The deals market in the South West is starting to move again. Kurt Jacobs reports.
Money has started talking again – and it’s saying ‘let’s start doing some serious deals in the South West’. After what was a dismal 2009, with the value of buyouts in the region falling by more than 90 per cent to just £55m, the first six months of dealmaking this year has been stronger in the region, according to pundits. And the main reason for that recovery is that finance for transactions, particularly access to debt, is at last starting to catch up with appetite.
Mark Naughton, who leads the corporate finance team at accountancy Grant Thornton’s Bristol office, says: “I’m rosy about things – the past few months have been pretty good. It’s far better than last year. “The big change is that banking has regained its appetite for dealmaking. We are not seeing banks prepared to lend at the sort of levels they did at the height of the boom, say in mid-2007. But some banks are prepared to back deals at the levels at which they did four or five years ago. Normal service has been resumed.”
According to the Centre for Management Buyout Research, the overall value of UK buyouts increased dramatically in the first three months of 2010 to more than £5bn – compared with just £1.1bn for the previous quarter and £5.6bn for the whole of 2009. Most pundits in the South West say the recovery in the region’s level of dealmaking is in line with the rest of the UK, and they expect figures for the second quarter to be even better when they are published.
The growing confidence of the banks to put greater amounts of debt into transactions is seen as a game changer in South West dealmaking. That funding should tip many transactions from potential to possible.
“People can start doing deals with the amounts of debt becoming available. The banks are still being quite particular about what they fund and it’s still only a relatively small amount of banking debt coming onto the market, but it’s enough to start getting deals that may have been gestating for one or two years to finally fly,” says Mark Harman, head of corporate finance at Target Accountants in Bath.
Few pundits expect or want a return soon to the highly-leveraged deals and extravagant prices of two years ago: instead, many are wary of returning to the days when debt was easily available and few questions were asked.
Sue Green, ofWatersheds Corporate Finance in Swindon, says: “It’s a return to normality and common sense. Some of the lending levels at the height of the boom were like 110 per cent mortgages – and who now thinks they were a good idea? Now the model is far more sustainable.”
However, those banks that decide to start seriously supporting dealmaking again have found that the environment to which they have returned is markedly different. First, private equity has become even more assertive in its role in dealmaking. UK private and venture capital funds have £100bn sitting uninvested, as Hugh Lenon, chairman of industry body the British Venture Capital Association (BVCA), told guests at an industry dinner in Bristol a few weeks ago.
Even though only a tiny fraction of that money is destined for businesses in the South West, it is still a huge pot of cash ready to be ploughed into companies in the region.
Second, during the banks’ semi-absence, private equity houses have started taking on their role as debt providers. Research by the BVCA has indicated that ten per cent of venture capital funding is now through venture debt rather than equity cash.
“Over the past few months we have seen more private equity and venture capitalists providing debt as well as private equity. There’s far greater flexibility on how we structure and fund deals,” says Jonny Allatt of Zeus Private Equity.
“However, the way that we souce deals has also changed. Private equity is looking to find businesses to work with directly, rather than the usual path of going through corporate finance advisers. Proprietary deal flow is our utopia.”
The other source of funding that has grown markedly over the past few months has come from the vendors – business owners helping to fund a sale of their own company, usually management buyouts or buy-ins, through loans, earn-outs or keeping equity stakes in the business.
A bit of vendor assistance has proven not only to be necessary in getting many deals away, but also lucrative for those selling. After all, cash sitting in a well-run business usually generates better returns than money mouldering away in a low-interest savings account.
And some owners have been keen to speed up their semi-exits from businesses and hand over to management teams because of concerns that the coalition government would increase sharply the rates of capital gains tax (CGT) in its emergency Budget.
Now many dealmakers expect the VIAMBO – the vendor initiated assisted management buyout – to remain a permanent way of funding deals in the South West.
Al Livingstone, head of corporate at Osborne Clarke’s Bristol office, says: “Deals are being driven partly by vendors wanting to cash in while CGT rates remain relatively low. In terms of funding deals, quite a proportion require the vendors to help bridge the funding gap by leaving part of the consideration outstanding.”
But the biggest buyers in the South West have been other businesses. Companies that have weathered the recession well and built a war chest, or have somehow managed to convince bankers to extend their facilities, are looking to buy other companies, some of which are being sold at a fraction of the prices they fetched a couple of years ago.
For example, energy services company Green Compliance in Cirencester made a series of acquisitions worth almost £10m in the fire protection and water sectors in the first half of 2010, funding the deals from its own coffers and from a £5m facility from its bank. Similarly specialty drug company Alliance Pharma, based in Wiltshire, managed to raise £16m to buy Cambridge Laboratories, partly through a bigger bank facility and partly by a share placing.
An example of some of the bargains that have been available over the past few months is the sale of Dorset ethical clothing company Adili, sold for just £1 to rival Green Baby after running out of funds; while Powabyke in Bath, which is developing a range of electric cars, was bought for £1m by Metroelectric after struggling to raise growth capital to expand.
Dealmakers are expecting to see more South West businesses come onto the market over the next few months from two sources: private equity houses, which are looking to raise fresh funds, will be looking to sell off their stakes in some better-performing companies to show potential investors that they can make good returns. And the banks, which have taken stakes in struggling companies in debt-for-equity swaps, are looking to sell their unwanted holdings.
Dealmakers have also noticed that as well as homegrown buyers, there is a growing interest by overseas business in acquiring companies in the region. For example, Somerset vet supplies business Centaur Services has been sold by its owner AHM to US rival MWI Veterinary Supply for almost £20m; and training company Morton House in Bournemouth has been bought by US giant General Physics Corporation. These surely won’t be the last.
Nathan Guest, partner and head of law firm Veale Wasbrough Vizards’ early stage team in Bristol, says: “There has been more cross-border deals, with overseas companies looking to take advantage of the low value of the pound and invest in the UK, particularly as a springboard to Europe. We’re acting for US, German and French companies looking to invest in the South West.”
Harman adds: “We’ve seen a lot of interest from US and Italian buyers in the past six months, who see that businesses are going relatively cheaply and that the pound is also low, and we know of others looking as well. There are Malaysian and Indian companies in particular looking at buying niche pieces of technology.”
Also in: July 2010
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