News - Midlands
Twelve months ago we wrote on these pages that the Midlands corporate finance community was going through a severe bout of soul searching. Why was the region losing out on action to other regional centres? How should it be reacting to the growing invasion of London houses into the Midlands pond?
But autumn 2006 finds our rainmaking community in remarkably rude health with several Dealmaker winners this year going so far as to say that they are enjoying their strongest market for a decade. The Midlands has regained its rightful market share; everyone's got used to working closer with London; the consumer is spending again; and you can even do business with that fiercesome Pensions Regulator.
There is a growing sense of self-confidence that Midlands dealmakers need not be constrained by regional boundaries in hunting for business. Matt Upton, partner at Ernst & Young, is part of a movement of younger players who see the Midlands business culture as one that is far more expansive in its outlook.
He says: "What we don't want is a Fortress Midlands mentality, where we won't allow dealmakers from outside the region to come onto our territory. That's not only a small-minded parochial attitude, it's at least ten years out of date and it's unworkable. What we want to emphasise is the skill sets we have. We no longer lack anything to put deals together. There's no reason why really big deals have
to migrate to London. The Midlands is busy trying to create deals, rather than just being along for the ride."
Paul Franks, investment director at Gresham Private Equity, says that recent deals show a new mindset. He says: "We have to accept there is no Midlands merger and acquisition (M&A) market as such any more. Instead there is a collection of people with the skills, drive and imagination to make deals happen."
Matt Waddell, Midlands head of corporate finance at PricewaterhouseCoopers (PwC), says market dynamics are perfect: "We have willing sellers and willing buyers in almost perfect balance, with sellers keen to take advantage of good prices and funders, both equity and debt, continuing to be keen to structure deals."
He says healthcare has performed particularly well this year, as has
industrial manufacturing. And his views that manufacturing could be a renewed focus for deal activity in the year ahead are echoed by several counterparts.
But he does add that the reduced presence of local private equity houses in Birmingham has impacted on the nature of dealmaking in the region too.
"Deals involving regional businesses are increasingly being structured on a national, rather than regional level,"
he says. "With competition driving the market and the growing interest of London finance houses in doing deals in the region, it's vital that local private equity firms and advisers keep an eye on both the national and regional markets."
And that is exactly what they appear to be doing. Phil Griesbach, director at Barclays Private Equity, says: "There is no question that the reduction in the number of private equity players in Birmingham following the withdrawal of Royal Bank Private Equity, the closure of 3i and the retrenchment of Bridgepoint to London has impacted on the local scene and has led to more local deals being transacted with London houses. However, from what I can see the Midlands corporate finance market is still faring relatively well."
Andy Currie, partner at Catalyst Corporate Finance, says the Midlands market has reacted well to changing market dynamics. "We should not bemoan the fact that some deals go off patch xd0 it is a fact of life," he says. "It is up to us all to ensure we have the origination capabilities to drive the local market. This is where I think the Midlands community is better placed than before. A couple of years ago, too many people were saying things like "it's not like the old days when we did all our deals in Metro and Primitivo'. Correct, it is not. Move on. Recognise that virtually every sector has gone national or even global. Why should ours be any different?"
Guy Green from law firm Eversheds sums things up: "To find large transactions we have been fishing outside the Midlands region and, indeed, outside the country. However, we have been able to bring them back to Birmingham for the advisory work and, in a significant number of cases, finance. Birmingham is also now becoming more of a national centre for transaction delivery too."
Currie agrees that the mid-market is far more a national market than it was ten or even five years ago. "The arrival of London players is largely as a result of them winning in auction processes yet there is relatively little evidence of London players originating transactions in the Midlands," he says. "The fact that London players may have fared better in a number of auction processes may be as a result of features such as being willing to pay more and the disposal of some Midlands business has been led by London based advisers. Midlands funders are not seeing the opportunity and are not playing the auction game as well as London funders."
Phil Burns, partner at Clearwater Corporate Finance and a two-time winner of Dealmaker of the Year, says the "whole London thing" has actually helped because it has made the locals much more competitive and hungry. "If you look at some of the off-patch deals brought into the Midlands then I think this supports that," he says. "Dealflow is much better as I think most of us with strong businesses on the ground are doing just fine."
