A REVIEW OF THE YEAR IN FACILITIES MANAGEMENT BDO MERGERS & ACQUISITIONS 2018

Transcription

1 A REVIEW OF THE YEAR IN FACILITIES MANAGEMENT BDO MERGERS & ACQUISITIONS 2018

2 CONTENTS INTRODUCTION 02 RECENT M&A TRENDS 03 KEY THEMES 05 CONCLUSION 08 1

3 INTRODUCTION SATVIR BUNGAR MANAGING DIRECTOR & HEAD OF FACILITIES MANAGEMENT SECTOR BDO LLP +44 (0) Welcome to the latest edition of BDO s Facilities Management ( FM ) sector newsletter which provides an insight into recent M&A trends and key themes facing industry operators. BDO LLP s 2016 FM sector report identified that the outsourcing of non-core activities has become an integral part of business and industry and the potential for cost-savings has been the primary driver of contractedout FM services. Over the years, the FM sector has grown very strongly internationally, and the UK has been at the forefront of this development. The global industry continues to attract new market entrants and remains highly competitive. Due to Brexit, companies with significant overseas operations have benefited from a depreciating pound and, from our recent discussions with international FM clients, M&A remains a growth strategy in the UK. Reflecting on a challenging 2017, there were some key themes that influenced deal activity, including: Good interest in technology enabled transactions Strong appetite to invest the UK Continued investments by PE in new platforms also proved to be BDO s most prolific M&A year ever as we completed more than 1,200 transactions across BDO s international network. In the FM sector, we were pleased to collaborate with many sector organisations. For example, I was deeply honoured to be asked to judge the Premises and Facilities Management Awards for the first time, an excellent platform to meet inspirational FM companies as judges, we look for innovative thinking and behaviours that demonstrated a market-leading proposition. We have listed below our key transactions illustrating some of our range of activity has started exceptionally well, with the above themes continuing as we have advised on two transformational acquisitions in areas relating to operational excellence & quality management and landscaping. We hope you find this document useful and welcome the opportunity to discuss how we can help you. 2

4 RECENT M&A TRENDS Before the uncertainties of Brexit, the last great danger to the UK s economy was the 2008 financial crisis. Back then, widespread panic and a recessionary economy forced businesses to focus on minimising risk and surviving the storm, impacting on the quality proposition from the FM service sector and valuation multiples. Since we have come out of the downturn and balance sheets have been tidied up, there has been more investor support for M&A as a way to achieve corporate strategy aims (such as strategic partnerships involving technology to innovate FM solutions) and there is renewed evidence of strategic multiples being paid for market leading FM assets. It is important that a business looking to sell has been through a detailed preparation phase given that it will be subject to intense scrutiny as part of a comprehensive due diligence exercise, involving commercial, financial, legal and operational aspects. Figure 1 highlights some of our key value considerations in FM for a successful M&A transaction. Figure 1 POSITIVE Use of disruptive/innovative technology to drive contract efficiencies Market differentiation (such as capabilities and postcode density) Stable (and rising) tender and contract renewal statistics to support forecast assumptions Strong KPI contract measurement regime Forward contracted order book underpinned by longstanding customer relationships Growing financial profile at margin, revenue and free cash generation level Ability to cross-sell and capitalise on managing wider customer FM budgets Contract margin progression and consistency amongst contracts Loyal and strong management team to drive continued growth Operational infrastructure that could drive ongoing merger synergies Ongoing austerity in contracts and the need to re-engineer gross margin % High customer concentration Poor due diligence of new contract wins and impact on successful mobilisation Key contract renewals in middle of a sale process High staff turnover in key roles (such as contract managers) Poor financial information at key contract level Lack of stability across contract margins due to nature of services and seasonality Poor customer retention and survey audit statistics Lack of up to date customer contractual records Management not committed to future business NEGATIVE 3

