UK M&A Activity Examined

This year's winners of the M&A Awards demonstrated how to prevail against adverse economic conditions.

There is no disguising the fact that dealmakers struggled to wrap up transactions in 2009, but there were entrepreneurs, advisers and investors who somehow made deals look easy. Chris McIntyre reports.

As other companies delisted from the Alternative Investment Market (AIM) last summer, Matt Riley, chief executive of telecommunications company Daisy Group, undertook a £204 million reverse takeover.

Since then, he has overseen ten acquisitions and defied the odds by arranging a three-year revolving credit facility of £75 million from three banks, each providing £25 million. ‘We raised the cash to carry on the acquisition spree,’ says Riley, whose mantra is that he wants to create a company in the mid-market, B2B telecoms space that can rival the might of BT.

Given the scarcity of ambition shown during the past 12 months, it’s not so surprising that Riley picked up the gong for Dealmaker of the Year at the annual M&A Awards. ‘We’ve got the cash available so it’s a very good time for a company like us at the moment,’ he says. ‘When the markets are really quite frothy, that’s not always the best time to be buying; you want to acquire at the bottom of the cycle if you can.’

The Great and the good

More than 400 of the UK’s leading advisers, financiers and dealmakers congregated at the Millennium Mayfair Hotel in London’s Grosvenor Square to congratulate the individuals behind the companies and firms that triumphed in what was an otherwise barren year for deals.

Jim Smith is now managing director at Bloomsbury Professional, but he picked up the award for Small Deal of the Year for the £10 million sale of Tottel to the publishing giant last July. ‘It was an incredibly clean deal – pretty much blemish-free,’ he says.

A publisher of academic titles, Tottel was initially acquired from LexisNexis in a management buy-out backed by Matrix Private Equity Partners six years ago. When the offer from Bloomsbury finally arrived, it was too good to refuse.

‘There were a number of reasons for exiting the business; not least so the shareholders could realise some of the value,’ Smith remarks. ‘We also accepted that our main clients, law and tax professionals, were very much going online and we would have needed another tranche of investment to fund the development of an online platform.’

The simplicity of Tottel’s sale stands in stark contrast to the cross-border deal for the household disposables concern CeDo, which private equity firm Rutland Partners bought from German investor Delton for £52 million. The financing package that was put in place spanned the UK, Germany and France, entailing an asset-based lending (ABL) component and a separate mezzanine fund.

CeDo’s revenue at the time of the deal was £185 million. Ben Slatter, a partner at Rutland, says the combination of ABL with mezzanine finance is an unusual one, and was particularly eyebrow-raising given the climate at the time. ‘July 2009 was close to the nadir of the banking crisis so it was impressive to get that sort of financing structure.’

Rutland made its initial approach to Delton in 2008. ‘As a firm, we look for businesses that need strategic change and have underperformed,’ says Slatter. ‘Any business, regardless of the sector, can be of interest provided we think we can add value by helping the management to improve the underlying business.’

For David Holbrook, a partner at technology investor MTI, its standout deal – the sale of bone repair company ApaTech to US healthcare group Baxter International – was anything but opportunistic. ‘I first came across the idea for ApaTech at the tail-end of 2003 by way of Simon Cartmell. He was the guy who was trying to raise money at that time and I’d been a colleague with him at GlaxoWellcome [now part of GlaxoSmithKline]. So I knew him very well, his reputation and capabilities.’

Along with the private equity giant 3i, MTI injected a first round of funding into what was then a profitless entity dreamed up at Queen Mary, University of London. ‘The market that it addresses is the need to fill holes in bone, particularly in spinal surgery where there may be crushed vertebrae. There is a huge market for this in the US.’

The challenge, as with any spin-out, was to develop the idea into a feasible, money-making reality. ‘Once we had established deals in the US early on, we had to build up our manufacturing capacity so that we could satisfy demand,’ states Holbrook, who is fulsome in his praise when speaking about Cartmell. ‘It was a wonderful job to enact a business plan that brought great sales and growth to the company so that it became a compelling acquisition for an international player like Baxter.’