The rise of auctions has been one of the defining trends of the year. Most financiers you speak to have nothing but disdain for them, but admit they are powerless to do anything about it. Ian Howey from Yorkshire Bank, who made our shortlist for banker of the year, says: "It's not easy to be positive about the auction process, especially from a bank perspective because no matter how good the debt offer you can still easily miss out. Give me a beauty parade any day."
Currie makes the point that auctions are not necessarily bad things but badly run ones are a real pain. "We can all point to a number of transactions that have fallen over simply because of a poorly run auction process," he says.
"A typical conversation might go along the lines of xd4you've got to bid £360m to get through to stage two', but your reply might be xd4the business isn't worth that, it's worth £350m'. The reply comes back: xd4I know but that's what you've got to do.' Further information released will then confirm the £350m valuation.
"You then might say: "My second round bid is £350m which you know is fair.' To which the reply comes: "The vendor won't sell at £350m because he originally thought he would get £350m but now he wants £360m.' Who told him it was worth £360m? "You did in your first round bid.' And so it goes on."
James Grenfell from Kroll Corporate Finance, says the process is largely cheque-book led and your ability to win the deal is largely down to the appetite of the venture capitalist (VC) and how prepared they are to cut corners and fund premium prices. "The process does however, increase the risk of over paying for a business and dramatically increase the risk of failure," he says. "At the same time the nature of the process reduces the influence of the management team and drives down their equity holdings. As a result I believe many lead advisers are limiting the number of auction processes that they enter."
But the strength of the local community working together can never be underestimated. The point was exemplified in the recent sale of shower tray business Just Trays to a Gresham-backed buyout. This transaction was cited by many as a great example of how the community can work together to deliver a deal involving an off-patch business.
Richard Wilkey from law firm DLA Piper and one of our Young Dealmaker finalists, says London financiers appreciate the links too. "When I worked on the buyout of Lindley Catering in Stoke, London-based Sovereign Capital who backed the deal really liked the way that we had a local community which worked for each other," he says. "And we have started to see more deal reciprocation between London and Birmingham. It isn't all one-way traffic now. People have got used to the impact of more aggressive London advisers operating in the Midlands and are working with it. It is an exciting time to be in Birmingham xd0 there is everything to go for."
So what have our rainmakers been going for over the past year? A highlight of the year for many, and again exemplifying the capacity of Midlands financiers to source deals from outside the region, was the sale of London-based Metal & Waste Recycling to management and Barclays Private Equity in a deal backed by Royal Bank of Scotland and Barclays.
Peter McLintock from law firm Hammonds worked on the transaction. "This was one of the few £3100m plus deals in recent memory entirely advised upon in Birmingham. It is also the largest leveraged deal ever done in the recycling sector," he says. "Who would have thought that scrap metal would be fought over by VCs? This is a sign of changing times and the private equity community's ability to change with it."
Two even bigger deals in which the Midlands corporate finance community played its part were the £31.46bn sale of telecoms entrepreneur John Caudwell's Phones4U and 20:20 Distribution businesses to private equity, and the sale of Derbyshire-based engineering group Doncasters to Dubai International Capital for a whopping £3700m.
The latter was one of several exits following a spate of take-privates originally led by Royal Bank Private Equity (RBPE) in 2001 (deals that helped RBPE's John Dillon take the Dealmaker of the Year award that year). As well as disposing of Doncasters for a hefty premium, over the past year RBS also oversaw the £3230m sale of the childcare division of the Britax empire to the US Carlyle Group (see deal of the year p45).
Birmingham law firm Wragge & Co was among those who advised the management team, funded by Providence Equity Partners, on the Phones4U deal. But admittedly much of the advice on the deal did come out of Manchester.
PwC also worked on some big ticket deals, most notably with Electra Partners Europe on the secondary buyout of Market Harborough-based Travelsphere for £3144m, and then earlier this summer acted for the management team on the £384m management buyout of Avery Weigh-Tronix from US parent Berkshire Partners in a deal backed by private equity company European Capital.
