The mantra for nearly any executive team intending to float on the Alternative Investment Market (AIM) is that they are going to use the funds raised to make a series of acquisitions in order to build a market-leading business.
Once that’s been achieved, the expectation is to either move to the main list or be bought out by another, preferably larger, company. As most AIM executives and shareholders can testify, this is easier said than done. No wonder then that Keith Tozzi, the chairman of drugs and alcohol abuse testing company Concateno, is looking so relaxed. He’s one of the lucky few to have pulled it off.
Barring a major hitch, Concateno will be bought by the US healthcare giant Inverness Medical Innovations for around £147 million, which amounts to 12 times EBITDA. Tozzi says he’s going to stick around, along with the company’s co-founder and CEO Fiona Begley. ‘We’re going to stay because we have some really quite large acquisitions we want to undertake in Europe now,’ says Tozzi.
It’s speedy progress given the company only came into existence in November 2006 via a cash shell. Says Tozzi: ‘Originally, the cash shell was set up to buy and consolidate water companies in the North East of England, which was a great idea but everybody else was trying to do the same thing.
‘I had used a couple of cash shells before and I went to the 12 institutions who were involved with the shell and said that this really wasn’t going to work in terms of water companies. I said they could have their money back or they could see if I could find something else to do with it.’
Tozzi had already been introduced to Begley, who was part-owner and MD of Medscreen, which provides a drugs and alcohol abuse testing service specifically for the workplace: ‘Fiona had this vision that there were a number of businesses focused on particular parts of the drugs abuse sector and this was just the moment to buy and consolidate them and try to build the European market leader.’
Begley’s sector expertise was complemented by Tozzi’s fundraising know-how and City connections. The shell was renamed Concateno, it bought Medscreen and throughout 2007 Tozzi and Begley went about buying six other drug-testing companies. ‘These gave us a unique grouping, where we had the principal test matrixes: urine, oral fluid and hair. We could then address a much broader range of market,’ he explains.
Pick and choose
It’s a strategy that demonstrates great ambition, but many a company has lost its way after embarking on a rapid acquisition spree. Tozzi evidently knew what he was doing, having gone on the acquisition trail with commodity inspection business Inspicio, which was sold to 3i for just under £230 million.
‘With acquisitions, I think you need to integrate where appropriate,’ observes Tozzi. ‘At Inspicio, we created a conglomerate of inspection businesses. We brought elements of the operations together, but there was no point in combining the laboratories. You have to look at the synergies that do work, such as giving yourself massive buying power and being able to cross-sell services.
‘You need to sell as much as you can, but don’t confuse that with operational synergies. Trying to force things together that don’t fit always seems to me to be a recipe for disaster.’
Tozzi is evidently at home in the business milieu, although he admits to being surprised he’s ended up on the entrepreneurial path. ‘When people describe their careers as perfectly logical, I tend to think it never works out like that in real life,’ he reflects.
Born in Kent, Tozzi’s father was an engineer so it made perfect sense to study a degree in civil engineering from City University London. Groomed and bred for the corporate ladder, Tozzi earned his stripes as a technical director on the main board at Southern Water. It was here that he got a taste for entrepreneurship while using in-house talent to set up a series of businesses within Southern before it was bought by Scottish Power following a ‘ridiculously high offer’.
Afterwards, he was approached to run the British Standards Institute, where he was chief exec for over three years. By that point, he decided the moment was right to go it alone, and so he went to AIM with a waste management company called Augean. Tozzi acknowledges that AIM has taken a disproportionate hit on valuations in the recession, but the market has served him well over the years.
‘The shareholders have been fantastically supportive – what you have to do is not go along and say: “I want to make an acquisition, have you got any money?” You must have a plan or a vision to build a company of a certain size and explain how you’ll need to make a series of acquisitions to be of a certain scale. It’s important to make them understand that you want help for the whole way, as opposed to discussing a one-off deal.’
