reluctant to step back in."
Johnson was involved in a sizeable disposal of a pub chain, where the auctioneer kept the process alive through an offer that no funder could refuse.
"They kept two bidders running throughout by offering to pay the costs of the eventual loser, up to £3500,000. Obviously even if the vendor decided not to sell, neither would be worse off, although the cost would be significant."
Johnson says some auctioneers also fail to ensure that the management is wedded to the auction outcome.
"You have to ensure that the team can be delivered, and that everyone is comfortable with the process," he says. "No-one can afford to start focusing purely on the price of the deal."
Failed auctions can also put a significant dent in the management team's hopes the second time round, according to Roger Buckley, BDO Stoy Hayward's private equity partner.
"Vendors have taken the advantages to heart without seeing the potential downside and the risk that their business might be seen as tarnished goods," he says.
Buckley recalls one disastrous auction where a business initially being touted for some £3110m, ultimately sold for just £380m.
Successful auctions inevitably drive up sale prices of course, but the cash-rich VCs don't seem overly bothered for the moment.
PricewaterhouseCoopers corporate finance partner Matt Waddell says one recent West Midland transaction saw a business making only £35m profit a year go for almost £350m.
"Ten times earnings is a high price, but the buyers were happy because it's not easy to find quality assets that are available," he says.
However, Waddell also offers timely statistics to counterbalance the feeling that auctions dominate the market.
"Last year, 80 per cent of the deals on which we were successful did not involve an auction, and we didn't get 80 per cent of those we looked at in auctions."
In common with other observers though, he accepts that the process is here to stay, but feels that several VC houses are already becoming disenchanted.
"It's a time-consuming process for everyone involved and the success rate is something like ten-to-one," says Waddell.
"We'll go into an auction if we genuinely think we can win it, but it's a pretty unattractive economic proposition for all of us given the slim chance."
True - but not as heartbreaking as the climax of a concerted Robson Rhodes effort to find an off-market deal in the Midlands last month.
"We'd been looking at this firm and had a VC seriously interested. We went to the company to find they were just three days away from giving exclusivity to someone else," recalls Pilley.
"It's a bad sign when you arrive somewhere and see a red Jaguar XK8 with the plates MBO 1"
The City has a veritable wall of investment money to lend and, as big ticket deals remain a rarity, auctions seem the logical route for vendors to maximise their returns.
The US-style process has become rapidly more popular in the last 18 months, and is regularly seen in the mid-market, rather than just at the previous £3100m-plus level.
But a large number of major transactions are still successfully completed in the traditional way.
Mark Advani, who heads the Birmingham office of ISIS Equity Partners, says two of his team's last four deals were entirely off-market and the others were very restricted sales.
"As a buyer, auctions are obviously a nightmare. You could spend months going through two or three rounds, only to discover that you've tied up staff on non-productive work," he says.
"There is a huge temptation to bid, have a look-see and then make up your mind later, but that doesn't work. You have to decide which four or five of the dozens of companies available you really want."
However, Advani accepts that the current balance is unlikely to continue.
"I do see more auctions ahead. If you are selling the best assets, whether to a VC or a trade buyer, then a tight auction must be the best way of attracting the maximum price," he says.
The theory was demonstrated when ISIS sold its stake in Fat Face Holdings to Advent International in 2005.
The price for the clothing, footwear and accessories retailer has never been confirmed, but is thought to be around £3100m.
Advani - who had led the original investment five years earlier - decided to grant exclusivity to one PE provider, from a shortlist of three.
"One said the money would be there in two weeks, the others said four, so we went for the first and they completed in just over a fortnight."
The auction debate brings much talk of angles, but Advani's view is mischievously dismissive.
"It doesn't disguise the fact that the price will be the decisive factor," he says. "People talking about angles are just looking for an excuse to pay the most."
But Paul Franks, Gresham's investment director in Birmingham, disagrees.
