News - Midlands
Tough questions
There's a lot of soul searching going on among this region's corporate financers. Why has dealflow dipped so consistently over recent years?
Is Birmingham losing out more to Manchester and Leeds? How can we stop those London finance houses pinching our deals? Are we doing enough to stop the rot? And how on earth can we put together deals when the economy, particularly on the retail side, is stuttering to a virtual standstill? Tough times indeed.
Where better place to start for a take on things than with this year's Dealmaker of the Year, none other than James Grenfell at Kroll Corporate Finance.
"The competitive nature of the private equity market means that dealmakers are hunting wider for deals and geographic barriers to initiating and completing deals are reducing," he says. But worryingly he adds: "I believe that this has hit the Midlands market harder than most and as a community as a whole we have been slower to react to the changing environment."
The view is backed up by one of the region's most outstanding younger dealmakers, James Trevis at law firm Eversheds. "We need to be positive and embrace the challenges ahead. We have no divine right to keep deals in the Midlands; we need to be proactive on deal origination. The world is a changing place; we need to be less parochial, need to be aware of connections elsewhere and where appropriate make use of them."
Our Lawyer of the Year for a second year running, Jim Lavery at DLA Piper Rudnick Gray Cary, believes the problems could be more deep rooted. As he tells our dealmakers forum discussion (starting on page 59), the problem could be that no one trusts 100 per cent the relationships they have anymore. "Because deal flow was limited between about 1999 and 2001, a lot of those famed relationships of the 90s got broken down. People went off and did different things. I do not think we trust people today in our own community as much as we did in the 90s and the whole community suffers as a result. We are not prepared to be as honest with each other."
Lavery goes on to say that because the relationship isn't quite as strong it means you cannot be as open as you want when it comes to putting together the deal.
All of which has meant a couple of things. Firstly a creeping tendency by dealmakers in the region to go off in their own separate directions and deal with new funders and advisers, wherever they may be. And secondly an ever-increasing focus on deal origination. Rainmakers realise that deals simply won't come to them anymore if they sit back and wait.
As Paul Franks, our Young Dealmaker of the Year, sums up: "The market is so much more sophisticated now. You have to spend time talking to more companies. You have to be prepared to do whatever it takes. You have to focus more on the origination side."
Mike Ellwood, managing director of Corporate & Structured Finance at Royal Bank of Scotland, agrees. "You have to be realistic and move with the market. This has seen our team in the Midlands working closely with our existing customer base on a number of refinancing opportunities with cash-out deals for management and equity holders a feature. We are also working with a wide number of advisers at the present time. We retain our close working relationships with Midlands advisers, but have this year also worked, where the transaction has dictated, with a number of parties external to the region's boundaries.
"Opportunities do and will continue to present themselves to Midlands dealmakers. However, we all need to have an open and constructive approach as to how we meet the challenges of the current environment. Openly promoting the expertise of Midlands' professionals by continuing to deliver deals across the leveraged finance spectrum and telling the wider market about them can only be the best advertisement for our local professional community."
Ellwood goes on to back up the view of many others in that 2005 has been a challenging year for dealmakers in the Midlands. "Statistically more businesses are being sold or restructured than undergoing the management buyout (MBO) route in the current market. The local corporate finance community has also been facing up to the growing influence of London in the leveraged finance market in the region," says Ellwood.
Latest figures underline the difficulties. According to business advisory Grant Thornton a total of 74 deals were completed in the Midlands during Q2 2005, compared with 96 in Q1. The Midlands results are in contrast to the national picture which has seen an increase in mergers and acquisitions (M&A) deals activity.
Corporate finance partner Andrew Roberts describes the number of deals completed in the West Midlands as "discouraging". "The deal values are comparable, but we have certainly seen a drop in volume which is a cause for concern," he says. "Although the current West Midlands economic climate is steady, business is certainly not booming, with real concerns over consumer confidence troubling many companies. Buyers and vendors certainly are being cautious."
