Public-to-private deals – Extra firepower

For businesses looking to leave the public markets without putting their growth plans on the back burner, a take-private deal could be the answer.

The public growth markets promise a springboard for businesses looking to further their growth ambitions, with greater exposure and access to capital among the key attractions.

However, in times of economic strife, a public listing can be more of a hindrance than a help, with investors reluctant to part with cash and the added burdens of public scrutiny, reporting requirements and advisory fees.

Group NBT, a specialist in web domain name management with pre-tax profits of £7 million, is one of 98 companies this year to decide that its time on AIM had run its course. It left the market through a £153 million deal with private equity firm Hg Capital.

It wasn’t a strategy that Group NBT itself devised, reveals CEO Geoffrey Wicks, with Hg Capital making the initial move. However, the nature and value of the deal made it too good to not take to shareholders, and their support was quickly won.

Wicks says the approach came along at a good time, with the deal marking the next stage in the business’s growth strategy. It is now looking to act upon plans announced in the summer to allow companies to create customised internet domain names.

‘We have continually said that we will look to grow organically but seek acquisitions in the right places,’ Wicks adds. ‘Having reached the size that we are now, we need investment beyond what we can achieve on the public markets.’

‘We knew that delisting would free up management time and diminish our cost base’

Related: Delisting from AIM: the great escape?

For businesses looking to be bought off the market, the private equity route offers an alternative to selling out to trade. However, in recent quarters, private equity take-private deals appear to have dried up, with only four such transactions occurring during 2011.

The volume of public-to-private deals in the UK so far this year, some £317 million, is a fraction of the £30.1 billion of deals completed during the boom year of 2007. Deals of this nature have gradually fallen off since then, with only a brief respite in 2010 slowing the fall to the current low levels.

Time to buy

One company that has managed to secure a buyer is Ideal Shopping Direct, a retailer of lifestyle, craft and hobbyist products to consumers through UK shopping channels. The Peterborough-based business was taken off AIM through a £78.3 million transaction in April.

Having joined the junior market in 2000, the consumer business felt the full wrath of the post-recession retail sector bite, recovering from pre-tax losses of £13.22 million in 2008 to profits of £6.7 million in the lead-up to the take-private deal with Inflexion Private Equity.

John Hartz, managing director of Inflexion, says the deal came about following an existing relationship that the firm had with Ideal CEO Michael Hancox. ‘Ideal Shopping Direct is unusual in that it had a chequered past,’ Hartz adds. ‘Mike had turned it around and consolidated the profitability of the business, which interested us.

‘It had a pretty unhappy life on AIM, and investors were getting a bit tired of the old regime and poor performance, so the support we got from shareholders was unanimous.’

Now that the business is backed by private equity it can compete in the more ‘radical’ manner originally planned, says Hartz.

Wicks of Group NBT is less critical of AIM. The domain name company joined the market in 1999, moved to the Main Market shortly afterwards, then stepped back to AIM in 2004 following the dotcom bust.

‘This isn’t about AIM, or indeed the Main Market, it’s about the public markets in general,’ he explains. ‘If we wanted to make a large acquisition and raise a significant amount of capital, there was always a lack of certainty.’

This uncertainty made it all the more difficult to compete with private equity and venture funds for choice acquisitions, Wicks adds. Nevertheless, he does concede that recouping the time he spent on reporting and investor relations is one bonus of leaving the public markets.

Change of scene

A total of 60 companies left AIM through acquisitions in 2010, with 40 of those being bought by other public companies (see chart). Making up the rest of those leaving AIM last year were 88 that simply cancelled their listing and 15 that transferred to alternative markets.

This year, there is a big drop in those leaving AIM through the acquisition route, with only 25 being bought, 18 of them by other PLCs. In addition, there have been 62 delistings and 11 choosing to move to a different market.

Among those companies choosing to leave AIM voluntarily is PR and marketing business Freshwater UK, which joined AIM in 2007 with the express intent of acquiring businesses to boost its regional network.

Haydn Evans, chief financial officer at Freshwater, says that to begin with the strategy worked, and Freshwater made three initial acquisitions worth a total of £4.5 million on the back of its listing and initial fundraising of £3.5 million.

However, the turmoil following the collapse of Lehman Brothers sent Freshwater’s share price plummeting, with the business then caught between ‘a rock and a hard place’.

‘We didn’t comply with venture capital trust (VCT) rules any more as we had over 50 employees, but we were too small for the big boys to take notice, as we weren’t in the £20 million to £50 million market cap range,’ Evans explains.

Related: Looking for life after delisting

Since moving away from AIM in October 2010, Evans says Freshwater has no regrets about the decision. ‘We knew that once we did come off it would free up management time and diminish our cost base, which it has done. In fact, we probably underestimated the amount of management time it would give back.’

Feeling trapped on AIM

Evans describes a listing on AIM as like living in a goldfish bowl, with the pressure to meet the expectations of shareholders and investors being ‘never-ending’. Looking at the market now, he believes that there are probably a number of companies in a similar position to the one Freshwater found itself in last year.

‘For AIM companies coming to market it is very flat. I would imagine that there are several companies like us who are still on AIM and wondering where the next batch of investment is going to come from.’

For Hartz, there are many quoted companies that have not reaped the benefits they expected from their listing, some of which could be interesting to private equity. But he admits that PE firms’ ability to target such companies recently took a knock following amendments made to the Takeover Code. This now requires quoted companies to reveal the identity of potential bidders at an early stage. Once bidders’ names are outed, they have 28 days to make a formal offer, failing which they must withdraw for six months.

From a private equity firm’s point of view, these changes increase the risk and costs of a take-private deal, so they are likely to occur even less frequently, Hartz adds. Inflexion is open to public-to-private opportunities, but it currently has to be prepared to ‘wade through the mud’ to make them happen. Hartz’s advice to quoted companies hoping for suitors is not to be too coy about it.

Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

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