Latest figures from the Centre for Management Buyout Research, which Griesbach's firm co-sponsors, appear to back up the feeling that the market is buzzing again. Traditional buyouts from corporates have made a dramatic comeback, making up over 40 per cent of the market by value. Griesbach says that some 43 per cent of total market value xd0 the highest share for five years xd0 is now coming from corporate vendors, good news for the private equity industry, especially here in the Midlands where the management buyout market has traditionally been fuelled by businesses divesting non-core operations.
"And there is a perception that primary buyouts yield much better returns than secondary buyouts. Many players have been increasingly concerned that the huge growth in secondaries from 5 per cent of the market in 2001 to 37 per cent in 2005, could eventually lead to much lower overall returns as private equity consumes itself."
Griesbach says the increase in corporate buyouts appears to be driven by the global M&A boom. "Corporate predators often dispose of the unwanted parts of acquisitions in the form of buyouts," says Griesbach. The research showed that leisure, business support services and manufacturing are the key industry sectors driving the buyout market.
However the march of secondary buyouts has certainly continued as VCs look to spend their money. A few financiers too note that banks are pulling back from all debt deals. Rob Carroll, managing director of Catapult Venture Managers, says last year debt finance was being used to fund a number of transactions that may have otherwise been ripe for private equity but this is no longer the case. "An emerging trend within the marketplace is the apparent pull back of the banks from racy all-debt deals," he says.
"We are seeing more and more deals requiring equity slivers to provide breathing room."
Carroll says this seems to be driven by a more choppy economic environment with interest rates rising and a growing number of personal and business insolvencies over the last year or so. "The apparent receding of appetite for large debt levels from banks means that either prices will have to fall or vendors will have to take a bigger risk in their roll-over or the market will be forced to embrace smaller equity funds," he says.
Carroll fears too that if interest rates rise to 5 per cent, as many commentators are predicting, then conditions will become more challenging. "This could mean that highly geared all-debt management buyouts struggle."
Such a reality check may be no bad thing as rainmakers pat themselves on the back for turning in a strong 2006. But while the good times last, they'll continue to make as much hay as they can
A Bigger Pond
Twelve months ago we wrote on these pages that the Midlands corporate finance community was going through a severe bout of soul searching. Why was the region losing out on action to other regional centres? How should it be reacting to the growing invasion of London houses into the Midlands pond?
But autumn 2006 finds our rainmaking community in remarkably rude health with several Dealmaker winners this year going so far as to say that they are enjoying their strongest market for a decade. The Midlands has regained its rightful market share; everyone's got used to working closer with London; the consumer is spending again; and you can even do business with that fiercesome Pensions Regulator.
There is a growing sense of self-confidence that Midlands dealmakers need not be constrained by regional boundaries in hunting for business. Matt Upton, partner at Ernst & Young, is part of a movement of younger players who see the Midlands business culture as one that is far more expansive in its outlook.
He says: "What we don't want is a Fortress Midlands mentality, where we won't allow dealmakers from outside the region to come onto our territory. That's not only a small-minded parochial attitude, it's at least ten years out of date and it's unworkable. What we want to emphasise is the skill sets we have. We no longer lack anything to put deals together. There's no reason why really big deals have
to migrate to London. The Midlands is busy trying to create deals, rather than just being along for the ride."
Paul Franks, investment director at Gresham Private Equity, says that recent deals show a new mindset. He says: "We have to accept there is no Midlands merger and acquisition (M&A) market as such any more. Instead there is a collection of people with the skills, drive and imagination to make deals happen."
Matt Waddell, Midlands head of corporate finance at PricewaterhouseCoopers (PwC), says market dynamics are perfect: "We have willing sellers and willing buyers in almost perfect balance, with sellers keen to take advantage of good prices and funders, both equity and debt, continuing to be keen to structure deals."
He says healthcare has performed particularly well this year, as has
industrial manufacturing. And his views that manufacturing could be a renewed focus for deal activity in the year ahead are echoed by several counterparts.
But he does add that the reduced presence of local private equity houses in Birmingham has impacted on the nature of dealmaking in the region too.