"If you don't have an edge, how well do you know the management? Or perhaps how the business would fit into your portfolio?" he asks. "Then the auction just becomes a case of last man standing, which doesn't work 95 per cent of the time."
Franks thinks victory can be achieved in the most competitive disposals with the correct research.
"We backed Olaer Industrial Products' management buyout (MBO) from Expamet International last year, which was a really aggressive auction involving about 20 people," he says.
"We'd spotted the business early though, knew it was coming up for sale and were well in the running even before the information packs went out."
Another Gresham transaction in 2005 - the exit from insurance claims management specialist ANSA - underlined the merits of old-style trade disposals.
"We identified one strategic buyer which was prepared to pay a premium for the certainty of an off-market deal," says Franks.
"We received three times our investment in one year, and management didn't have to go through the distraction of an auction."
At Close Brothers Private Equity (CBPE), investment director Ted Bell also believes in flexibility.
"The best thing to do with auctions is avoid them wherever you can," he says. "The Holy Grail of investment deals is still off-market ones, but equally you can't afford to be formulaic when selling".
"We've completed exits via auctions and via a single buyer. It depends what is best for each company and management."
Bell speaks of being "honest and correct", which aren't the first words you expect to find in the lexicon of corporate finance.
However, CBPE's strategy clearly pays off. "We have won major deals when the auction process fell apart and we were seen as the benign alternative," recalls Bell.
"In the case of Moody International - a $55m buyout - they didn't come to us initially, but our reputation for playing straight eventually attracted them."
Bell says the ability to parachute in quality management can be another critical factor in winning deals via a competitive auction.
"We'd worked with Mike Snapes at European Golf Brands, and knew he was just what Nottingham-based Hillarys Blinds wanted," he says.
"They were doing £35m or £36m, but he really put the burners under the business and three years later they were doing £313m or £314m."
The speed at which the auction trend has grown has created the impression that the Midlands' VC community is enjoying a boom, but LDC's investment director Chris Hurley believes it's an illusion.
"Mid-market deals fell 15 per cent last year, and all deals were down 20 per cent. Anecdotally, I believe this is the result of the obsession with auctions and we are working in a false market," he says.
"Everyone in corporate finance always says they're busy, but you can have all Birmingham working on the same deal, which soaks up a lot of resources."
Hurley says advisers need to recognise that auctions are an option, rather than a must.
"We are seeing a lot of busted auctions because the corporate finance people keep trying to force deals through the mangle that just can't be done.
"Six rounds of an auction then everything falls apart, and the would-be vendor has achieved nothing for their time and money."
Hurley accepts that funders must also adapt their strategies to the market's changing nature, but has a different interpretation of Advani's caveat about price.
"Seeing angles as excuses might just be a truism. You understand a business so well and have realised its true value that you are prepared to pay the most."
Martin Draper, regional director of LDC, says that while auctions have loing been a feature of the mega-deal market, they are far thinner on the ground at smaller company end.
He adds: "However, bouyant market conditions and the weight of available funding are making protracted auction processes a more commone feature of the mid-market landscape.:"
It's easy to assume, of course, that paying top dollar must clinch any deal, but James Arrowsmith, MVM's investment manager in the Midlands, shares the view of CBPE's Bell that perception can be as critical.
"We sold a business through an auction when several financial institutions were bidding, but we didn't choose the one offering the highest price because it had a reputation for cutting the price along the way."
He believes managing vendors' expectations can be equally crucial.
"Everyone has to try to discern the difference between value and price, which isn't easy, especially if someone sees just one chance to sell a business they have spent many years building."
However, Arrowsmith accepts that even professionals can be overcome by an adrenalin-pumping desire to do the deal.
"When you are selling a business, you focus on building momentum, but deals do develop a life of their own and you can find yourself being swept away," he admits.
"You always need to maintain a sense of distance and remember that running an auction process well can add massive value for the vendor."
The VC community's concern that advisers have become obsessed by auctions is shared by Eversheds' head of corporate, Stephen Kitts.
