The survivors
The landscape looks bleak, lonely, deserted. You are one of the few to have endured the collapse, and you are among those that others will look to as we rebuild again.
The past year has been a catastrophe for the Midlands on the stock markets – more than half of its shareholder value has been wiped out to a total market capitalisation of less than £15bn. Yet some businesses have prospered and seen their share price stay steady or even rise.
Over the next few pages we’ll tell some of their stories and find out the secrets of their survival. We’ll also look at how quoted companies are set to fare over the next 12 months and the survival strategies they may take.
Will some decide to quit the stock markets? Will others use it as an opportunity to float? And will some grab the chance to build and acquire?
THE COMING YEAR
“It’s a hard rain’s a gonna fall”: Tim Cofman-Nicoresti, at Midlands stockbroker WH Ireland, is usually pessimistic about the prospects of the market. But in humming Bob Dylan he’s become positively apocalyptic.
He adds: “The market will carry on going down; it always runs ahead of the economy and is pricing itself in for recession. I would expect to see the FTSE go down to 3,000 this year. It’ll be hard for the next six to nine months.
“I don’t think we’ve seen the full effect of the financial crisis. There’s a lot of tosh from some people about the real economy, that we’ve had the shake up, but we haven’t yet cured the underlying debt problems. There’s a wall of debt from old management buyouts, four million people still have credit card debt from Christmas 2007. When consumer debt hits the wall it will smash retail, and all else follow.”
Cofman is not alone in believing the hard times on the markets are not yet over. Steve Douglas, of rival Midlands broker Arden Partners, adds: “I’ve run out of words to describe how awful last year’s performance was – FTSE down 40 per cent, Aim down 50 per cent.
“It’s pretty grim, led by the financials, they’ve dragged down the other sectors, almost without exception. The banking crisis came at the worst possible moment as we were doing everything wrong at the wrong time. Anyone who doesn’t have to be in the market isn’t or is getting out by selling at any price.”
So it’s the end of the world, or at least the floating world, as we know it, then?
Actually no. Probe people such as Cofman-Nicoresti and Douglas a little further and they believe redemption and salvation will eventually arrive, before it reaches the rest of the economy.
They believe the market will start recovering in 2010, possibly even as early as late 2009, in anticipation of a wider economic recovery. But expect a bumpy ride before then.
Edward Dawes, partner at Birmingham law firm Wragge & Co, says the availability of finance will be among the stock market drivers.
Many companies looking to extend or renew bank facilities will have unpleasant surprises as the cost, security cover and covenants become hard, if money is available at all. This is likely to be a major risk factor affecting any company whose facilities are due for renewal during 2009.
And some sectors will continue being hit harder than others: most businesses related to finance, property, automotive, retail and media will find 2009 tough going.
Bevan Brittan partner Sarah Cartwright says: “The more resilient stocks have been ones that are seen as recession-proof or close to, and not overly geared – Domino’s Pizza, for instance, and some of the utilities. But even a company such as Imperial Tobacco, a classic defensive stock, is down.”
Keri Rees, partner at Eversheds, adds: “I’m not looking at sectors but characteristics, that is what will drive the market.
“Investors will look at businesses with cash reserves, which are lowly geared and cash generative. They will back those that were being slagged off last year for being over-prudent – those businesses will become the darlings of the market. Businesses like that can afford to be optimistic and have freedom to move.
“It’s the businesses that have gone on a land grab and spent cash that now find their hands tied managing debt.”
JOINING THE MARKET
The irony is that, because the stock markets are so depressed, some businesses are actively considering whether this is time to consider a flotation.
The decision to join the stock markets is being driven partly by opportunity – get in just before a recovery and rise with the tide – and partly out of desperation. Some businesses are considering a flotation because, despite the uncertainties and risks, it is one the few ways of raising capital as banks are still largely unwilling to increase lending to businesses, private equity appears to have gone into hibernation and private investors are being careful with money.
Rees says: “If you’ve ever had an appetite to float now is the time to sate it. The market is as flat as a pancake. A flotation takes months, even years to prepare, so now is the time to start easing your business into the process.”
Cartwright says: “What is debatable is when the market may be more receptive to initial public offerings (IPOs). Twelve to 18 months is being talked about, and if this is the case businesses should start thinking about it early.”
Certainly the road to market is becoming the one less travelled of late. In the UK, during the first 11 months of 2008, there were just 26 listings, compared with 167 during the same period in 2008. Most commentators suggest the IPO market will not pick up until late 2009 or perhaps 2010 – just about the time it would take to get a business in shape for a flotation.
There are many “half floats” in the Midlands – businesses that have not formally committed themselves to joining the stock market, but are getting in shape with due-diligence, a firm outline and creating a clear story that can be readily understood by investors.
Gordon Newlands, corporate finance partner and senior partner of Ernst & Young’s Nottingham office, says: “Despite a slowdown in actual listings, the pipeline of companies preparing to make the transition from private entity to public enterprise remains robust.
“This pipeline reflects the fact that the IPO journey is widely understood as a lengthy transformational process. In fact executives of outperforming companies start preparing to list 12 to 24 months before going public.