The decrease in Midlands' M&A activity is also supported by the latest figures from the Centre of Management Buy Out Research (CMBOR) which revealed that 20 MBOs have taken place since the start of 2005 with a value of £3306.4m - roughly half of deals managed during the same period last year.
Richard Sanders, partner at Catalyst Corporate Finance - who again makes our shortlist this year -, says original 2005 market expectations were for a continuation of the high level of deal activity seen towards the end of 2004, while the reality has been a slowdown. Sanders lays much of the blame with the economy. "Retail sales figures post Christmas were disappointing for a number of retailers and this had an impact on the overall economy which is very much driven by the consumer."
How has this been reflected in deal activity? Sanders says: "Initially a number of opportunities that were in the pipeline at the end of 2004 came to the market too late and the prices promised at the end of 2004 were not on offer in 2005. Those promising fundamentals in the latter part of 2004 that were driving deal activity changed in the first half of 2005. It has taken some time for these changes to be assimilated and understood by the market. This is one of the key factors to slowing down deal activity to date."
He adds that a particular consequence of the changing nature of the economy is that debt multiples offered have been unpredictable. "Some transactions continue to attract substantial debt offers, whilst others have struggled to achieve the historic levels."
Another factor casting a giant cloud over deal activity has been pensions.
As Adrian Cutler, corporate partner in the Birmingham office of law firm Cobbetts, says: "2005 has been the year where under-funded pension schemes have come to the forefront and the deficit in some funds has, unfortunately, resulted in the collapse of otherwise viable transactions. With the problem escalating, this is a theme that is going to recur in coming years. However, we are simply going to have to become more creative when structuring deals where issues surrounding pension schemes exist."
However, as we all know, in tough times the tough get going and rise to the top, and our annual celebration of the region's dealmakers is all about highlighting those firms and individuals who have risen to the challenge.
Chief among them continues to be Clearwater Corporate Finance, which demonstrated its domination of the mid-market with a hat-trick win of the coveted title of adviser of the year.
Led in the Midlands by joint managing director Phil Burns, Clearwater's team continues to complete a string of successful deals throughout the UK regions and its new London office, which opened on July 2004, is generating deal flow from South East companies and bringing transactions back in to the Midlands community. Further to our earlier observation, their success is largely down to proactive deal origination skills, which mean that Clearwater is not reliant on referrals. The success is all the more remarkable given that it is still barely two years since Clearwater undertook its own MBO from Tenon.
Catalyst and Kroll also continue to make waves in the market, exemplified by Grenfell's overall success, a success also based on being prepared to go in search of deals further afield if need be. One of his nominated top three deals this year was leading a group of Birmingham advisers to complete the buy-in management buyout of Leeds-based IT service provider Esteem Systems.
Across the board, Grenfell led his team through a series of successful and complex transactions over the last year.
A particular highlight was the £380m sale of SFI Group, owner of the Slug and Lettuce, Litten Tree and Bar Med, high street bars, to the Laurel Pub Company. Grenfell described it as a "milestone transaction" for the firm and its largest to date.
However, the boutiques didn't completely have it their own way. Big Four firm Deloitte also caught the eye this year after a few years out of the Dealmakers limelight. Its most high-profile deal was advising 3i and Newco in the £325m acquisition and incorporation of Interflora, one of the undoubted highlights of the year for Midlands advisers.
Another notable Midlands deal - and one from Clearwater's stable - with debt courtesy of Bank of Scotland, was the £348m secondary buyout of Denby Pottery, a 200-year-old brand that has survived everything from an MBO to a flotation to a take private, not to mention the decline of the pottery industry.
It was another strong year for the region's big banking players, not least as they encroach ever more on venture capital (VC) territory. As Adrian Cutler, corporate partner at law firm Cobbetts sums up: "This year the VCs have again not been as active as they have been previously and, as a result, the deals market has been largely underpinned by the banks, which have taken a much more innovative approach to integrated finance. This has meant that debt finance has been used to fund a number of transactions that may have otherwise been ripe for private equity investment."