5 Our database records almost 500 completed deals in the last four years and Figure 2 highlights the UK mix of transaction volume by sub-sector saw a slower start but levels increased in the second half of the year, with total transaction levels ending slightly lower than Whilst the mega deals have slowed down, recent M&A activity in FM has been buoyant in mid-market transactions. If you have a healthy asset, our transaction experience suggests that auctions remain robust. Figure 2 Figure Building maintenance Building management systems Catering Cleaning Compliance services Integrated services Landscaping M&E Other Security 4.9% 13.6% 18.1% 2.9% 7.0% Building maintenance Catering Compliance services Landscaping Other 7.4% 13.3% 5.7% 9.2% 17.9% Building management systems Cleaning Integrated services M&E Security FM SUB-SECTOR DEVELOPMENTS Together, M&E, building management systems and compliance continue to account for around half of all transactions. Cleaning sub-sector deals continue to rise, with a near doubling in volumes in saw 19 deals, a 46% increase. There are large quantities of other transactions which are buoying the figures: records management, waste services, other property services; deals which FM providers have completed which don t fit neatly into another category (e.g. 8 Solutions). PRIVATE EQUITY INVESTMENT IS ON THE UP, ALBEIT REMAINING CAUTIOUS Strength of UK PE funds and liquid debt markets has continued to support investments in new soft and hard FM platforms which are seen as broadly defensible. We advised major service charge consultancy provider Profile Consultancy Limited on its sale to Bellrock, a technology enabled FM provider, backed by Lyceum Capital and Foresight Group on its investment in soft facilities management provider Tudor Contract Cleaners. Since 2014, PE deals have accounted for a fifth (and higher in certain sub-fm disciplines) of all transactions. Whilst historic failures, particularly in public sector-focused vehicles, have reduced appetite, it is encouraging to see renewed appetite, such as Bridges Fund Management, the specialist sustainable and impact investor, announcing its 9 million investment to take a majority stake in Just Ask, a business working exclusively with housing associations, mainly in the South-East of England, providing a range of services such as cleaning and general grounds maintenance. 4

6 KEY THEMES GROWING PRESENCE OF INTERNATIONAL, SERIAL ACQUIRERS ATTRACTED TO THE UK TO BUILD SCALE AND PRESENCE It is encouraging to see continued M&A in the UK underlines foreign buyers appetite for British businesses after the UK's vote to leave the EU. In 2017, for example, some 26% of UK targets were acquired by foreign companies, in part incentivised by a stable economy and weak pound. This enthusiasm is from both PE and trade, and all the M&A processes we are currently involved with have an international angle. There is a growing interest from French buyers, for example, and transactions included idverde SAS establishing a new UK presence in the green landscaping space through two major acquisitions between of The Landscape Group and Quadron Services (the shareholders of both targets were advised by BDO). The trend was further illustrated in 2017 as EDF Energy Services, a joint venture between EDF Energy and Dalkia, agreed to purchase Imtech UK and Ireland from Endless LLP. The acquisition will be critical for EDF Energy Services in bringing technical capability to support the full life cycle of an asset, from design through to maintenance, and also helps to further the group's international expansion strategy. In the same month, Excellerate, a major force in the security, cleaning and related industries in Africa, announced the acquisition of a majority stake in the Templewood group of companies. The acquisition is Excellerate s first in the UK and the partnership marks its intention to develop a major presence through organic growth and by acquisition. Many other UK transactions were completed by serial acquirers in Servest (of South African origin), Marlowe plc (UK listed) and Noonan Services, for example, have all continued to announce acquisitions of specialist services companies. 5 5

