Recession-proof sectors may not exist but there are some showing more resilience than others and offering greater opportunities to dealmakers. Claire Robson reports.
Getting a deal past the finishing line has proved tough in recent months. Be it a lack of funding, unbridgeable gulfs between vendor and purchaser expectations, or a general lack of corporate confidence, dealmakers are faced with obstacles through the whole process.
Not surprisingly, deal volumes and average values have plummeted, particularly for private equity funded and highly leveraged transactions. According to the Centre for Management Buy-out Research in Nottingham, private equity in the UK totalled just £2bn in the first quarter of 2009, with two thirds of the total accounted for by a single deal. That compares with £1.3bn achieved in the final three months of last year, the lowest quarter for 13 years.
Deal numbers also declined in the period January to April, in which just 61 deals were completed, compared with 152 in the same period last year.
“Using those figures as a litmus test, things seem incredibly bad,” says John Farnsworth, head of the corporate finance team at accountancy firm Smith Cooper. “The mega deals of £50m-plus have suffered the most. They take a lot more nerve from everyone, something we are desperately short of in this climate.”
In a market in which nobody can see the bottom, persuading them to act now is an uphill struggle. Even where there is some appetite, the difficulty of getting the money on the table means many potential deals are thwarted.
Peter McLintock, head of corporate in the Birmingham office of law firm Hammonds, says: “Raising funding is like pushing on a piece of string. The whole paradigm changed with the banking crisis. It’s very difficult to get lenders to be bullish about an opportunity, and even when they are it takes ages to get deals rubber stamped."
Dealmakers are now finding themselves becoming involved much earlier in the process to offer nervous parties a helping hand and try and straddle the hurdles that block the path.
“For instance, it may be that you need to help find alternative funding and ensure the client has their house in order. We’re often acting more like a business consultant,” says Chris Rees, corporate partner at law firm Nelsons in Leicester. He adds: “All professionals involved in a transaction are having to roll up their sleeves and work a lot harder to keep it moving.”
Farnsworth agrees: “Getting deals completed takes the patience of a saint and the dedication of an Olympic athlete. That is why screening work is now so much more important. You only want to be taking on assignments you really believe can be delivered. As well as ensuring there is a robust business plan, you have to ensure you have the right people on board, supplying you with the right information.”
Although there is no such thing as a sure bet in the world of dealmaking, some sectors have proved far more resilient than others and these are the areas where advisers are focusing most of their effort.
Although public sector investment may well need to be reigned in in future years, the government remains committed to spending its way out of recession.
“Anything supported by the public purse is a good source of work right now,” says Paul Bevan, corporate finance director for the East Midlands at Tenon. “So sectors such as healthcare, education and training are all still generating deals.”
Be it funding the development of GPs’ super surgeries, advising on government infrastructure projects or supporting the expansion of care home providers, these areas remain lucrative sources of deal activity – that is if you can fight off the competition.
“Other businesses performing well are those offering a niche with some element of intellectual property,” adds Bevan. “Then there are the companies offering staple products and services we can’t do without. That includes technology, colleges, food stores or even funeral directors.”
Although much of the retail sector is facing tough times, anything offering real value, particularly in relation to food, is proving far more robust. The leading supermarket chains continue to expand and the likes of Aldi and Lidl are cashing in on cost- conscious consumers.
“Fast-food franchises are also performing well,” says Farnsworth. “For instance, pizza delivery business Dominos’ profits are up 20 per cent year-on-year, and Subway and KFC are also doing well and continuing to grow. People are staying in more and ordering takeaways instead of going to a restaurant. We have signed a lot of mandates since January for this type of client.”
Another sector assured of future growth is environmental technology. The introduction of landfill tax has forced businesses to take recycling far more seriously and as a result the sector is attracting significant investment.
Charles Bond, corporate partner at law firm Cobbetts in Birmingham, says: “The low-carbon economy is coming into focus as an attractive arena, especially given the overlap between public and private funding and enterprise. In particular, commentators think the next couple of years will be important in the cleantech industry, with investment in the wind and energy from waste sectors growing rapidly.”
He adds: “The West Midlands should be taking advantage of its historic skills and expertise to play a part in the manufacture and supply of these new products.”
Dealmakers are also reaping the rewards of looking further afield for clients. “We are keen to cast a wider net to cover international markets,” says David Vaughan, head of corporate at law firm Wragge & Co in Birmingham. “We are spending a lot of time on the ground in the US, India and the Middle East where investors want to get into our market as they see it bottoming out."
The weakness of the pound is also appealing for overseas purchasers, ensuring they make the most of their improved buying power before sterling recovers. Many investors are targeting businesses in distress – a reliable source of deals in the current climate. Those with cash can pick up a bargain from the administrators or owners who see the writing on the wall.
“A lot of businesses are having to do deals to put fires out and dispose of non-core subsidiaries,” says McLintock. “We are starting to see a lot of consolidation as businesses in a strong position take the opportunity to snap up competitors. Many are looking to buy and build by osmosis.”
Buyers who are in the market are also in with a greater chance of securing a decent deal as they are no longer have to compete with swathes of private equity investors.
But distressed sales alone aren’t going to bring dealmakers out of the doldrums. If transaction levels are to really pick up it will need banks to start putting their money where their mouth is; buyers and sellers to bring their price expectations in line; and for all parties to stop sitting on their hands.
“That will require a grassroots return of confidence,” says Farnsworth. “We are all being brainwashed by bad news stories and need to hear something positive. Hopefully more investors are returning to the market. I think we have seen the bottom of the credit squeeze and things can only get better.”
Also in: July 2009
-
Editorial: Employment Matters
A friend of mine worked at LDV. He had been there for years and worked his way up to foreman. He’s had two weeks’ pay and no work this year, and now he’s on the scrapheap, one of the 810 out of 850 workers at the Washwood Heath factory to be laid off so far.
-
Power in their Hands
Andy Coyne introduces this year’s list and ponders the nature of power.
