The world has changed, says Gary Quaife of consultancy firm Edward Symmons. After years of favourable economic conditions, the banking crisis has left private equity houses unable to raise debt, causing the number of buy-outs to shrink.
In its latest quarterly review, the Centre for Management Buy-out Research confirmed that UK buy-outs were down substantially, reaching a total value of £17.1 billion in the first nine months of the year, compared with £40 billion in the same period last year. While deal volumes were little changed, with 503 buy-outs completed by the end of September compared with 672 for the whole of last year, the decline in total values was highly indicative.
“There has been a dramatic turnaround in the marketplace over the last 12 months in terms of the number and types of deals being financed,” Quaife observes.
“A year ago, mid-market transactions were being financed with a mixture of private equity, debt and ABL. Deals are still being done, but private equity houses are cautious about how, with whom and which vehicle they intend to use to support it.”
Self-assured and with an easy-going manner, Quaife asserts that the liquidity crisis has caused the centre of gravity to shift for asset-based lenders, who, according to Quaife, are now refocusing on core assets, namely receivables and inventory. Over the last 12 months, the partner notes that asset-based lenders, who once aggressively pursued plant and machinery, property and cash-flow loans, have begun to withdraw from these assets in favour of the certainty of core assets.
“People were lending against collateral they didn’t understand at rates that didn’t generate high enough returns.” The diminishing value of property and machinery has caused a flight from fixed assets.
“We have seen a realignment of ABL with the economic downturn and therefore private equity, a sector that was increasingly interested in ABL, has become wary of certain assets.”
A prominent deal involving private equity exploring alternative funding for an acquisition took place in September last year when Luke Johnson’s Risk Capital Partners acquired Borders, the UK’s third largest book retailer.
The consideration comprised an upfront cash payment of £10 million and a deferred element of up to £10 million dependent on the business hitting certain performance targets.
Through the £20 million deal, bibliophile Johnson was able to secure Borders’ 70 outlets, which were put up for sale by its American parent earlier that year as a result of tough trading on the high street and fierce competition from the supermarkets.
The US parent company made a £115 million loss on the sale, but still retained a 17 per cent stake in the business.
Johnson secured the £20 million facility from Landsbanki, and Edward Symmons was engaged by the C4 chairman to conduct a valuation of the inventory.
Quaife says: “Risk Capital came to us to enter the ABL arena in order to fund the transaction. Based on our gross asset valuation of £70 million, Landsbanki was able to structure the £20 million facility.”
This transaction represented a new area of expertise for the property and asset consultants, who had previously concentrated on the manufacturing and distribution sectors. The partner describes the retail environment as a challenging one: “Understanding the market in general; high street retail; the supermarkets; and online retail added to the complexities of the valuation process.
“We had to analyse historic trends to see where the business would go and how this would impact the inventory in a recovery situation,” adds Quaife.
Since Borders, the property and asset consultant has completed valuations for several asset-based lenders on major retailers.
Shifting up a gear
For the most part, Edward Symmons conducts its assessments in the inventory-heavy manufacturing sector. One such deal was Munich-based buy-out house Nordwind Capital’s acquisition of German auto component manufacturer ISE Innomotive and ISE Industries last year, for undisclosed terms.
The deal marked the buy-out house’s second investment in the German automotive industry, and was backed by Commerzbank.
“ISE was a Tier 1 supplier to the automotive sector and had been in insolvency for a year. Based on our valuation, Commerzbank was able to provide an undisclosed facility, enabling Nordwind to do the deal,” says Quaife.
“The biggest challenge was understanding the jurisdictional issues, when it comes to lending against assets. The automotive sector is not the most straightforward of sectors as it is contractual.”
As part of Valliance, a European group of valuers, Edward Symmons was able to work alongside its European counterparts to gain insight into the local market and legal issues.
There are few jobs less enviable than trying to value assets in volatile and uncertain conditions, Quaife admits: “Property and plant are difficult to value. How do we do it? We have been through downturns before and thereby have accumulated the knowledge and experience needed to judge the market.”
He adds: “You have to understand the demand before you come to a valuation. There is still demand for property in prime locations and for specific plant. Take Woolworths for example, some of the high street locations will be snapped up.
“However, times have changed and there is undoubtedly more caution regarding the nature of the asset, the level of funding and the price. Lenders want more in return now.”