"Deals involving regional businesses are increasingly being structured on a national, rather than regional level,"
he says. "With competition driving the market and the growing interest of London finance houses in doing deals in the region, it's vital that local private equity firms and advisers keep an eye on both the national and regional markets."
And that is exactly what they appear to be doing. Phil Griesbach, director at Barclays Private Equity, says: "There is no question that the reduction in the number of private equity players in Birmingham following the withdrawal of Royal Bank Private Equity, the closure of 3i and the retrenchment of Bridgepoint to London has impacted on the local scene and has led to more local deals being transacted with London houses. However, from what I can see the Midlands corporate finance market is still faring relatively well."
Andy Currie, partner at Catalyst Corporate Finance, says the Midlands market has reacted well to changing market dynamics. "We should not bemoan the fact that some deals go off patch xd0 it is a fact of life," he says. "It is up to us all to ensure we have the origination capabilities to drive the local market. This is where I think the Midlands community is better placed than before. A couple of years ago, too many people were saying things like "it's not like the old days when we did all our deals in Metro and Primitivo'. Correct, it is not. Move on. Recognise that virtually every sector has gone national or even global. Why should ours be any different?"
Guy Green from law firm Eversheds sums things up: "To find large transactions we have been fishing outside the Midlands region and, indeed, outside the country. However, we have been able to bring them back to Birmingham for the advisory work and, in a significant number of cases, finance. Birmingham is also now becoming more of a national centre for transaction delivery too."
Currie agrees that the mid-market is far more a national market than it was ten or even five years ago. "The arrival of London players is largely as a result of them winning in auction processes yet there is relatively little evidence of London players originating transactions in the Midlands," he says. "The fact that London players may have fared better in a number of auction processes may be as a result of features such as being willing to pay more and the disposal of some Midlands business has been led by London based advisers. Midlands funders are not seeing the opportunity and are not playing the auction game as well as London funders."
Phil Burns, partner at Clearwater Corporate Finance and a two-time winner of Dealmaker of the Year, says the "whole London thing" has actually helped because it has made the locals much more competitive and hungry. "If you look at some of the off-patch deals brought into the Midlands then I think this supports that," he says. "Dealflow is much better as I think most of us with strong businesses on the ground are doing just fine."
The rise of auctions has been one of the defining trends of the year. Most financiers you speak to have nothing but disdain for them, but admit they are powerless to do anything about it. Ian Howey from Yorkshire Bank, who made our shortlist for banker of the year, says: "It's not easy to be positive about the auction process, especially from a bank perspective because no matter how good the debt offer you can still easily miss out. Give me a beauty parade any day."
Currie makes the point that auctions are not necessarily bad things but badly run ones are a real pain. "We can all point to a number of transactions that have fallen over simply because of a poorly run auction process," he says.
"A typical conversation might go along the lines of xd4you've got to bid £360m to get through to stage two', but your reply might be xd4the business isn't worth that, it's worth £350m'. The reply comes back: xd4I know but that's what you've got to do.' Further information released will then confirm the £350m valuation.
"You then might say: "My second round bid is £350m which you know is fair.' To which the reply comes: "The vendor won't sell at £350m because he originally thought he would get £350m but now he wants £360m.' Who told him it was worth £360m? "You did in your first round bid.' And so it goes on."
James Grenfell from Kroll Corporate Finance, says the process is largely cheque-book led and your ability to win the deal is largely down to the appetite of the venture capitalist (VC) and how prepared they are to cut corners and fund premium prices. "The process does however, increase the risk of over paying for a business and dramatically increase the risk of failure," he says. "At the same time the nature of the process reduces the influence of the management team and drives down their equity holdings. As a result I believe many lead advisers are limiting the number of auction processes that they enter."
But the strength of the local community working together can never be underestimated. The point was exemplified in the recent sale of shower tray business Just Trays to a Gresham-backed buyout. This transaction was cited by many as a great example of how the community can work together to deliver a deal involving an off-patch business.
