News - Midlands
Eastern Promise
The year began when, just days into the New Year, Nick Menzies, founder of the Derby-based Menzies Hotel Group, sold his 14-strong chain to Nikko Principal Investments for £3120m. Menzies became an 18 per cent shareholder in the new business, turning his stake into £321.6m. The rest of the senior management team - all of whom stayed with the new business - each received a five per cent stake.
But the Menzies deal will by no means be the biggest of the year. The pending acquisition of Peterborough-based food suppliers Geest by Icelandic food group Bakkavor, in a cash deal worth £3485m, looks set to eclipse that. Locally-based advisers, who as Insider went to press were finalising the transaction, say the deal will bring wider benefits, providing a boost to the region's reputation as a centre of excellence to arrange and close deals.
Stephen Kitts, head of corporate finance at law firm Eversheds, which has been working on the Bakkavor deal, says that one of the reasons for the buoyant mood in the local deals market is the sense that there is a growing professional community in the East Midlands. "Also there is a feeling that there is more deal activity going on in the East Midlands than the West Midlands, and that has to be good for business," he adds.
Mark Freer, investment director for Lloyds Development Capital (LDC) in the East Midlands, agrees that confidence has improved over the last six months, with transaction volumes and new investments on the rise. He also says that the number of enquiries has increased significantly, with shareholders taking the opportunity to evaluate their options in what has been a more stable economic environment.
Other local advisers believe that 2005 is shaping up to be a profitable year. Rob Britton, a partner at Clearwater Corporate Finance, says his firm has closed six deals in the past 12 months. Britton says that while the number of transactions is down on the previous like-for-like period, deal sizes have increased. The six deals the firm has closed up until April this year amounted to £3160m. Britton says that Clearwater's expectations for this year are looking very healthy, adding that deal size is already 60 per cent up on the same quarter last year.
Iain Pirrie, director of integrated and acquisition finance at Bank of Scotland in Nottingham, says that the bank has completed three deals worth a total of £3150m in the past 15 months. These lucrative deals have whetted the bank's appetite for more transactions. Pirrie says that the bank is aggressively hunting for venture capitalists (VCs) that might want to pursue exit strategies, as well as finding companies that might want to acquire a business or carry out a management buyout (MBO). "We have a strong appetite to do deals in the East Midlands and we firmly believe that there is a lot of demand out there for our services from people who might be considering floating their businesses to boost funds or who want to buy or sell a company," he says.
Dealmakers in the region firmly believe that the past 12 months have seen competition levels soar, particularly with the eagerly awaited return of the trade buyer. John Farnsworth, corporate finance partner at Midlands-based business advisory firm Smith Cooper, welcomes the return of trade buyer interest. "It is good to have a healthy balance of trade buyer interest and MBOs," he says. "It allows dealmakers greater opportunity to find exit strategies more quickly."
The return of the trade buyer has added to the region's deal tally. According to the University of Nottingham's Centre for Management Buy-out Research (CMBOR), of the 35 exits carried out last year - of which the largest was that of heating products company Baxi Group at £3663m - 12 were trade sales, three were flotations, 12 were MBI/MBOs, and the remaining eight were deals carried out with companies in receivership.
Kitts notes that managers are also increasingly looking to float their business as a viable exit strategy, as well as looking for a trade buyer. As a result, says Kitts, dealmakers are resorting to double tracking whereby they initiate plans for the company to float as well as try to find a trade buyer to take the business quickly.
The secondary buyout (SBO) is also fast becoming the deal of choice for those investors that want a reasonably quick exit. Freer says that the number of SBOs has increased over the past couple of years as private equity houses work to return cash to shareholders. "SBOs are viewed as a solid proposition for VCs compared with other investment options. This is because the company that the funder wants to exit has an established track record and a management team familiar with private equity ownership." However, he says that with the return of the trade buyer past experience dictates that the SBO route should become a less favourable one in 2005.
Yet despite market sentiment, there is evidence elsewhere to suggest that the region's dealmakers are overly optimistic in their predictions for the year. According to Rod Ball, research fellow at CMBOR, there is no evidence so far that the East Midlands deals market is more buoyant, attractive, active, or fruitful than it was last year. In fact he predicts that the deals market will remain flat for the rest of the year, not just in the East Midlands, but nationwide.
Ball says that there have been 14 deals finalised in the East Midlands in the first quarter of this year at a combined value of £3219m. The majority were private sales, with only two being SBOs.