And top honours once again went to Lloyds TSB, which consolidated its victory of 12 months ago. Mark Bolshaw and Paul Whitehouse were also both shortlisted in the individual category and only narrowly pipped by Ian Tetsill at Barclays. Lloyds say the pipeline continues to look strong, while follow-on deals from its own portfolio are also proving to be a rich seam at the moment.
A highlight for Tetsill - and many other dealmakers - was the £320m MBO of Stone Computers, a business that assembles and distributes own-brand desktop computers and other branded IT hardware for the public sector. The deal was backed by Baring English Growth Fund and structured by Catalyst.
Talking of the public sector, it was an area that continued to be a profitable source of deals over the year, alongside sectors such as outsourcing, support services and healthcare.
And despite the woes on the high street there were still deals to be done there if you looked hard enough. As David Armfield, Midlands' head of corporate finance at PricewaterhouseCoopers, says: "Over a third of the deals we advised on during the year have been in the retail and consumer goods sector."
These deals included the sale of two Midlands-owned businesses - Aqualisa and M&M Sports. "Looking ahead, we expect deal activity in the healthcare sector to remain robust, but with consumer confidence waning, the retail sector may be quieter in the months ahead," adds Armfield.
In the VC arena many column inches were devoted during the year to 3i's controversial closure of its Birmingham office, a move prompted by the firm's wish to consolidate its growth capital team in London. But what really stuck in the throats of Midlands financiers was the firm's decision to keep open its Manchester office because, in 3i's words, "being local is more important the further away you are from London".
David Totney, of asset-based lender Liquidity, speaks for many in the community when he says he struggles to understand the logic of the decision.
"If I had been 3i I would have shut London or Manchester and moved everything to the Midlands where we have geography on our side," he told our Dealmakers Forum.
Totney believes the closure could lead to a wider perception problem for Birmingham too. "Firms start to look at their regional make-up and ask themselves whether they need an office in Birmingham."
The whole equation becomes more worrying when so few deals are being done. As Grenfell says: "The private equity market has too much cash chasing too few deals. Both have the effect of pushing up price levels and making deals more difficult to complete. The market currently favours the seller, and therefore we have more activity focused on disposal work."
For those VCs still here there was a double triumph for LDC, which is also celebrating a new office move in Birmingham. Individual winner Martin Draper admits it has been a relatively quiet year across the board, but it didn't stop him putting together some cracking deals, most notably the buyout of Cannock electrical products group Electrium.
But as one VC leaves the region, another is quickly stepping into its shoes in the shape of Catapult Venture Managers, which has built on a solid five years in the East Midlands with the launch of Advantage Enterprise & Innovation Fund in the West Midlands and the opening of a Birmingham office.
Director Clive Austin believes the Midlands is now full of opportunity for regional private equity houses. "While many firms have opted for the mantra "big is good - small is bad' and gone in search of pavements made of gold in London, the opportunities remain for well-placed private equity firms in the Midlands.
"Private equity returns in the last few years have generally been better on larger deals, hence many firms have felt the need to upscale and relocate to the big smoke," he says. "However, there is now a massive overhang of capital chasing too few mega deals and returns are starting to suffer in the big deal arena.
"With the UK market becoming more mature, returns are being eroded. Arguably the recent rise of the secondary and tertiary buyout market is early evidence of this. In contrast, with the smaller deal market in the regions deserted by many investors, the time is now a-changing for regional players to capitalise." As such Austin believes there should be plenty of investment activity to keep everyone busy locally if advisers keep an open mind on deal size.
Talking of VCs, we cannot fail to mention one of the best exits of the year which belonged to ISIS. Back in 1999 its investment in retailer Fat Face was the very first deal done out of Birmingham. Since that time the company has increased turnover six-fold to £360m and increased its number of stores from 30 to 98. For an initial investment of £33.5m ISIS received a 40 per cent stake in the company. On the company's sale to private equity group Advent International earlier this year ISIS made 11.9 times its initial investment.
Meanwhile in our other categories there was little change this year. Congratulations again to Gateley Wareing, which saw off some much bigger guns to win Law Firm of the Year while Lloyds TSB Commercial Finance maintained domination of the asset-based lending category.