Richard Wilkey from law firm DLA Piper and one of our Young Dealmaker finalists, says London financiers appreciate the links too. "When I worked on the buyout of Lindley Catering in Stoke, London-based Sovereign Capital who backed the deal really liked the way that we had a local community which worked for each other," he says. "And we have started to see more deal reciprocation between London and Birmingham. It isn't all one-way traffic now. People have got used to the impact of more aggressive London advisers operating in the Midlands and are working with it. It is an exciting time to be in Birmingham xd0 there is everything to go for."
So what have our rainmakers been going for over the past year? A highlight of the year for many, and again exemplifying the capacity of Midlands financiers to source deals from outside the region, was the sale of London-based Metal & Waste Recycling to management and Barclays Private Equity in a deal backed by Royal Bank of Scotland and Barclays.
Peter McLintock from law firm Hammonds worked on the transaction. "This was one of the few £3100m plus deals in recent memory entirely advised upon in Birmingham. It is also the largest leveraged deal ever done in the recycling sector," he says. "Who would have thought that scrap metal would be fought over by VCs? This is a sign of changing times and the private equity community's ability to change with it."
Two even bigger deals in which the Midlands corporate finance community played its part were the £31.46bn sale of telecoms entrepreneur John Caudwell's Phones4U and 20:20 Distribution businesses to private equity, and the sale of Derbyshire-based engineering group Doncasters to Dubai International Capital for a whopping £3700m.
The latter was one of several exits following a spate of take-privates originally led by Royal Bank Private Equity (RBPE) in 2001 (deals that helped RBPE's John Dillon take the Dealmaker of the Year award that year). As well as disposing of Doncasters for a hefty premium, over the past year RBS also oversaw the £3230m sale of the childcare division of the Britax empire to the US Carlyle Group (see deal of the year p45).
Birmingham law firm Wragge & Co was among those who advised the management team, funded by Providence Equity Partners, on the Phones4U deal. But admittedly much of the advice on the deal did come out of Manchester.
PwC also worked on some big ticket deals, most notably with Electra Partners Europe on the secondary buyout of Market Harborough-based Travelsphere for £3144m, and then earlier this summer acted for the management team on the £384m management buyout of Avery Weigh-Tronix from US parent Berkshire Partners in a deal backed by private equity company European Capital.
Latest figures from the Centre for Management Buyout Research, which Griesbach's firm co-sponsors, appear to back up the feeling that the market is buzzing again. Traditional buyouts from corporates have made a dramatic comeback, making up over 40 per cent of the market by value. Griesbach says that some 43 per cent of total market value xd0 the highest share for five years xd0 is now coming from corporate vendors, good news for the private equity industry, especially here in the Midlands where the management buyout market has traditionally been fuelled by businesses divesting non-core operations.
"And there is a perception that primary buyouts yield much better returns than secondary buyouts. Many players have been increasingly concerned that the huge growth in secondaries from 5 per cent of the market in 2001 to 37 per cent in 2005, could eventually lead to much lower overall returns as private equity consumes itself."
Griesbach says the increase in corporate buyouts appears to be driven by the global M&A boom. "Corporate predators often dispose of the unwanted parts of acquisitions in the form of buyouts," says Griesbach. The research showed that leisure, business support services and manufacturing are the key industry sectors driving the buyout market.
However the march of secondary buyouts has certainly continued as VCs look to spend their money. A few financiers too note that banks are pulling back from all debt deals. Rob Carroll, managing director of Catapult Venture Managers, says last year debt finance was being used to fund a number of transactions that may have otherwise been ripe for private equity but this is no longer the case. "An emerging trend within the marketplace is the apparent pull back of the banks from racy all-debt deals," he says.
"We are seeing more and more deals requiring equity slivers to provide breathing room."
Carroll says this seems to be driven by a more choppy economic environment with interest rates rising and a growing number of personal and business insolvencies over the last year or so. "The apparent receding of appetite for large debt levels from banks means that either prices will have to fall or vendors will have to take a bigger risk in their roll-over or the market will be forced to embrace smaller equity funds," he says.
Carroll fears too that if interest rates rise to 5 per cent, as many commentators are predicting, then conditions will become more challenging. "This could mean that highly geared all-debt management buyouts struggle."
Such a reality check may be no bad thing as rainmakers pat themselves on the back for turning in a strong 2006. But while the good times last, they'll continue to make as much hay as they can