The largest deal that the region has seen is the aforementioned Menzies deal, followed by the incorporation of Lincolnshire-based Interflora. which saw a £323.2m equity investment from 3i.
"The UK deals market was worth £320bn in total last year. The first quarter of this year has seen transactions being finalised worth around £35bn, so the only realistic conclusion that we can draw so far is that we are on course to equal last year's figures," says Ball.
According to data provided by CMBOR, the number of deals being carried out in the region has never reached the level of deal activity recorded ten years ago. In 1995 there were 73 transactions; last year there were 59, although the total value has risen from £3769m to £31.7bn. Deal activity peaked in the region in 2000 when 62 deals were finalised worth £33.3bn. Of the 59 deals transacted last year, 44 were valued at less than £35m each, compared to 50 in 2003.
The top five deals in the region last year were the SBO of Baxi Group in February for £3663m; the institutional buyout of Weetabix (Latimer) in January for £3642m; the SBOs of Hillarys Blinds for £3115m last August and Denby in December for £348m; and the BIMBO (buy-in management buyout) of JT Frith in July for £344m. Between them, these accounted for over £31.5bn of the region's total deal value of around £31.75bn.
Freer believes that deal activity in the East Midlands has been largely driven by the region having a solid base of high-quality deal advisers, particularly in Nottingham. Like most dealmakers based in the area, Freer says that there are strong signs to suggest that local expertise is being used to help secure deals outside of the region. As an example, the £346m MBO of the Cheshire-based packaging firm Britton Group was originated and transacted solely by East Midlands' professionals.
But Matthew Proudlove, member of the corporate finance team at business advisers Cooper Parry in Nottingham, says that while the majority of transactions are being carried out by local advisers, banks and private equity providers, he believes that "the parochialism of the deals market is changing as regional boundaries become blurred".
Proudlove observces that, with the exception of Birmingham, Nottingham is the only real centre of expertise between London and the Pennines. "You have Manchester and Leeds in the north, and London in the south. Everywhere in between is a potential market for East Midlands-based dealmakers because the expertise just isn't there," he says.
Eversheds' Kitts largely agrees, citing the recent decision by VC 3i to move out of Birmingham as an indication that "equity providers now feel that they can operate out of London but continue to work with the networks of locally-based advisers in the region when backing deals".
John Sykes, director at business advisory firm Tenon Corporate Finance, says that advisers are increasingly ready and willing to travel "off-patch" to attract new clients and work. "We have always had the motto: 'Have deal will travel'. Sometimes prospecting off-patch makes you appear hungrier or more committed to the deal. Whatever the reason, there is a market place for East Midlands advisers outside the region."
A good example, says Sykes, was the sale of West Midlands-based LFPV, a subsidiary of the Danish vehicle distribution business Extend Reach Corporation, to Conrico International, the leading exporter of Land Rover and other brand vehicles, parts and capital equipment to the developing world. Historically, Extend Reach had used big city advisers for LVPV's corporate affairs, but when it came to the sale it turned to the Leicester office of Tenon Corporate Finance and Leicester lawyers Harvey Ingram Owston.
"We needed a team of professionals to work closely together to meet a very tight timetable," said Christian Haar, chief executive at Extend Reach, at the time of the deal. "In the past we have taken professional advice from Birmingham and London but felt that the team from Leicester would commit the senior resource and pragmatic approach necessary to get the deal done."
Talking of Leicester, corporate boutique Fusion continues to bring in the deals too. Earlier this year the firm advised on the MBO of Swindon-based Cadillac Plastics from GE Electric, while in the final quarter of 2004 it completed the MBO of Leicester-based Aluminium Shopfronts. An all Leicester based team of professionals completed the deal with funding coming from RBS. But like its rivals Fusion also follows deals outside the East Midlands too. For instance last summer it advised on the MBI of Yorpower Manufacturing based in York. Funding for that deal came from Bank of Scotland in Leicester.
Sykes also says that a number of London-based VCs have started to use his firm's due diligence and other specialist teams on projects north of the capital to cut costs. Sykes adds: "Sometimes sector specialisations or practical sector experience help you win away from home. For instance our food sector team based in Nottingham helped us to deliver the MBO in January of Kingsland Wines and Spirits in the North West.