It’s an approach that’s got results at Concateno. The biggest challenge, says Tozzi, has been to train the sales team to cross-sell effectively: ‘Beforehand, if you were an employer and sought to bring in drug testing, you would get a company that provides urine testing saying it was the most effective means to detect drug use. Then another company would arrive and say oral fluid testing was superior to any other test. If you cross-train then you are able to send in a salesperson who can objectively assess what the client wants and provide the best form of testing.
‘We put these businesses together very quickly, so our salespeople were competing in separate businesses and then they’re all sitting round the same table as colleagues. The psychology of that can take a while to alter – that was the biggest part of the jigsaw that we had to put together.’
The key acquisition was medical diagnostics company Cozart, which Concateno bought for a considerable £64.4 million at the end of 2007. Going beyond a traditional breathalyser kit, Cozart has developed a product that can analyse for five drug types in a maximum of eight minutes.
‘It tells you what someone has taken and in what quantity, so it’s a clever device,’ observes Tozzi. The real market for the gadget lies with police forces, who can use it to test drivers. However, in its present form, the device takes up to eight minutes to produce a result, which the police argue is too long a period to hold a driver at the roadside. Fortunately, Cozart has a joint venture with Philips, the electronics company, and they’re due to release the next generation of these devices, which should produce results much faster.
Back in 2007, research was undertaken whereby drivers who were stopped in France and Italy suspected of drink driving were also tested for illegal drug use. The results showed that 25 per cent of drivers found to be over the limit for alcohol had also taken a cocktail of drugs. ‘It makes you wonder how big the problem is,’ says Tozzi. ‘We think it’s a massive market, and it’s never been addressed previously because there hasn’t been the technology.’
When this kind of potential is factored in with Concateno’s already established pan-European presence across each of the main areas of drugs abuse testing, it becomes clear why Inverness Medical is happy to splash the cash during these austere days.
Although Concateno’s revenue is a modest £47.5 million (2007: £41.8 million), the company posted a profit of £4.2 million (2007: £2 million) for year-end 2008. Crucially, the business has high recurring revenues, with 50 per cent of its clients in the public sector and 25 per cent in the regulated private sector. ‘The churn is tiny and legislation is generally in our favour,’ says Tozzi, noting that with a market cap of £124.98 million he’s comfortable with the business’s net debt of £24.1 million (2007: £27 million). ‘We’re lowly geared and we went to the banks at the very beginning and told them what we planned to do and the sort of debt that would be needed; they’ve supported us the whole way through.’
All things considered, it’s difficult to identify a threat to Concateno’s business model. ‘Once you’ve made that initial sale, you probably know that you have that customer – be it a government, police force or whoever – for around seven years. The likelihood of them moving is small,’ observes Tozzi. ‘In one sense, it’s a sad reflection on society, but from a business point of view it’s an area that is growing at around 15 per cent per annum. If you’re working from the public treatment side, that isn’t going to go away. From an employment viewpoint, it’s very difficult for an employer to say it wants to introduce a drug and alcohol abuse testing arrangement and then say they’re going to stop it.’
The company is in a uniquely powerful position, especially with the additional firepower and financial security Inverness Medical should bring when that deal is wrapped up. Tozzi believes that things have fallen into place so neatly because he, Begley and the rest of his team have come together at the right time.
‘With hindsight, you always think you should’ve done something ten to 15 years earlier. But the truth is that you didn’t actually have the contacts back then. The thing that makes it work is the advisers, City contacts and institutions you know.
‘Until you build that list of people you can go to, it’s very hard. So you end up doing things later than you would have liked to.’
Keith Tozzi – Vital Statistics
Date of birth: 23.02.49
Marital status: Married
Favourite singer: Elton John
Pet hate: Surprises – ‘Don’t hide things’
Business hero: Bill Courtney, former chairman of Southern Water: ‘He taught me the simple rules, such as never confuse business decisions with people decisions. Make the business decision and then deal with the people in the kindest way possible.’