Wales may not have the strongest economy in the UK, but its recent deal-making performance has put it out in front. Mark Dunne reports

Do I see the four horsemen of the apocalypse riding down Queen Street in Cardiff? No, I don’t,” says Peter Wright when asked how he sees the Welsh deal market performing over the next 12 months.

The optimism of the investment director at debt and equity provider Finance Wales is fuelled by an MBO surge at the start of the year caused by companies racing to meet April’s CGT deadline.

“We had a strong run in our first quarter partly because we did three or four small MBOs, which were almost all lifestyle engineering businesses.”

In the six months to October 2007, Finance Wales spent some £5 million. The following half year, it invested three times as much. This is a typical figure for the firm, but for Wright this year promises to be even better.

Finance Wales’s year-on-year run rate for the first six months is double what it was in 2007 and this financial year it expects to hit £10 million by September with deals it has in its pipeline.

Wright expects to invest £15 million in the second half to finish at £25 million. “I’m forecasting a 20 per cent increase in volume. I wouldn’t say that we are doing more deals by number but we are doing larger deals.”

The way of the dragon

Finance Wales’s experiences this year are echoed by research compiled by information and marketing services company Experian, which highlighted a massive 258 per cent increase in deal values in the region.

Volume may have dropped 17 per cent in the first six months to 85 from 102 in the same period of 2007, but £2.7 billion was spent compared to £774 million
12 months ago. This bucked a trend across the UK, with Wales the only region showing a rise in values during this time. The increase was in part due to the £2 billion sale of medical business Convatec to Avista Capital Partners and Nordic Capital in May.

Another major transaction was Henderson Global Investors’ £364.5 million acquisition of designer outlet McArthurGlen.

Declining deal volumes haven’t dampened the spirits of Nigel Greenway of law firm Berry Smith’s corporate team, who worked on £130 million worth of deals between February and May, including the £87 million disposal of medical products developer BBI.

“Since early June the deal completion rate has been slower, but we have still managed to get away a few decent mid-sized deals this summer,” Greenway says.

Robert Cherry, a partner at Morgan Cole in Cardiff, witnessed a fall in deal flow during the summer, but is seeing evidence of a recovery.

“It’s a combination of the summer being particularly quiet and owner-managers looking again at exits, which may have been postponed six months ago,” the lawyer says.

“They are starting to become reconciled to the prospect of lower multiples on exit and in some cases going ahead with it now that they have had the summer to think about it.”

Raising the stakes

Wright believes that Finance Wales’s current activity is explained by having to work on larger deals to fill the gap left by banks and asset financiers.

“There have been quite big increases in the size of the deals we do, which is being driven by the banks chipping back at the amount they want to do on an unsecured basis,” he adds. “In one case we were going to do £1.2 million and ended up doing £1.5 million after a bank wanted to reduce its proposed investment. We are even seeing a couple of cases where banks have pulled out of a deal completely.”

Wright is currently looking at a business that is growing, profitable and cash generative that two banks have turned down, so he is investing £250,000 because he cannot get a small firm’s loan for the amount in Wales.

“The reality is that the banks are tightening up their balance sheets. We can do the same thing and run for the hills or say ‘this is a good business, the banks have a problem right now so we will stretch into that gap’.”

Cherry agrees that it is difficult to raise funding, especially for MBOs. “Corporate acquirers are seeing it as a good time to buy bolt-on businesses, because they can buy them off their balance sheet. For those MBOs there will be a significant degree of structuring of the price with the deferred element to enable them to fund the deal.”

The problems with raising enough finance to complete transactions could be down to the lack of a VC community in Wales, according to Greenway.

“The corporate finance community is developing year on year and has a high level of expertise. However, we do still lack a VC community in Wales – we have Finance Wales, but nothing of substance beyond it.

“It will be interesting to see if fund manager Excalibur can change this, and make a real dent in the market, also likewise for the Bristol-based funds that have expressed an interest in the region,” he adds. “That is a challenge for those to take up.”