"However there e are lots of hungry professionals across the UK looking for deals. We have to acknowledge that there has been a move towards Birmingham. If the funders are based in Birmingham, there is a temptation for them to use Birmingham advisers on East Midlands' deals," adds Sykes.
But the Menzies deal will by no means be the biggest of the year. The pending acquisition of Peterborough-based food suppliers Geest by Icelandic food group Bakkavor, in a cash deal worth £3485m, looks set to eclipse that. Locally-based advisers, who as Insider went to press were finalising the transaction, say the deal will bring wider benefits, providing a boost to the region's reputation as a centre of excellence to arrange and close deals.
Stephen Kitts, head of corporate finance at law firm Eversheds, which has been working on the Bakkavor deal, says that one of the reasons for the buoyant mood in the local deals market is the sense that there is a growing professional community in the East Midlands. "Also there is a feeling that there is more deal activity going on in the East Midlands than the West Midlands, and that has to be good for business," he adds.
Mark Freer, investment director for Lloyds Development Capital (LDC) in the East Midlands, agrees that confidence has improved over the last six months, with transaction volumes and new investments on the rise. He also says that the number of enquiries has increased significantly, with shareholders taking the opportunity to evaluate their options in what has been a more stable economic environment.
Other local advisers believe that 2005 is shaping up to be a profitable year. Rob Britton, a partner at Clearwater Corporate Finance, says his firm has closed six deals in the past 12 months. Britton says that while the number of transactions is down on the previous like-for-like period, deal sizes have increased. The six deals the firm has closed up until April this year amounted to £3160m. Britton says that Clearwater's expectations for this year are looking very healthy, adding that deal size is already 60 per cent up on the same quarter last year.
Iain Pirrie, director of integrated and acquisition finance at Bank of Scotland in Nottingham, says that the bank has completed three deals worth a total of £3150m in the past 15 months. These lucrative deals have whetted the bank's appetite for more transactions. Pirrie says that the bank is aggressively hunting for venture capitalists (VCs) that might want to pursue exit strategies, as well as finding companies that might want to acquire a business or carry out a management buyout (MBO). "We have a strong appetite to do deals in the East Midlands and we firmly believe that there is a lot of demand out there for our services from people who might be considering floating their businesses to boost funds or who want to buy or sell a company," he says.
Dealmakers in the region firmly believe that the past 12 months have seen competition levels soar, particularly with the eagerly awaited return of the trade buyer. John Farnsworth, corporate finance partner at Midlands-based business advisory firm Smith Cooper, welcomes the return of trade buyer interest. "It is good to have a healthy balance of trade buyer interest and MBOs," he says. "It allows dealmakers greater opportunity to find exit strategies more quickly."
The return of the trade buyer has added to the region's deal tally. According to the University of Nottingham's Centre for Management Buy-out Research (CMBOR), of the 35 exits carried out last year - of which the largest was that of heating products company Baxi Group at £3663m - 12 were trade sales, three were flotations, 12 were MBI/MBOs, and the remaining eight were deals carried out with companies in receivership.
Kitts notes that managers are also increasingly looking to float their business as a viable exit strategy, as well as looking for a trade buyer. As a result, says Kitts, dealmakers are resorting to double tracking whereby they initiate plans for the company to float as well as try to find a trade buyer to take the business quickly.
The secondary buyout (SBO) is also fast becoming the deal of choice for those investors that want a reasonably quick exit. Freer says that the number of SBOs has increased over the past couple of years as private equity houses work to return cash to shareholders. "SBOs are viewed as a solid proposition for VCs compared with other investment options. This is because the company that the funder wants to exit has an established track record and a management team familiar with private equity ownership." However, he says that with the return of the trade buyer past experience dictates that the SBO route should become a less favourable one in 2005.
Yet despite market sentiment, there is evidence elsewhere to suggest that the region's dealmakers are overly optimistic in their predictions for the year. According to Rod Ball, research fellow at CMBOR, there is no evidence so far that the East Midlands deals market is more buoyant, attractive, active, or fruitful than it was last year. In fact he predicts that the deals market will remain flat for the rest of the year, not just in the East Midlands, but nationwide.
Ball says that there have been 14 deals finalised in the East Midlands in the first quarter of this year at a combined value of £3219m. The majority were private sales, with only two being SBOs.
The largest deal that the region has seen is the aforementioned Menzies deal, followed by the incorporation of Lincolnshire-based Interflora. which saw a £323.2m equity investment from 3i.
