Rothschild: Navigating through the downturn
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Stephen Griffiths, Director, Rothschild, Leeds
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It was no great surprise that GDP contracted last quarter and the UK is now, technically and temporarily, back in recession. With the fear of faltering economic growth now the reality, should we all acknowledge the likelihood of a longer downturn? Is a prolonged period of rather anaemic growth the best we can hope for? I am more optimistic than most about the outlook for the UK economy. Notwithstanding sharply contracting public spending (excluding ballooning interest payments on our national debt), we have reasons to be sanguine: a flexible labour market, increasingly flexible labour laws, low interest rates, moderating inflation and exchange rates moving in favour of exporters. Similarly, I am optimistic about the prospects for the recovery of M&A and corporate activity in the region. Rothschild’s Regional business has just recorded one of its best ever years, though 2011 was genuinely a year of two halves. Up until the summer, we were generating some of our highest ever profile deals. 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. In 2010 and H1 2011, the M&A market had recovered fairly strongly from the nadir of 2008/2009. The debt and equity capital markets were supporting buy-outs with comfortably familiar capital structures. KKR achieved leverage of over 5x EBITDA on the buy-out of Pets at Home when Rothschild 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 The Binding Site and Britax Childcare to Nordic capital, Umeco’s sale of Pattoniar to Exponent, Morrisons’ acquisition of Kiddicare.com and Peel’s cash offer for Pinewood Shepperton. But the glow quickly evaporated in August with the Greek debt crisis. Despite being outside the Euro Zone, the hitherto recovering 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. But not everything stopped. We continued to work on a number of deals which made it through this malaise. One great example being the £180m sale of ISIS-backed Wiggle to Bridgepoint. And the sale of Gall Thomson to Phoenix Private Equity. What remained a healthy deal pipeline continued to be converted into downturn-defying transactions into 2012. 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 independent debt and equity advisory business. 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. 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. Secondly, UK businesses are performing relatively well compared to their European peers following the restructuring programmes of 2007-2009. Thirdly, UK corporates often can demonstrate differentiated positions in fast growing international markets that others cannot. 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, integrity and longstanding relationships as their world 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 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. There are reasons for similar hopes about industrials, healthcare and other sectors. What of the 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. We should look to the future with a degree of confidence. And talk up the UK economy, not talk it down. In corporate finance, 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. Stephen Griffiths, Director, Rothschild, Leeds More articles in
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