Getting real

Wright is sanguine that the opportunities he has seen this year will continue to come. “I know everybody is saying the end of the world is nigh, but you make your best investments in a downturn.”

DONE DEALS

Vista Support Services

In July the Cardiff-based provider of support and maintenance services to companies using EpoS systems was bought by its managing director Brian Norman and finance director Richard Olds.

The company was sold by DigiPos Store Solutions for an undisclosed sum, with funding provided by Finance Wales and HSBC. Vista’s clients include Lloyds Pharmacy, Spar, Peacocks, Londis, Vision Express and Game.

Warwick International

Flintshire-based Chemical specialist Warwick International has been bought by its management for £129 million.

The buy-out team was led chief executive Bob Ellis, who was supported by Steve Williams, Barry Tillby and Doug Lovatt.

The business was sold by US company Sequa Corporation, and the deal was backed by Close Brothers Private Equity and a banking club led by Royal Bank of Scotland.

Merlin Marketing and PR

The marketing and PR specialist, which lists HBOS Cards and Penderyn Welsh Whiskey among its clients, was sold to Freshwater in February.

The Cardiff-based company was sold for £1 million in cash and shares and now trades as Merlin Freshwater Wales. The deal and takes the acquirer’s business to 139 employees in ten offices.

Dipec Plastics

A senior manager bought the plastics company in February for an undisclosed sum after its founder retired. The South Wales-based company, which makes plastic products for a sci-fi television programme and a high-profile British artist, is now controlled by Jason Callow after he received £140,000 from Finance Wales.

Venture Structured Finance

Kelvin Thomas – Regional Director
029 2064 7355
kelvin.thomas@venture-finance.co.uk
www.venture-finance.co.uk

The appetite for alternative finance, such as invoice and asset-based lending (ABL) continued to grow over the last six months. This is due to a couple of key drivers: firstly, an increased awareness of the funding possibilities of invoice finance and ABL among businesses and their advisors; and secondly, a tightening of funding lines from many major high street banks, which has forced businesses to look for alternative forms of funding.

Market difficulties and the uncertain economic climate across all business sectors have accelerated the appetite for considering independent financiers as first choice working capital providers.

This overall trend is mirrored in the Welsh market and we have seen a growing stream of businesses, usually reliant on bank overdrafts, finally making the switch to more flexible funding packages. Liquidity is becoming a serious issue for a huge number of businesses, particularly in the manufacturing sector – these businesses are turning to Venture often when their traditional lenders instigate a finance review, based on what some would see as a knee-jerk reaction to the general business environment rather than specifics.

The current economic climate has also led to a rise in the number of business turnaround or rescue packages that are using invoice finance and ABL for essential funding. We are increasingly getting involved earlier in the process and are often able to provide a package that stabilises the business and provides a sound platform for turnaround.

Co-operative Bank

Andrew Hannah – Senior Business Development Manager
029 2064 4265
andrew.hannah@cfs.coop
www.co-operativebank.co.uk

Last year’s relaxation in capital gains tax led to a dramatic increase in deal activity in Wales and the good news is that despite today’s uncertain economic climate, we are still experiencing a healthy deal flow.

There has been a raft of deals within the region’s leisure industry over the last six months, suggesting that the UK leisure industry is resilient to economic pressures.
It could be said that far from having an adverse effect on the market, the credit crunch is giving this industry a boost as people tighten their belts and holiday parks, for example, have proved to be a robust investment because the asset value of these sites holds strong. When the economy is strong, customers tend to trade up to more expensive caravans and lodges and, when weak, customers who previously may have taken foreign holidays trade down to caravan holidays in the UK.

We have noticed that the level of acquisitions has remained buoyant; however, the types of acquisition are changing and our customers are opting to merge their companies as opposed to the more traditional takeovers.This could be a reflection of people wanting to expand their exit strategies to provide more financial security in a more difficult economic climate.

Our team at the South Wales Corporate Banking Centre is still very much open for business and lending to companies with impressive business strategies. We are in a strong position to provide funding, unlike other lenders who seem to be more reluctant to provide funding at this time.