M&A activity in Milton Keynes tells a familiar story; fewer deals, higher price tags. Last year, the region reflected national and global trends as deal volumes plunged 44 per cent to 32 transactions and values rose 26 per cent to £969 million.
Almost £1 billion changed hands in the region, which ranks as the UK’s second-fastest growth area for business creation, according to research from accountancy firm UHY Hacker Young. With at least five new companies arriving in or expanding within Milton Keynes each month, it’s not hard to see why.
Every business sector is represented within the city, says government body Invest Milton Keynes, however, M&A activity is clearly centred on consumer services, technology, healthcare, financial services and logistics markets. One of the largest mid-market deals of recent times was the sale of Newport Pagnall-based Welcome Break by Investcorp. The Bahrain private equity group sold the motorway services operator to Appia Investments, a consortium of investors led by Dutch Bank NIBC, early last year for £490 million.
Investcorp had plans to invest in Welcome and refresh its run-down sites when it bought the company from Maquarie Bank-owned Moto for £473 million in 1997. In February 2007, Investcorp recapitalised the UK’s second-largest motorway services operator for £300 million, valuing it at £500 million and generating a large capital return to its investors.
The sale price was just enough to enable the private equity investor
to break even on its investment.
Alongside consumer services, deals are being struck in the distribution and logistics markets. One such deal placed Swindon-based Smiths News Plc, the UK’s largest newspaper and magazine wholesaler and distributor, at the negotiating table to acquire a 50 per cent stake in Rascal Solutions.
Milton Keynes-based Rascal Solutions provides inventory management services to retailers for newspapers and magazines. The deal was completed in March 2008 for £3 million in cash, an initial payment of £2 million was made followed by a deferred element of £1 million paid in October.
Mark Cashmore, group chief executive, says the transaction was part of his strategy to make the newspaper and magazine “category” as efficient as possible for his 23,000 retail customers.
Says Cashmore, “Working with retailers on inventory management is part of our service proposition. Rascal was already in that game and we knew the owners. We decided that it would be better to work together rather than to develop independent solutions that would compete with each other.”
Smiths News, previously the news distribution arm of WH Smith de-merged in 2006, serves major retailers and smaller convenience stores. In August, the company reported a full-year pre-tax profits increase of 4.8 per cent to £33 million on a turnover of £1.2 billion.
Although upbeat about the deal and the company’s improved position in the market, Cashmore refused to comment on whether there were more deals in the pipeline.
Other deals within the distribution and logistics industry in Milton Keynes last year include the acquisition of warehouse operator Gazeley by Dubai-based Economic Zones World, a developer and operator of economic zones, technology, logistics and industrial parks, for £300 million in June.
At the smaller end, Ian Menzies of M33 Corporate Finance has seen the shortage of debt finance spur more non-cash mergers, particularly between Milton Keynes professional services firms.
Says Menzies, “The banks appear to have gone to sleep or can’t get their minds around debt finance. Non-cash mergers enable two firms to come together without having to go to the bank for borrowing.”
In contrast to some advisory firms who refuse to admit a decline in deal activity, Menzies is candid about the slowdown: “In the last six months, we haven’t done any deals. Transactions have tended to be sub-£15 million and business sales orientated, with vendors who want to sell their business and get help with the process.”
The principal notes that vendors are becoming more realistic about valuations and have accepted that the value of their business has fallen in terms of the multiples that can be achieved, despite the stability shown in some private company price indices.
Interestingly, accountancy firm BDO Stoy Hayward’s latest Private Company Price Index (PCPI) indicates that private company prices are holding constant. The PCPI, which tracks price-earnings (p/e) multiples paid by trade buyers for private companies, remained constant at 11.5 times p/e multiples in the third and final quarter of 2008.
Menzies is doubtful of the integrity of such indices, which he believes could be “flawed” as vendors frequently are unwilling to publish the sale prices that have been achieved for their businesses. “With private companies you often find that the reported profits are nothing like the real ones.”
He adds, “Looking at pre-tax profits before remuneration has been subtracted artificially inflates the price-earnings of the company.”
Land of opportunity
There are around 10,500 companies based in the region, of which one-third has been established since the year 2000, according to Invest Milton Keynes. Sandcliffe Investments, a private equity investor, is one such ambitious growth company, which was established in 2004 by Paul Atherton and Jeremy Mackenzie.
Previously of PricewaterhouseCoopers, the founders relocated to Milton Keynes from London in order “to tap into potential business opportunities”. The private equity investor has sourced £40 million from banks and private investors, of which half has already been invested in deals in and beyond the local area.
Says Atherton, “The city has a lot of growth opportunities within it. It is extremely well developed in terms of financial services and the infrastructure is probably far more developed than any other regional town of a similar size.”
Sandcliffe made its deal debut with AT James, a supplier and fitter of suspended ceilings, for over £4 million in 2005. The business is located in Fareham, Hampshire, and services contracts worth between £5,000 and £3.5 million. When Atherton and Mackenzie identified A T Jones as a potential target, they had plans to expand the business into Milton Keynes. To this end, they opened a regional office in 2007 and the interior fit-out firm has won business since.
“In order to extract as much value as possible from activity in and around the region,” Atherton says the firm will use the same business model and aims to bring the operations of Cambridge-based portfolio company Fenland Flat Roofing to Milton Keynes.
“Milton Keynes punches above its weight and we will continue to look at opportunities and base ourselves as an investor here,” Atherton says.