Just three management buyouts (MBOs) have crossed Insider’s radar so far this year, but the latest at Pensord, which prints our magazine, suggests the market may be picking up. Managing director Tony Jones had intended to sell two years ago, but “the recession came along, which was fun and stimulating, but now it’s job done and time to hand over to the management team.”
Jones and finance director Graham Lambert sold to a team led by Darren Coxon and Karl Gater. The £12m transfer was paid for with a mix of bank credit, mortgage, buyer funding and vendors’ deferred consideration. It’s the second time Pensord has been through the process. Jones took over the first time when its American owner was planning to close the business.
“I spent three frustrating years trying to get investment, without which it would have failed with the loss of 118 jobs,” says Jones. “We could have walked away but I’m not used to failure. So we went through the first MBO, not to get rich but to get the investment needed to save the business.”
The other noteworthy Welsh buyouts have been at Haverfordwest carpet supplier Meadow Carpets and Pontypool electrical components group Wiltan. The rarity is down to timing, says Mike Baggott, partner at law firm MLM Cartwright: “The value of many businesses has fallen drastically, and owners are looking to ride out the storm instead. It’s not that they don’t think about an MBO, but it’s a brave thing to do at the best of times and at the moment it’s too big a gamble.”
Activity peaked two years ago, taking a lot of the available companies out of play. “I’ve seen a lot of buyouts that could happen, but just don’t come off. At current prices owners are not as prepared to sell,” says Nick Toye, director at BPU.
Culture is another reason, because owners do not always think ahead. “Too many are not planning for succession or an exit so when they do sell it’s frequently not at the price they could have got, and it’s usually a trade sale to someone outside Wales,” says PeterWright, investment director at Finance Wales, the Assembly Government’s investment arm.
The total value of Welsh MBOs completed in 2009 was £22m, compared with £218m in 2008 and £700m in 2005, according to the Centre for Management Buyout Research.
“Half of companies have not made any plans for the transfer of the business. Those that say they have admit this is based on a hypothetical discussion, or an agenda item to be actioned in the future,” says Frank Holmes, partner at Gambit Corporate Finance. “Only six per cent started planning after receiving an unsolicited approach from a potential suitor – hardly the best way to maximise value.”
A third reason may be the way in which they are financed. In Wales, most buyouts are funded by bank debt, supported by some funding from the vendor such as a loan note or earn-out. Bank debt became harder to obtain after the credit crunch, which leaves providers such as private equity house Westbridge Capital in Cardiff.
Managing partner Guy Davies says: “Wales has an equity gap. Smaller deals, say £35,000 to £2m, are often covered by Enterprise Capital Funds, but there’s none west of Swindon. The only real provider at the lower end has been Finance Wales, and there’s nothing in the £2m to 10m bracket. There has been a dearth of funding for that lower middle tier, which has meant greater reliance on bank debt.”
But many in Wales’ corporate finance community believe more activity is on the way, partly due to an upturn in bank funding. Access to private equity in Wales is also set to improve. In July 2010 Westbridge finished the first close of a £50m fund that will be invested in deals of £3m. And Finance Wales is creating a £300m fund that, to invest in buyouts of up to £10m.
The gradual economic recovery has meant earnings and multiples are rising. And the UK government’s increase in capital gains tax from 18 to 28 per cent in its emergency Budget was better than some feared. The cut to 10 per cent for income below £5m will help owners, because most company sales in Wales are below £5m.
Toye says: “The banks seem more open, and prices for businesses are not likely to rise significantly for the next three years. So if you’re going to sell it might as well be now.”
