Midlands M&A review

The Midlands has been left reeling by the recession, but there is money out there for the right deal. James Harris reports

The Midlands has been left reeling by the recession, but there is money out there for the right deal. James Harris reports

The Midlands has been hard hit by the recession. ‘Things were pretty bad at the start of the year,’ says Richard Cox, a partner at law firm Browne Jacobson.

‘The problem is that there simply isn’t the volume of deals to [build an overall picture of what] industries are active. Healthcare and social care are often talked about, as they are less exposed to economic turbulence, but really deals are being made because they stand up on their own merits, regardless of sector.’

In 2008, the Midlands generated 344 deals, a reduction of 29.2 per cent from the year before, according to research specialist Zephyr. Of the prices that were disclosed, the combined value fell by 28.2 per cent to £8.9 billion.

Even the food industry, which has a large presence in the East Midlands, is suffering. ‘Given the way supermarkets are going, a lot of these businesses are having a tough time,’ says Cox.

Inevitably, heavy industry and engineering are getting hit too. Paul Johnson, head of due diligence at accountancy firm Baker Tilly, comments: ‘What has happened to the car industry has affected large pockets of the Midlands, although this is driving some work as struggling firms consolidate to maximise economies of scale.’

Cox adds: ‘There is a cross-section of industries in the Midlands and deals are still happening, but they tend to be at the quality end – the kind that would be done in any market.’

Predictably, one of the biggest obstacles to deal flow is the lack of bank lending. Andrew Hornigold, a partner at law firm Pinsent Masons, explains: ‘Deals won’t happen if incumbent banks get cold feet. It is very important to secure the cooperation of the target company’s lender. There’s more due diligence, more risk analysis and credit committees are much stricter on pricing debt.’

While it may be difficult to arrange backing for new businesses, that doesn’t mean funds aren’t available for companies. Cox notes: ‘Established businesses are in a better position, because lenders are keen to hang on to existing clients. That’s why we’re seeing a lot of restructuring and refinancing. Banks are more willing to invest in the devil they know.’

Sarah Cartwright, a partner at law firm Bevan Brittan, says: ‘You hear that the banks are now definitely lending but I suspect it will take some time to impact significantly on deal flow.’

Relief may yet come from another quarter. ‘Private equity firms are open for business. Many are biding their time and waiting to see how low prices will fall, but the money is there,’ says Johnson.

One of the most active private equity firms in the region is LDC, which has made three deals this year. Alistair Pendleton, investment director at LDC, says: ‘There is still a strong appetite within the private equity industry to nurture and support businesses in the Midlands.’

‘We are looking to invest £250 million of equity this year, so it is very much business as usual. That’s not to say things are easier now. With prices so low, a high-quality company will be reluctant to sell unless it is absolutely necessary for it to do so. ‘I would say our approach remains both positive and watchful.’

The nuclear option

This year LDC invested £6.5 million in Nuclear Engineering Services Ltd (NESL), an engineering group based in Wolverhampton. Brett Cooper, chairman of NESL, explains: ‘It’s a typical West Midlands company in the sense that it draws from the area’s strong engineering background, but it’s a bit of an accident how we came to the region.’

The company moved to Wolverhampton after acquiring the Rolls-Royce Nuclear Engineering Services business in 2003. NESL employs 200 staff and reported an increase in revenue of 30 per cent to £18 million in 2008. Cooper adds: ‘We’ve grown year-on-year and we’re forecast to grow even more this year.’ Long-term decommissioning projects are the central source of growth, but the company is also well positioned to take advantage of the renewed interest in nuclear energy by the UK government.

Looking for funds

After a period of solid growth, the company decided to seek external finance: ‘There was an option to continue relying on organic growth, but we realised that if we stuck with that, we would only be able to achieve a modest growth profile. We knew that to achieve our full potential we would have to look elsewhere.

‘Initially we went to other companies in the nuclear industry as well as some venture capital outfits, but we couldn’t find what we were looking for. I think it’s fair to say that, in this climate, that’s not all that surprising.’

The company then participated in an auction with interested private equity firms. Cooper says: ‘This option gives us the flexibility to manage the business, while also benefiting from investors with deep pockets.’

The transaction was not without its hiccups. Johnson, whose firm acted as lead advisers in the deal, comments: ‘The deal took longer than anticipated. There was a very serious assessment of risk by the investors and the management team. In the end, it just goes to show that good businesses will find money.’

Bright prospects

NESL has big plans. ‘We have some new initiatives in the pipeline, including a major new engineering facility in West Cumbria as well as further organic growth at our site in Sellafield. We are also looking into decommissioning and other nuclear projects in Europe. There are also exciting opportunities in the naval defence sector, working with the Ministry of Defence.’

After a gruelling year, there are signs that fortunes are changing. Pinsent Masons’ Hornigold says: ‘I’m confident of a return of activity. More companies are on the acquisition trail. In the past couple of months, there has been an improvement in the number of bids and companies are more willing to test the market.’

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk 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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