Hear what the cream of the M&A crop have to say about dealmaking during the last 12 months.
Financiers, advisers and dealmakers gathered at the recent M&A Awards to celebrate remarkable achievements in a tough year. James Harris reports
With deal flow at a ten-year low, prices in the doldrums and financial institutions behaving like they’ve stumbled into a minefield, it was a surprise to see dealmakers in an optimistic mood at this year’s M&A Awards, held at the Hilton Hotel, Park Lane.
The credit squeeze certainly hasn’t held back Richard Morley, partner at NBGI Private Equity and M&A Personality of the Year. He made an aggregate cash multiple of 6.6 times and achieved an average IRR of 110 per cent on transactions during the past 12 months.
Morley explains: ‘We exited quite a few businesses in 2007 and 2008 so our current portfolio is smaller than average – this helps us to focus on new investments. If you are devoting all your energy to an existing portfolio, it leaves little time for new opportunities and it creates a cautious approach to investment.’
Prevailing market conditions are allowing dealmakers with a good eye to take advantage of distressed businesses. Morley recently led the acquisition of 17 bars and pubs out of administration from the Food and Drink Group.
‘The company ran into difficulties and we were able to acquire some of the best performing bars. Since making the acquisition, we have made a bolt-on acquisition and we’re expanding the business. It’s a great deal for us.’
Racal Acoustics is a UK-based international defence products business that supplies noise-reduction headsets to the military. ECI Partners, dubbed Deal/Dealmaker of the Year, acquired the business in 2005 for £52 million in an auction, which was ‘extremely heated, even by the standards of the day,’ says Ken Lindsay, partner at ECI.
Under ECI’s stewardship, Racal’s revenues more than doubled over the next three years. Lindsay explains: ‘There was no slash and burn. We ran it for the long term as that way you get the most out of a business.’
In this period, the company developed two products, Raptor and Frontier 1000; it also managed to get a foothold in the US. ‘The business had always been international, but it had never cracked the US market. This time around, most of the sales growth came from the US.’
Fortunes appeared to hang in the balance when the decision to sell the company was made in September 2008, about the same time as the global financial system imploded. Lindsay comments: ‘It was a week after Lehman went bust, so banks were failing and the world was falling apart.’
Nevertheless, Lindsay was confident a good price could be achieved. ‘We recognised that the business had a high level of strategic attractiveness for certain buyers, most of whom had cash in the bank.’
An encouraging sign was the interest from financial institutions in pushing a deal through. ‘Even at that point, there was a strong appetite among banks, many of whom were offering very high lending multiples.’
In December 2008, the business was sold to US defence company Esterline for £150 million. ‘We made a lot of money on that deal. The Racal sale also shows how a good old-fashioned British manufacturing business can play in global markets and win business.’
Interim Manager of the Year David Moore is not afraid of getting his hands dirty: ‘I don’t consult, I implement,’ he states.
Fluent in French and German, Moore was appointed CFO of Amoena, a Germany-based manufacturer of medical devices, in the first half of 2008. Says Moore: ‘It wasn’t a bad business by any stretch of the imagination, but it was underperforming.’ The first issue to be tackled was financial reporting. ‘It wasn’t clear where the company was making money,’ he says.
As well as improving the information on hand, Moore wanted the finance team to take a more active role: ‘In many German companies, the finance team stays in its corner; that’s not my approach. I encouraged them to get away from their desks and communicate with all the business divisions.’
Moore eventually identified the right management team to push the business forward: ‘My job is to work my way out of a job, which I did.’
The comeback kid
Steered by the indomitable Charles Wilson, Northamptonshire-based cash-and-carry company Booker Group won Turnaround of the Year (Wilson also bagged CEO of the Year at the Quoted Company Awards at the start of 2009 – see March issue), while Simon Riddell’s Animalcare took the award for the year’s best IPO.
Animalcare has needed to work hard for its gong: ‘We have not been hit with a battering ram like some companies, but it has been tough,’ admits Riddell. At the start of 2008, Richey, as the company was known, focused on livestock management and identification tags for cattle. ‘It’s a good, solid business, but it has limited growth potential as the agricultural market, especially livestock, is in long-term decline.’
