Venture Finance’s directors for the North and South contrast dealmaking in the UK over the past 12 months.
After a tough year for M&A in 2009, hopes were high that 2010 would be better. Chris McIntyre speaks to Venture Finance’s managing directors for the North and South with contrasting perspectives on dealmaking over the past 12 months and in the future.
‘Last year was very much about refinance opportunities and this year has been a mix of refinance and M&A,’ says Alison Small, managing director of Venture Finance covering the North of England and the Midlands. ‘Acquisitions are on the increase and we’re hopeful that it will shift to a more equal balance over the next year.’
Small says that the bulk of M&A transactions she’s seen this year have been management buy-outs from larger groups, either where vendors have divested assets or where management teams have seen a good opportunity to buy the business at a reasonable price.
In November, Venture backed the MBO of knitwear manufacturer Hawick Knitwear from Waterlinks Investments. Small comments, ‘We provided the management team with a £2.1 million facility including a £600,000 inventory line. That delivered more finance to the business to give a good headroom facility, as well as helping complete the transaction.’
She adds that in the North and the Midlands, the demand is coming from businesses in the manufacturing sector such as engineering and clothing, and has even seen an increase in enquiries from the previously struggling automotive sector: ‘Traditionally this is the heartland of manufacturing rather than services.’
Down South, regional managing director Steve Websdale describes 2010 as a ‘year of acceleration’ that gathered pace after a slow start. Websdale covers Venture’s activities across the South including London, and notes the service sector is currently the most active, particularly recruitment. He adds, ‘In human resources there are acquisitions and consolidations taking place. It’s very important ground for us. These businesses, and the sector, tend to be pretty good barometers for how the economy is faring.’
One of Venture’s larger deals of this year in the South was the acquisition of the medical recruitment company DRC Locums by the private equity group Hamilton Bradshaw. Websdale explains that Venture Finance provided funding of £11.75 million to support the buy-in management buy-out. He adds, ‘It was a mixture of receivables, a term loan, and a cash-flow loan. As a profitable and cash-generative business, the company was able to service the cash-flow loan, and that bridge gave it the extra headroom it needed.’
In the buy-out market, Small says that deferred consideration is a major feature. She comments, ‘Deferred consideration has probably replaced the gap the private equity houses have left over the last year. The price is what the price is, so if you are unable to raise sufficient debt finance and private equity isn’t available, then as a vendor in a bid to do the deal you either accept a lower price or you accept a different consideration structure.’ Small adds that a positive side of this for the management is that they retain all of the equity.
However, private equity firms have started to become active again, and working alongside them is a strengthening trend. Websdale sees more in the pipeline for next year. He comments, ‘It’s good news for us because we’re off the back of what was, particularly on the PE side, a quiet 18 months to two years. We saw a dearth of opportunities for a long period because people were keeping their heads down.’
Despite the difficult economic conditions of this year, Websdale notes that distress hasn’t been a feature of the transactions he’s seen in the South over 2010. In June, Venture provided a £2.5 million receivables and inventory finance with a secured loan facility for the Hampshire-based brick and tile producer Michelmersh. The financing, in addition to funds raised on AIM, enabled the company to acquire a competitor brick manufacturer to expand its product range.
Websdale adds, ‘It was a profitable, well-established business and the opportunity was there – they seized it. We were happy to provide additional facilities and participate in the acquisition process.’
Websdale says that, generally, his clients have enjoyed a reasonable level of growth in 2010. But he has also noticed a significant level of restructuring in the professional services sector, with numerous peripheral offices now centralised. Websdale adds, ‘That consolidation has changed where deals have originated from.’
Similarly, Small has noticed a movement of corporate finance departments away from the North toward London. She says, ‘Whilst the North West and particularly Manchester is still very strong in corporate finance and people have retained their teams, I do think that there’s been a shift down to London from other parts of the country. Quite a few corporate finance advisers have moved over to assist their corporate recovery colleagues.’
Small attributes this to a lack of deals to keep the teams occupied, which has meant that many staff have had to become more multi-skilled. She adds, ‘It’s going to be a challenge for businesses, but hopefully as activity levels come back up, people will move back up the M1.’ Despite this, Small expects to see a similar trend in manufacturing and distribution M&A and refinancing in the coming year, which she believes will be driven more strongly by private equity transactions.
Looking to the year ahead, Websdale predicts that refinancing will continue to be dominant. However, he adds, ‘We have seen an increased level of activity around acquisition opportunities. Parties involved in the deals tend to be at the table for the first time in quite a period. Their intent, generally, involves either adding to their portfolios or disposing of existing investments. I expect that activity to fuel the first quarter of 2011.’
Websdale says that the transactions he has viewed tend to carry good brand names, and adds, ‘We’re not seeing “cut and burns”. These transaction types have “hold and grow” characteristics.’