Over a six-year period, the company went from nominal sales to generating £40 million a year and it was highly profitable. Baxter paid $330 million (£220 million) for ApaTech in March, which saw it take home the award for Large Deal of the Year.

In rude health

Holbrook argues that the healthcare sector continues to be one of the more durable areas for deals: ‘The market for acquisitions by corporates of med-tech companies is ongoing. Big medical concerns tend to grow by acquisition rather than through innovation. They’ve got lots of cash so the healthcare environment is strong despite the economic doldrums that we all face.’

Manish Madhvani, a partner at investment bank GP Bullhound, sees similar trends among high-tech companies. ‘The sector is definitely picking up. The M&A market in our industry is being driven by the fact that many of the technology companies have large cash balances and are usually very profitable, but they’re not attracting good interest rates on that cash. As a result, they are looking for unique ways to deploy that capital by moving into new, strategic areas.’

One such deal came in the cleantech sector through the sale of Concentrix Solar to French semiconductor manufacturer Soitec. GP Bullhound, winner of Corporate Finance Boutique of the Year, worked on the deal, which Madhvani describes as a ‘perfect storm’. He explains that the core business of Soitec was losing momentum and the company needed to pull off a transformational acquisition, using its expertise and manufacturing capacity in the burgeoning solar technology sector.

‘They had the opportunity to enter a market that was growing rapidly as opposed to having a core market going steadily into decline,’ he says, adding that the deal was a spectacular piece of business for the vendors. Set up in 2005, the company was sold for €55 million (£50 million) when it was delivering sales of just €4 million.

Sound advice

Among the professional services firms to find some cheer amid the year’s thumb-twiddling gloom for the bulk of advisers was Travers Smith, which won Law Firm of the Year. With 70 partners split between offices in London and Paris, the firm continued to work on many of the notable transactions completed during the past year, such as the $104 million sale of MX Telecom to US company Amdocs, and the management buy-out of arts and crafts retailer HobbyCraft by private equity firm Bridgepoint.

Philip Sanderson, a partner at Travers Smith, claims that the firm has been involved in over a third of all mid-market deals in the first half of this year. ‘A lot of M&A is still done within the private equity space,’ he says. ‘We’ve looked at plenty of financial services and retail businesses, which I still expect to be one of the drivers of the recovery. We’re also trying to make sure that we can work as much as we can on international M&A. It’s very important in our market that we are doing global deals.’

Modesty is a virtue

The winners of this year’s awards are refreshingly reluctant to overstate their achievements, which echoes the general air of uncertainty from small business owners, investors, advisers and serial entrepreneurs about the current state of the economy. Sanderson, who notes that the firm is recruiting and very much on the front foot, admits, ‘It’s a market to be cautious about. While we had a fantastically successful year in terms of deals done, it’s quite difficult not to see an element of a purple patch in that activity’.

MTI’s Holbrook states that, although there are great investment opportunities arising, the problem for the investment community in the mid-market continues to be the relative lack of funds to deliver on attractive strategies. ‘The challenge for our industry is to get more money into the system,’ he comments.

Daisy’s Riley, who realised cash in the business when it reversed onto AIM, stands out as the one who wants to keep pushing for the summit. ‘Our major competitor is BT, which still has the lion’s share of the market with over 50 per cent. We’re not anywhere near them yet, but we’re trying.’

The company, it should be pointed out, is still loss-making and the scale of the task in hand is not to be underestimated. That said, there is pedigree on the board, such as executive chairman Peter Dubens. He created the 365 Media Group (sold to BSkyB) and Pipex Communications, which wisely sold off part of its broadband operations before evolving into the present business.

Last year, Daisy posted revenue of around £53 million and the expectation is for this to be around £300 million for this financial year. The hope is for further acquisitions to eventually push revenue up to £500 million. ‘That’s the number we’re aiming for because that then gives us real market scale,’ says Riley. ‘We’re heading in that direction and looking forward to achieving it.’

By next year we may find that Daisy is still leading the way as the UK’s most acquisitive business.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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