Is Birmingham losing out more to Manchester and Leeds? How can we stop those London finance houses pinching our deals? Are we doing enough to stop the rot? And how on earth can we put together deals when the economy, particularly on the retail side, is stuttering to a virtual standstill? Tough times indeed.
Where better place to start for a take on things than with this year's Dealmaker of the Year, none other than James Grenfell at Kroll Corporate Finance.
"The competitive nature of the private equity market means that dealmakers are hunting wider for deals and geographic barriers to initiating and completing deals are reducing," he says. But worryingly he adds: "I believe that this has hit the Midlands market harder than most and as a community as a whole we have been slower to react to the changing environment."
The view is backed up by one of the region's most outstanding younger dealmakers, James Trevis at law firm Eversheds. "We need to be positive and embrace the challenges ahead. We have no divine right to keep deals in the Midlands; we need to be proactive on deal origination. The world is a changing place; we need to be less parochial, need to be aware of connections elsewhere and where appropriate make use of them."
Our Lawyer of the Year for a second year running, Jim Lavery at DLA Piper Rudnick Gray Cary, believes the problems could be more deep rooted. As he tells our dealmakers forum discussion (starting on page 59), the problem could be that no one trusts 100 per cent the relationships they have anymore. "Because deal flow was limited between about 1999 and 2001, a lot of those famed relationships of the 90s got broken down. People went off and did different things. I do not think we trust people today in our own community as much as we did in the 90s and the whole community suffers as a result. We are not prepared to be as honest with each other."
Lavery goes on to say that because the relationship isn't quite as strong it means you cannot be as open as you want when it comes to putting together the deal.
All of which has meant a couple of things. Firstly a creeping tendency by dealmakers in the region to go off in their own separate directions and deal with new funders and advisers, wherever they may be. And secondly an ever-increasing focus on deal origination. Rainmakers realise that deals simply won't come to them anymore if they sit back and wait.
As Paul Franks, our Young Dealmaker of the Year, sums up: "The market is so much more sophisticated now. You have to spend time talking to more companies. You have to be prepared to do whatever it takes. You have to focus more on the origination side."
Mike Ellwood, managing director of Corporate & Structured Finance at Royal Bank of Scotland, agrees. "You have to be realistic and move with the market. This has seen our team in the Midlands working closely with our existing customer base on a number of refinancing opportunities with cash-out deals for management and equity holders a feature. We are also working with a wide number of advisers at the present time. We retain our close working relationships with Midlands advisers, but have this year also worked, where the transaction has dictated, with a number of parties external to the region's boundaries.
"Opportunities do and will continue to present themselves to Midlands dealmakers. However, we all need to have an open and constructive approach as to how we meet the challenges of the current environment. Openly promoting the expertise of Midlands' professionals by continuing to deliver deals across the leveraged finance spectrum and telling the wider market about them can only be the best advertisement for our local professional community."
Ellwood goes on to back up the view of many others in that 2005 has been a challenging year for dealmakers in the Midlands. "Statistically more businesses are being sold or restructured than undergoing the management buyout (MBO) route in the current market. The local corporate finance community has also been facing up to the growing influence of London in the leveraged finance market in the region," says Ellwood.
Latest figures underline the difficulties. According to business advisory Grant Thornton a total of 74 deals were completed in the Midlands during Q2 2005, compared with 96 in Q1. The Midlands results are in contrast to the national picture which has seen an increase in mergers and acquisitions (M&A) deals activity.
Corporate finance partner Andrew Roberts describes the number of deals completed in the West Midlands as "discouraging". "The deal values are comparable, but we have certainly seen a drop in volume which is a cause for concern," he says. "Although the current West Midlands economic climate is steady, business is certainly not booming, with real concerns over consumer confidence troubling many companies. Buyers and vendors certainly are being cautious."
The decrease in Midlands' M&A activity is also supported by the latest figures from the Centre of Management Buy Out Research (CMBOR) which revealed that 20 MBOs have taken place since the start of 2005 with a value of £3306.4m - roughly half of deals managed during the same period last year.