"The UK deals market was worth £320bn in total last year. The first quarter of this year has seen transactions being finalised worth around £35bn, so the only realistic conclusion that we can draw so far is that we are on course to equal last year's figures," says Ball.
According to data provided by CMBOR, the number of deals being carried out in the region has never reached the level of deal activity recorded ten years ago. In 1995 there were 73 transactions; last year there were 59, although the total value has risen from £3769m to £31.7bn. Deal activity peaked in the region in 2000 when 62 deals were finalised worth £33.3bn. Of the 59 deals transacted last year, 44 were valued at less than £35m each, compared to 50 in 2003.
The top five deals in the region last year were the SBO of Baxi Group in February for £3663m; the institutional buyout of Weetabix (Latimer) in January for £3642m; the SBOs of Hillarys Blinds for £3115m last August and Denby in December for £348m; and the BIMBO (buy-in management buyout) of JT Frith in July for £344m. Between them, these accounted for over £31.5bn of the region's total deal value of around £31.75bn.
Freer believes that deal activity in the East Midlands has been largely driven by the region having a solid base of high-quality deal advisers, particularly in Nottingham. Like most dealmakers based in the area, Freer says that there are strong signs to suggest that local expertise is being used to help secure deals outside of the region. As an example, the £346m MBO of the Cheshire-based packaging firm Britton Group was originated and transacted solely by East Midlands' professionals.
But Matthew Proudlove, member of the corporate finance team at business advisers Cooper Parry in Nottingham, says that while the majority of transactions are being carried out by local advisers, banks and private equity providers, he believes that "the parochialism of the deals market is changing as regional boundaries become blurred".
Proudlove observces that, with the exception of Birmingham, Nottingham is the only real centre of expertise between London and the Pennines. "You have Manchester and Leeds in the north, and London in the south. Everywhere in between is a potential market for East Midlands-based dealmakers because the expertise just isn't there," he says.
Eversheds' Kitts largely agrees, citing the recent decision by VC 3i to move out of Birmingham as an indication that "equity providers now feel that they can operate out of London but continue to work with the networks of locally-based advisers in the region when backing deals".
John Sykes, director at business advisory firm Tenon Corporate Finance, says that advisers are increasingly ready and willing to travel "off-patch" to attract new clients and work. "We have always had the motto: 'Have deal will travel'. Sometimes prospecting off-patch makes you appear hungrier or more committed to the deal. Whatever the reason, there is a market place for East Midlands advisers outside the region."
A good example, says Sykes, was the sale of West Midlands-based LFPV, a subsidiary of the Danish vehicle distribution business Extend Reach Corporation, to Conrico International, the leading exporter of Land Rover and other brand vehicles, parts and capital equipment to the developing world. Historically, Extend Reach had used big city advisers for LVPV's corporate affairs, but when it came to the sale it turned to the Leicester office of Tenon Corporate Finance and Leicester lawyers Harvey Ingram Owston.
"We needed a team of professionals to work closely together to meet a very tight timetable," said Christian Haar, chief executive at Extend Reach, at the time of the deal. "In the past we have taken professional advice from Birmingham and London but felt that the team from Leicester would commit the senior resource and pragmatic approach necessary to get the deal done."
Talking of Leicester, corporate boutique Fusion continues to bring in the deals too. Earlier this year the firm advised on the MBO of Swindon-based Cadillac Plastics from GE Electric, while in the final quarter of 2004 it completed the MBO of Leicester-based Aluminium Shopfronts. An all Leicester based team of professionals completed the deal with funding coming from RBS. But like its rivals Fusion also follows deals outside the East Midlands too. For instance last summer it advised on the MBI of Yorpower Manufacturing based in York. Funding for that deal came from Bank of Scotland in Leicester.
Sykes also says that a number of London-based VCs have started to use his firm's due diligence and other specialist teams on projects north of the capital to cut costs. Sykes adds: "Sometimes sector specialisations or practical sector experience help you win away from home. For instance our food sector team based in Nottingham helped us to deliver the MBO in January of Kingsland Wines and Spirits in the North West.
"However there e are lots of hungry professionals across the UK looking for deals. We have to acknowledge that there has been a move towards Birmingham. If the funders are based in Birmingham, there is a temptation for them to use Birmingham advisers on East Midlands' deals," adds Sykes.