He says: "It seems those who win disposal mandates automatically think an auction is the right way to go, but everyone needs to be very clear and careful about the decision.
"Auctions can be fantastic, but can be wholly inappropriate. Management teams need to be educated to realise that an auction will not automatically get them a fabulous return."
As Insider went to press, his point was underlined by his latest transaction, working with the buy team on a £370m disposal.
"The auction didn't deliver, so the company then decided to establish a collaborative relationship with a single VC," says Kitts.
"It is a successful business, but the deal was complicated by both its corporate structure and the market which it serves."
Inevitably, as auctions become commonplace, advisers adopt more sophisticated techniques of managing the process on behalf of management.
Martyn Pilley, corporate finance partner at RSM Robson Rhodes, floats the concept of the virtual auction.
"We've had successful sales with just one buyer. If everything goes just right, they may not even know that they are the only buyer," he says.
Pilley recalls how one Birmingham plc used an auction to value its own business ahead of an MBO.
"They went out to potential trade buyers, whilst working on a possible buy-out, then benchmarked the company against the prices on offer and did the MBO," he says.
Pilley also recently encountered an intriguing reversal of the VC philosophy that suggests the best pickings lie off-market.
"I spoke to a private equity house which would rather be in an auction, than trying for off-market deals," he says.
"They would at least get the initial information and have a detailed starting point. They might then be happy to pay top price, rather than haggle over a potential off-market deal that could go nowhere."
Even the most experienced and high-profile advisers can come unstuck during auctions though.
Ben Johnson, who heads the private equity team at East Midlands lawyers Geldards, says it is common for completion timetables to disintegrate as negotiations proceed.
He says: "The key issue for the auctioneer is maintaining the competitive pressure on the preferred bidder.
Often though, the pressure is lost and the deal then collapses because the under-bidder is reluctant to step back in."
Johnson was involved in a sizeable disposal of a pub chain, where the auctioneer kept the process alive through an offer that no funder could refuse.
"They kept two bidders running throughout by offering to pay the costs of the eventual loser, up to £3500,000. Obviously even if the vendor decided not to sell, neither would be worse off, although the cost would be significant."
Johnson says some auctioneers also fail to ensure that the management is wedded to the auction outcome.
"You have to ensure that the team can be delivered, and that everyone is comfortable with the process," he says. "No-one can afford to start focusing purely on the price of the deal."
Failed auctions can also put a significant dent in the management team's hopes the second time round, according to Roger Buckley, BDO Stoy Hayward's private equity partner.
"Vendors have taken the advantages to heart without seeing the potential downside and the risk that their business might be seen as tarnished goods," he says.
Buckley recalls one disastrous auction where a business initially being touted for some £3110m, ultimately sold for just £380m.
Successful auctions inevitably drive up sale prices of course, but the cash-rich VCs don't seem overly bothered for the moment.
PricewaterhouseCoopers corporate finance partner Matt Waddell says one recent West Midland transaction saw a business making only £35m profit a year go for almost £350m.
"Ten times earnings is a high price, but the buyers were happy because it's not easy to find quality assets that are available," he says.
However, Waddell also offers timely statistics to counterbalance the feeling that auctions dominate the market.
"Last year, 80 per cent of the deals on which we were successful did not involve an auction, and we didn't get 80 per cent of those we looked at in auctions."
In common with other observers though, he accepts that the process is here to stay, but feels that several VC houses are already becoming disenchanted.
"It's a time-consuming process for everyone involved and the success rate is something like ten-to-one," says Waddell.
"We'll go into an auction if we genuinely think we can win it, but it's a pretty unattractive economic proposition for all of us given the slim chance."
True - but not as heartbreaking as the climax of a concerted Robson Rhodes effort to find an off-market deal in the Midlands last month.
"We'd been looking at this firm and had a VC seriously interested. We went to the company to find they were just three days away from giving exclusivity to someone else," recalls Pilley.
"It's a bad sign when you arrive somewhere and see a red Jaguar XK8 with the plates MBO 1"