London calling

Deal makers continue to be active in the capital, with small and medium-sized businesses underpinning headline-grabbing megadeals.

Deal makers continue to be active in the capital, with small and medium-sized businesses underpinning headline-grabbing megadeals.

Deal makers continue to be active in the capital, with small and medium-sized businesses underpinning headline-grabbing megadeals.

With global metal prices at record highs, leading players in the industry are seeking to consolidate and London-based mining firm Rio Tinto plc is at the forefront of this drive.

Rio Tinto, the second largest mining company in the world, announced in July that it has agreed a $38.1 billion [£18.7 billion] cash deal to acquire Canadian aluminium manufacturer Alcan, valuing each share at $101.

FTSE 100-listed Rio Tinto came in for Alcan after an earlier $27 billion bid from US mining firm Alcoa was rejected on the grounds that it undervalued the business.

Rio Tinto’s bid was enough to price Alcoa out of the market and secure the support of Alcan’s shareholders. The deal is now making its way through the regulatory process and is expected to complete in the coming months.

While this is one of the largest deals involving a company based in the capital this year, it is an exception, with the majority of M&A activity at the small to medium-sized level. For example, on April 2 outsourcing and professional services firm Capita Group plc continued its growth by acquiring insurance business CMGL from private equity firm Sovereign Capital Partners for £32 million.

CMGL employs more than 440 staff in London, Cheltenham, Birmingham and overseas. In the year to December 2005, it recorded a £41.4 million turnover with an operating profit of £1.2 million.

London-based SMEs have also proved attractive to acquirers. For example, marketing agency Sponsorship Media was acquired by French rival Havas Sports for an undisclosed sum in March 2007.

Sponsorship Media will now trade as Havas Sports UK and was bought by the French group as part of its plan to establish a UK operation before the 2012 Olympics in London.

In the same month, stage equipment provider Core Creative was acquired by rival Hawthorns for an undisclosed sum from The Concerto Group. The deal boosted Old Maltby, Leicestershire-based Hawthorns’ turnover to some £9 million, and brought its staff up to 87.

Hawthorns acquired Core Creative to give the company a permanent base in London, where an increasing amount of its work is based. It has since rebranded Core Creative as Hawthorns.

London-based SMEs have also turned to outside funders to accelerate their growth. Streetcar, a pay-as-you-go car club, received £6.4 million from private equity firm Smedvig Capital in March to fund its growth plans, which include geographic expansion and increasing the size of its car fleet.

Elsewhere, The Capital Fund, which invests in fast-growth companies in Greater London, has continued to expand its portfolio in 2007. Its deals this year have included a £250,000 investment into Kids Planet, a family activity centre operator. Kids Planet, which operates under the Jack & Lulu brand, will use the money to open new sites.

Capital gains

Other London-based companies have looked to the stock markets to continue their growth. For example, on April 10, identification technologies developer Matica plc joined AIM, raising some £1.88 million on debut.

Matica, which joined AIM to help further its international ambitions, designs, manufactures and markets machines that personalise credit cards, identification cards, membership cards and SIM cards. Its market capitalisation is now £8.9 million.

Earlier in the month, satellite telecoms provider Avanti Communications Group plc, which was demerged from Avanti Screenmedia in December 2006, also joined AIM.

While Avanti Communications did not raise any capital from its admission, its chief executive, David Williams, hopes the business will benefit from an improved profile from being on AIM.

Investment companies also continue to use London as a base for listing. Cash shell Vestpa plc, which raised some £3 million on its admission in June, is now evaluating several acquisition opportunities in sectors ranging from consumer goods to engineering and telecoms.

In addition, Ora Capital Partners plc, the latest venture from Richard Griffiths, the founder of broker Evolution, joined AIM in April, raising £35.21 million at 120p.

Ora already has several investments, including AIM-listed investment businesses Kanyon and Oxeco, which are focused on the resources and technology and science sectors respectively. Ora also has a 64% stake in growth company-focused corporate financier BankORA. The firm still has £60.5 million available to spend on further investments.

The firm has already met with investor approval. Ora’s final results for the period from November 7, 2005 to January 31, 2007, revealed a pre-tax profit of £2 million. Since admission, its share price has increased to 142p and its market cap is now some £142 million.

Failures down

The relatively buoyant deal making activity in the capital is indicative of the positive economic climate in the capital. This is backed up a fall in corporate failures in the first half of 2007, with 1,231 businesses going into administration, compared to 1,658 for the same period in 2006, according to business information provider Experian.

Indeed, the 25.8% fall in insolvencies year on year is the biggest fall in the UK and well above the average fall of 6.9%.

However, City of London businesses are finding conditions tougher, with 286 businesses failing in the first half of 2007, compared to 277 last year. While this is only a rise of 3.2%, there are indications that the City market is tightening. In Q2, insolvencies were up by 10.9% year on year – the biggest jump in the whole of the UK.

Nevertheless, in economic terms, London is also still performing well, and has grown consistently since mid-2003. While output fell to a 17-month low in April 2007, the economy has since enjoyed an upturn and is again above the UK average for growth, according to the Royal Bank of Scotland’s latest PMI London Report.

However, London’s growth was outpaced by the Southeast and Southwest and matched by the Northwest in Q2. This demonstrates how buoyant the UK economy is, especially in the South.

This growth was driven by the service sector, while manufacturing production fell, RBS reported.

Another indicator of the buoyancy of London’s economy is that employers are increasingly recruiting. Indeed, only employers in the Southwest recruited at a faster rate than those in London in Q2.

“The London private sector regained its status as a powerhouse of growth in June, posting an expansion of output second only to the Southwest among all UK regions,” said Ross Walker, RBS economist. “Underlying the improvement in activity growth was a buoyant expansion of new business in the capital’s dominant service sector. Latest data showed that firms kept hiring new staff at a brisk pace, reflecting rising workloads.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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