The acquisition of Animalcare, a veterinary medicine business, in January 2008 not only led to a change in name, but also introduced the company to a burgeoning market. ‘This was a market sector that had been growing at six to eight per cent a year,’ confirms Riddell. The industry was given a helpful boost by the European Union, which harmonised the registration process for generic medicines, thereby cutting costs and red tape.
Animalcare listed shortly afterwards with an initial market cap of £10.86 million, although it wasn’t plain sailing. ‘We had a rougher ride than we had anticipated on admission,’ Riddell comments, noting that the engine for growth for veterinary medicine was the increase in pet insurance, which enabled owners to indulge pets in more complex and expensive treatments. ‘It’s hardly surprising that in straitened times there is less demand for insurance.’
The company was also hurt by currency fluctuations. ‘We buy in dollars and we forecasted the dollar at $1.90 to the pound. We couldn’t react as quickly as we wanted to when the pound collapsed, so that left us with some profit issues.’
Animalcare managed to absorb the losses into other operations. Riddell comments: ‘The agricultural business is pretty robust and we’ve managed to maintain profitability. It’s disappointing that the market is not growing as it was before, but it is not declining either. Many business leaders would give their right arm for a flat market.’
Even under such difficult conditions, the company has raised an additional £7.49 million. ‘We’ve also managed to lower our gearing so we’re in good shape and we’re still profitable.’
‘We definitely punch above our weight,’ says Jonathan King, partner at Osborne Clarke, which won Law Firm of the Year. The firm advised on 160 deals with a total value of over £4.6 billion in 2008.
In addition to general corporate know-how, the team ‘also offers particular expertise in TMT (technology, media and telecoms), or digital media as it is now generally known,’ adds Adrian Bott, London-based practice group head at the firm.
As deals ground to a halt, a number of due diligence providers understandably felt the pressure. Not so Hazlewoods Corporate Finance, winner of the Specialist Due Diligence Provider of the Year award. The company has completed 93 deals valued at £360 million in 2008, up from 62 deals the year before.
Partner Andrew Brookes attributes this rude health to its area of focus: ‘We specialise in healthcare, so the economic drivers behind the industry are not affected by the recession.’
Another firm bucking the trend is Lloyds TSB Corporate Markets Acquisition Finance, winner of Financier of the Year, which has provided over £2.6 billion across 63 private equity-backed transactions in 2008.
Highlights include supporting CVC Capital in its €2.4 billion acquisition of a 25 per cent stake in Evonik Industries, a German industrial group, and supporting HgCapital on its £40 million investment in Achilles Group.
The judges said that Icon Corporate Finance had been ‘knocking on the door’ for the past couple of years but the latest tranche of deals showed the time was right for the firm to win the award for best corporate finance practice. In particular, the judges were impressed by the sale of Bracknell-based IT company Practique to Silicon Valley-based rival Merced Systems.
Icon partner Alan Bristow comments: ‘The owners of Practique wanted to have an active role in the business in the future, not just for a transitional period but for a considerable amount of time. Not only that but they were keen not to be sold to a rival. That’s a challenging brief when you’re looking for a buyer. We found a Californian IT company that agreed to all the stipulations, and at a very good price as well.’
It adds up
Mid-tier professional services firm Tenon continues to pick up a head of steam after collecting the award for best accountancy firm. ‘It has been a good year all round,’ reflects Tenon’s Mark Lucas. ‘We focus on the entrepreneurial sector, and as conditions worsen, companies are finding it hard to trade. The need to release equity value for growing businesses is paramount and we have used all sorts of solutions to this problem, from MBIs to deferred compensation schemes.’
In the face of toughening market conditions, Tenon’s corporate finance team acted on 92 transactions last year with a total deal value of some £446 million. ‘Our sales have grown by 80 per cent,’ says Lucas.
The overall mood on the night was encapsulated in the after-dinner speech given by BBC sports presenter Ray Stubbs. “Stubbsy” revealed to the packed attendees that he shared their optimism, although his own hopes were pinned on England bringing home the World Cup from South Africa next year. Let’s hope the optimism among dealmakers is more grounded in reality.
For more information on the M&A Awards click here