Richard Sanders, partner at Catalyst Corporate Finance - who again makes our shortlist this year -, says original 2005 market expectations were for a continuation of the high level of deal activity seen towards the end of 2004, while the reality has been a slowdown. Sanders lays much of the blame with the economy. "Retail sales figures post Christmas were disappointing for a number of retailers and this had an impact on the overall economy which is very much driven by the consumer."
How has this been reflected in deal activity? Sanders says: "Initially a number of opportunities that were in the pipeline at the end of 2004 came to the market too late and the prices promised at the end of 2004 were not on offer in 2005. Those promising fundamentals in the latter part of 2004 that were driving deal activity changed in the first half of 2005. It has taken some time for these changes to be assimilated and understood by the market. This is one of the key factors to slowing down deal activity to date."
He adds that a particular consequence of the changing nature of the economy is that debt multiples offered have been unpredictable. "Some transactions continue to attract substantial debt offers, whilst others have struggled to achieve the historic levels."
Another factor casting a giant cloud over deal activity has been pensions.
As Adrian Cutler, corporate partner in the Birmingham office of law firm Cobbetts, says: "2005 has been the year where under-funded pension schemes have come to the forefront and the deficit in some funds has, unfortunately, resulted in the collapse of otherwise viable transactions. With the problem escalating, this is a theme that is going to recur in coming years. However, we are simply going to have to become more creative when structuring deals where issues surrounding pension schemes exist."
However, as we all know, in tough times the tough get going and rise to the top, and our annual celebration of the region's dealmakers is all about highlighting those firms and individuals who have risen to the challenge.
Chief among them continues to be Clearwater Corporate Finance, which demonstrated its domination of the mid-market with a hat-trick win of the coveted title of adviser of the year.
Led in the Midlands by joint managing director Phil Burns, Clearwater's team continues to complete a string of successful deals throughout the UK regions and its new London office, which opened on July 2004, is generating deal flow from South East companies and bringing transactions back in to the Midlands community. Further to our earlier observation, their success is largely down to proactive deal origination skills, which mean that Clearwater is not reliant on referrals. The success is all the more remarkable given that it is still barely two years since Clearwater undertook its own MBO from Tenon.
Catalyst and Kroll also continue to make waves in the market, exemplified by Grenfell's overall success, a success also based on being prepared to go in search of deals further afield if need be. One of his nominated top three deals this year was leading a group of Birmingham advisers to complete the buy-in management buyout of Leeds-based IT service provider Esteem Systems.
Across the board, Grenfell led his team through a series of successful and complex transactions over the last year.
A particular highlight was the £380m sale of SFI Group, owner of the Slug and Lettuce, Litten Tree and Bar Med, high street bars, to the Laurel Pub Company. Grenfell described it as a "milestone transaction" for the firm and its largest to date.
However, the boutiques didn't completely have it their own way. Big Four firm Deloitte also caught the eye this year after a few years out of the Dealmakers limelight. Its most high-profile deal was advising 3i and Newco in the £325m acquisition and incorporation of Interflora, one of the undoubted highlights of the year for Midlands advisers.
Another notable Midlands deal - and one from Clearwater's stable - with debt courtesy of Bank of Scotland, was the £348m secondary buyout of Denby Pottery, a 200-year-old brand that has survived everything from an MBO to a flotation to a take private, not to mention the decline of the pottery industry.
It was another strong year for the region's big banking players, not least as they encroach ever more on venture capital (VC) territory. As Adrian Cutler, corporate partner at law firm Cobbetts sums up: "This year the VCs have again not been as active as they have been previously and, as a result, the deals market has been largely underpinned by the banks, which have taken a much more innovative approach to integrated finance. This has meant that debt finance has been used to fund a number of transactions that may have otherwise been ripe for private equity investment."
