Rothschild: Downturn…what downturn?
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Roger Hemming, Head of Midlands, Rothschild, Birmingham |
Many have commented on the accuracy of economic forecasts. So no great surprise that GDP contracted last quarter and the UK is now officially, temporarily at least, back in recession. With the fear of faltering economic growth now the reality, should we all acknowledge the reality of a longer downturn? Despite this apparent weakness, however, Rothschild’s Regional business has just recorded one of its best ever years. I would like to illustrate what I think is going on by sharing some of our experiences of 2011. It was genuinely a year of two halves. Up until the summer, we were getting some of our highest ever profile deals away. The M&A environment was basking in the warm glow of GDP responding well to the 2009 quantitative easing programme. The medicine was working and we thought we knew why. There was huge relief in the apparent certainty of it all. What do I mean by certainty? Easy to forget, but the UK economy had experienced seven sequential quarterly improvements in growth up until Q3 2010. The debt and equity capital markets were supporting buy-outs with comfortably familiar capital structures, which could have been forgiven for forgetting that that the Credit Crunch had ever happened. KKR achieved leverage of over 5x EBITDA on the buy-out of Pets at Home when we helped to sell the retailer in 2010. These “benign” conditions continued into the first half of 2011. In this period we helped originate and execute a number of flagship transactions; including the sales of both The Binding Site and Britax Childcare to Nordic capital, Intertek’s $730m acquisition of Moody, Umeco’s £146m sale of Pattoniar to Exponent, Stewart Group’s £146m sale to Campbell Brothers, and Centrica’s £30m acquisition of PH Jones. But the glow quickly evaporated in August with the Greek debt crisis. Despite being outside the Euro Zone, the hitherto buoyant UK corporate finance market was severely impacted. Many deals were either stopped in their tracks or put on hold, with capital markets paralysed and North American funds racing to calculate their exposure and reappraise European investment strategies. Not everything stopped however. We continued to work on a number of deals which made it through this second half malaise. One great example being the £180m sale of ISIS-backed Wiggle to Bridgepoint for 16x EBITDA. What remained a strong deal pipeline (despite the strong first half) continued to be converted into downturn-defying transactions into 2012, as underlined by the £274m-offer by US-strategic Cytec Industries for Umeco. And of course Rothschild has not been alone in getting great deals away in this period. The turmoil in the capital markets has highlighted even more the value of our debt and equity advisory business in getting transactions away. For example, corporate as well as structured debt borrowers have seen the mid-market revert to the oligopoly of UK lenders underscoring the advisory opportunity when renewing facilities or raising debt for buy-outs. So what’s happening now? Are we in a downturn? The answer is yes and no. There is no doubt to my mind that the UK economy will continue to rattle along the bottom for some time as austerity measures are stepped up and all-pervasive stag inflationary factors – such the inexorable energy price increases – hurt consumer demand and general sentiment. Stepping back from the UK economic perspective though, we are seeing three factors driving my cause for optimism in M&A markets. Firstly, strategic buyers are looking to deploy their growing cash piles. Have sympathy for Apple’s dilemma with its $100bn cash pile! Secondly, UK businesses are performing relatively well compared to their European peers following the early restructuring programmes of 2007-2009. Thirdly, UK corporates often can demonstrate differentiated positions in fast growing international markets that others cannot. So Rothschild’s global financial advisory business does exactly what its name suggests. It would be incorrect to view our business as purely Midlands or indeed UK market driven. Our 15-man team is part of an international market place for corporate finance services that can deliver the services of a global investment bank locally in Birmingham. Looking forward, I believe premium multiples will continue to be achieved for the highest quality businesses. British services and products (just like our real estate) will continue to be sought after around the world as investors increasingly value trust, authenticity and safety as their worlds becomes less ordered and predictable. Growth opportunities will be highly valued by investors regardless of sector. Despite subdued UK consumer demand, British brands are doing well internationally. Whilst Western consumer sector multinationals have been consolidating their brand portfolios for some time, we are now seeing strong interest from Asian buyers in quintessentially British brands. For example, we have just helped Bright Foods make the biggest ever foreign investment by a Chinese food group when they acquired a controlling interest in Midlands-based Weetabix in a deal which values the cereal maker at $1.2bn. Business services assets will continue to attract interest as British regulatory standards evolve and take the lead on accepted best practice around the world. UK austerity will drive another round of outsourcing and services opportunities. I could go on in similar veins about industrials, healthcare and other sectors. What of the not so shiny stars? Businesses which are not able to show top quartile growth. These will still transact, but at lower multiples. The key is that the owners are now accepting of the fact that the racy pre-Crunch multiples are not going to be achieved, and that more prudent deal structures are the norm. So I see a place in the wide array of deal possibilities for all buyers and sellers. To sum up, the unknowns have become the knowns as fear gives way to reality. Back to certainty! So again, as I have said recently, we should look to the future with confidence. We all need to be a little more flexible and creative in our approach to getting deals done, just like the good old days of 50 years’ ago when Rothschild expanded beyond the City and opened its first regional office in the UK. More articles in
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