“It’s difficult to predict when IPO activity will recover and capital markets need first to stabilise to rebuild confidence. However, many companies will use market conditions to fully prepare themselves to take advantage once the IPO window reopens in 2009 or 2010.”
Cartwright agrees: “It takes months to prepare a company for being public facing – ensuring contracts are in writing, executed properly; that there are no potentially troublesome shareholders or employees who could cause a minor PR disaster by bringing a skeleton out of the cupboard; and that the intellectual property is owned. These need to be sorted out, and it’s useful to do it before any formal IPO due diligence process starts.”
IS THIS TIME TO COME OFF?
Ironically, as some pundits are advising flotations, others are asking whether companies, particularly smaller ones, should consider going private.
As stock prices plummet, directors of some listed business, tired of being ignored, of volatile prices and of the sheer fag of compliance and keeping shareholders sweet, are wondering whether now is the time to exit.
They think: “Surely if we leave the market behind, best do it when shares are at rock bottom and the cost of exiting is cheap.”
Research by accountancy firm BDO Stoy Hayward indicates almost a third of smaller quoted companies (SQCs) – those with a market capitalisation of less than £250m – say they are likely to go through a public-to-private (PTP) move in the next few years. And almost half say private equity would be better than the capital markets for investing for growth and acquisitions.
The reason for such disillusion, according to the report, is that 69 per cent of SQCs feel the stock markets do not value their business fairly. And, with the benefit of hindsight, one third say they would not have led their company through a flotation.
The sense of disillusionment grows the further down the market cap chain we go. Nearly 70 per cent of SQCs believe companies with a market capitalisation of less than £30m are not fairly valued by the market with a lack of interest among their institutional shareholders and analysts. This falls to 45 per cent for companies with a market capitalisation of £30m to £99m, but is only 24 per cent for those with a capitalisation of more than £250m.
John Stephan, corporate finance partner at BDO in Birmingham, says: “The majority of smaller quoted companies are frustrated about their place on the public markets. A significant number of directors feel it’s in their company’s best interest to explore coming off the market and obtaining private equity funding. Many investors agree and are encouraging management teams to find an exit.”
While delisting may look attractive when the market is falling, and SQCs have real issues getting attention, there are two hurdles – raising money for a PTP (public-to-private) and the effort involved. Andrew Borkowski, partner at Nottingham law firm Geldards, says: “The problem with delisting is finding the funds to achieve the objective.
“Big giants such as Pendragon, the East Midlands car dealership that before the credit crunch and the stock market collapse had a capitalisation of £600m, have seen their capitalisation fall to £20m, but with liquidity being a big issue with the banks, the main hurdle is capital.”
Edwards Dawes, of Birmingham law firm Wragge & Co, takes the same approach: “I predict a return of the PTP – if the funding to do so can be found – and the missing piece is the availability of debt finance.
“There are lots of reasons PTPs look set to make a comeback, particularly where there are good companies with strong balance sheets being overlooked in the stampede to defensive positions. For those the market isn’t working. All companies have to weigh up whether the cost and regulatory burden of a listing are worthwhile, and if it isn’t they need to do something about it.”
However, Dawes also says that just because management would rather be free, shareholders may not hold the same views: the traditional message of ‘this will save the company listing fees’ may not be enough. Shareholders want their pound of flesh in the form of cash.
Douglas says: “Take-privates are not easy at the best of times, and it will be even more difficult now. Among institutional shareholders you’ll see two camps – one where the view is ‘we’ve had all the pain, all the write downs, so we won’t sell at bottom of market’ and the other view is: ‘we need to take cash wherever we can get it – let’s sell!’ A large number fall into this category.”
The other hurdle is the time and cost of delisting: the administration and fees to advisers will cost up to ten per cent of the bid value for SQCs. The average time need for a delisting is six months, but times vary as they are dependent on the way the PTP is structured and the speed with which acceptances from shareholders can be obtained.
Arden adds: “The timetable is driven by people. If you have shareholders signed up when you launch the bid it can take as little as six weeks. Well, if you launch a bid in hostile situation that can run and run.”
EXIT BY BUYOUT
Some Midlands businesses are set to quit the stock markets this year by another route: acquisition.
Takeovers of quoted businesses is nothing new, but many pundits expect the rate of acquisitions to intensify.
Borkowski predicts a run of takeovers, particularly at the smaller end. He says: “I see 2009 as a year of opportunity but more so at the lower end – companies that are making good profits but have too much debt. These will be good targets for private business angels. I’m already acting for a number of funds targeting such companies.
“Although everyone is predicting 2009 will be a bloodbath, I’m optimistic that with every cloud there’s a silver lining. We still have private companies with positive balance sheets that will have the appetite to take on opportunities.”
However, the urge to seek solace in the arms of another business will not be confined to SQCs: larger plcs are set to take the same route. This is a path well established in the region. For example, in 2008 Nottingham clinical technology organisation Clinphone was acquired by Parexel, a global bio and pharmaceutical services company, while FKI, the Loughborough engineering firm, was bought by Melrose.
Newlands adds: “Some Midlands corporates have embraced takeovers to benefit from being part of a larger group, strengthening resources, and market position. Because of difficult conditions, the region’s plcs have become susceptible to acquisition.”
