There’s finance out there for acquisitions and investment, you just have to know where to look. Jim Simpson guides you through the hazards.
The troubles of the banks and the resulting lack of debt is spawning its own myths. One is that deals are not possible at the moment – plainly wrong as Avacta Group, a Leeds University spin-off, has just proved. In January the science company, based in York, acquired two businesses in as many weeks for £7.86m.
Avacta’s acquisitions were both paper transactions, paid for with its own shares, but it shows that even without the banks, and even in a downturn, there will be deals as businesses look for bolt-on acquisitions or succession issues prompt a change in ownership.
As Roger Esler of Deloitte’s corporate finance team says: “Resilient businesses can still find buyers. The prevalence of strategic buyers will increase as markets stabilise. We are set to see a lot of consolidation in the coming years but, importantly, supported by strategic focus.”
Another misconception is that the private equity houses will be stifled by the lack of debt available from the banks. But, according to Mark Buttler of Key Capital Partners, the reverse is true.
“In our part of the market – £1m to £10m – the management buyout funded entirely by debt was our main competitor because this left the management team with a far larger part of the equity than if the team had involved a private equity house,” he says.
Now, with bank debt unavailable, Key Capital is either acting alone or working with vendors in arrangements where the vendor is deferring payment in some way. For instance, Key Capital paid £2m to acquire Badger Books in December for one of its portfolio companies, Pandora Books.
“Before we would have done the transaction using a mixture of debt and equity, but we concluded it would be just too much trouble to get the banks involved,” says Buttler.
Now Key Capital is working on a deal to acquire what Buttler will only describe as a West Yorkshire service company. To complete the deal the vendor is effectively replacing what would have been bank debt with a loan note, or deferred consideration, in order that the deal can proceed.
NVM, another private equity house operating in the £2m to £10m market, also says it is seeing a lot more opportunities in the market. “Our deal flow is more buoyant than six months ago,” says investment manager Jeff Holder. “And we’re seeing a lot more pragmatism from vendors.”
Holder says NVM’s investment fund of £50m gives it a great deal of clout so it can live with more modest levels of bank finance. He also says that vendors are prepared to accept that their payment for the business may be deferred on contingent on meeting certain targets or crucial contracts being renewed.
This is being seen in other parts of the market too, says Esler.
“The sale of YFM Group to GLE Group, on which Deloitte advised, involved a range of deferred contingent mechanisms to preserve value for the exiting shareholders,” he says.
“The awarding or renewing of a fund management contract, for example, is a black and white event on which it’s not always easy for either party to take a view.”
Xavier Woodward, director of corporate finance at KPMG, has also noted the increased use of vendor deferral. “We’re all trying to find a way of replacing the senior debt that was previously funding deals at up to four times EBITDA, and at times this is coming from the vendor leaving some money in the business.”
Asset-based lending has become more popular as a means of raising finance for deals, providing a different risk profile for credit committees to mull over. According to Phil Tarimo, head of Investec’s growth and aquisition finance team in the north, this return of other forms of finance will augment, or even replace, the senior debt once provided by the banks.
Tarimo set up the team in March 2008 to provide mezzanine debt and asset-based lending for mid-market companies with a funding requirement of between £4m and £30m.
He had previously worked in Deloitte’s specialist debt advisory team, but has returned to full time dealmaking with the South African bank.
“It’s more like it was ten or 15 years ago when a deal would consist of three times operating profit in senior debt, plus one times operating profit in mezzanine debt and then everything over and above that was equity,” he says.
Tarimo looks at two transactions a week and agrees with other professionals that the days are gone when owner-managers could look forward to an immediate cash payout when they sold their business.
Instead, he says, vendors and purchasers have to reach a creative compromise as to when and how the vendor can draw their money out of the business.
“For example, they could agree a put and call option that enables the vendor to sell their equity stake in the business at a predetermined price,” he says.
So it seems that deals are still possible, but thanks to well-established forms of financing that have not been seen for some time and also old-fashioned values of agreement and trust.
Also in: February 2009
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