And top honours once again went to Lloyds TSB, which consolidated its victory of 12 months ago. Mark Bolshaw and Paul Whitehouse were also both shortlisted in the individual category and only narrowly pipped by Ian Tetsill at Barclays. Lloyds say the pipeline continues to look strong, while follow-on deals from its own portfolio are also proving to be a rich seam at the moment.
A highlight for Tetsill - and many other dealmakers - was the £320m MBO of Stone Computers, a business that assembles and distributes own-brand desktop computers and other branded IT hardware for the public sector. The deal was backed by Baring English Growth Fund and structured by Catalyst.
Talking of the public sector, it was an area that continued to be a profitable source of deals over the year, alongside sectors such as outsourcing, support services and healthcare.
And despite the woes on the high street there were still deals to be done there if you looked hard enough. As David Armfield, Midlands' head of corporate finance at PricewaterhouseCoopers, says: "Over a third of the deals we advised on during the year have been in the retail and consumer goods sector."
These deals included the sale of two Midlands-owned businesses - Aqualisa and M&M Sports. "Looking ahead, we expect deal activity in the healthcare sector to remain robust, but with consumer confidence waning, the retail sector may be quieter in the months ahead," adds Armfield.
In the VC arena many column inches were devoted during the year to 3i's controversial closure of its Birmingham office, a move prompted by the firm's wish to consolidate its growth capital team in London. But what really stuck in the throats of Midlands financiers was the firm's decision to keep open its Manchester office because, in 3i's words, "being local is more important the further away you are from London".
David Totney, of asset-based lender Liquidity, speaks for many in the community when he says he struggles to understand the logic of the decision.
"If I had been 3i I would have shut London or Manchester and moved everything to the Midlands where we have geography on our side," he told our Dealmakers Forum.
Totney believes the closure could lead to a wider perception problem for Birmingham too. "Firms start to look at their regional make-up and ask themselves whether they need an office in Birmingham."
The whole equation becomes more worrying when so few deals are being done. As Grenfell says: "The private equity market has too much cash chasing too few deals. Both have the effect of pushing up price levels and making deals more difficult to complete. The market currently favours the seller, and therefore we have more activity focused on disposal work."
For those VCs still here there was a double triumph for LDC, which is also celebrating a new office move in Birmingham. Individual winner Martin Draper admits it has been a relatively quiet year across the board, but it didn't stop him putting together some cracking deals, most notably the buyout of Cannock electrical products group Electrium.
But as one VC leaves the region, another is quickly stepping into its shoes in the shape of Catapult Venture Managers, which has built on a solid five years in the East Midlands with the launch of Advantage Enterprise & Innovation Fund in the West Midlands and the opening of a Birmingham office.
Director Clive Austin believes the Midlands is now full of opportunity for regional private equity houses. "While many firms have opted for the mantra "big is good - small is bad' and gone in search of pavements made of gold in London, the opportunities remain for well-placed private equity firms in the Midlands.
"Private equity returns in the last few years have generally been better on larger deals, hence many firms have felt the need to upscale and relocate to the big smoke," he says. "However, there is now a massive overhang of capital chasing too few mega deals and returns are starting to suffer in the big deal arena.
"With the UK market becoming more mature, returns are being eroded. Arguably the recent rise of the secondary and tertiary buyout market is early evidence of this. In contrast, with the smaller deal market in the regions deserted by many investors, the time is now a-changing for regional players to capitalise." As such Austin believes there should be plenty of investment activity to keep everyone busy locally if advisers keep an open mind on deal size.
Talking of VCs, we cannot fail to mention one of the best exits of the year which belonged to ISIS. Back in 1999 its investment in retailer Fat Face was the very first deal done out of Birmingham. Since that time the company has increased turnover six-fold to £360m and increased its number of stores from 30 to 98. For an initial investment of £33.5m ISIS received a 40 per cent stake in the company. On the company's sale to private equity group Advent International earlier this year ISIS made 11.9 times its initial investment.
Meanwhile in our other categories there was little change this year. Congratulations again to Gateley Wareing, which saw off some much bigger guns to win Law Firm of the Year while Lloyds TSB Commercial Finance maintained domination of the asset-based lending category.