7 NEXT GROWTH SPUR IN FM? This will come from technology and the Internet of Things as being most likely to shape where the FM market goes in the years to come. These developments offer progressive operators, and their end customers, the ability to provide far greater efficiency in terms of total FM and could prove to be the root of the sector s next big leap forward. The pressure to innovate has never been more acute as providers in the UK and other markets seek to address escalating employment costs, increased regulatory scrutiny over flexible labour models, government spending cuts, delayed spending on projects following the UK s vote to leave the EU and ever-more rigorous workplace health and safety regimes. Adapting to regulatory changes on labour including the National Living Wage, apprenticeship levy and autoenrolment will add additional pressure on the cost base of facilities providers. Our clients are increasingly using disruptive technology to make more efficient soft service delivery in areas such as cleaning, security, landscape design and M&E and to streamline the supplier base further. In 2017, construction and services group Skanska has announced it has been trialling 'smart data' technology combining sensors, a mobile app and a web dashboard at its UK head office. Working with IoT specialist Spaceti, the company has been testing a system that aims to provide building managers with timely and accurate information about how a building is used, together with a range of environmental information. Commentators say Skanska is the first company in the UK to pilot this system and now plans to use it at other sites where it handles FM. One interesting technology deal was Bridgeway Consulting s 50% acquisition of Bridgeway Aerial, a provider of drone inspection services. Drones are increasingly being used to condition survey buildings and the benefits of such disruptive technology is now moving into more complex areas, such as being used to reduce the cost of servicing and maintaining wind turbines, which get damaged by adverse weather conditions every day. Equipped with cameras which capture images of the turbines, such drones are able to carry out inspections four times faster than the established methods of manual visual inspections and lifting platforms. 6 6

8 IMPACT OF BREXIT ON THE UK M&A MARKET. ANY OTHER SURPRISES? There remains lack of clarity as to what extent Brexit has impacted on UK M&A at this stage as we re still on a road to Brexit. There remains continued uncertainty around what the future will look like. In some cases, the prospect of Brexit is driving increased appetite for investment in the UK, while in others it means a pause on major M&A decisions until the outcome of Brexit becomes more certain. Some specific industry sectors are also more exposed to Brexit, including those where there is a heavy focus on the export of goods to the UK, and the impact on M&A and underlying valuations in those is perhaps more pronounced. The continued uncertainty poses some interesting questions. For example, how should businesses react in such uncertain times and how can policymakers create the right environment to help them to flourish? In simple terms, what should Britain s post-brexit economy look like? After all, change brings with it great risk but also great opportunities for those able to capitalise on them. A recent BDO publication talks about our vision for a New Economy * which makes the most of the UK s talents, skills and entrepreneurial spirit. Brexit is an important consideration for most FM businesses in relation to any change in immigration policy affecting EEA nationals given that a material proportion of the FM workforce, particularly in delivering soft FM contracts, comes from the EU. As a minimum, those considering major investment decisions are doing so with a view to the potential outcomes of Brexit and the likely impact on their underlying business and the acquisitions being considered. We are also certainly seeing an increased focus in due diligence on foreign exchange exposure, given the significant currency movements over the last year and in some cases the impact on underlying earnings, and that s something businesses considering sale are focusing heavily on in advance of transactions to ensure the quality of earnings presented and their foreign exchange management is robust. *BDO Publication: Where Next? A New Economy

9 CONCLUSION Continued investor support in acquiring UK FM assets are having a profound effect on the shape and colour of the FM sector. This indicates that while there are inescapable economic challenges both in the present and on the horizon, FM is increasingly resilient and becoming strategic and business critical. Government initiatives such as the first phase of the new 12 billion FM Framework from the Crown Commercial Service is welcomed with the intention to bring more SMEs into the supply chain and by making the entry process into the framework simpler. Carillion s recent liquidation should be used as an opportunity to change wider industry behaviours to promote value added initiatives on contracts as opposed to decisions driven by cost alone. It is interesting to see that the UK government is directly managing certain ex-carillion FM contracts but it remains unclear what the long term dynamics of this recent move are for the wider industry. M&A activity will remain a dominant force in the sector, with the UK s impending departure from the EU only supporting this trend as overseas operators look for a part of the UK market while the pound is weak and UK operators seek to secure a position in the EU single market that they might otherwise lose. We expect foreign companies in FM to be looking to increase their UK foothold through acquisitions over the immediate future. Competition for disruptors driving innovation in FM is influencing attractive valuations for vendors. The main challenge for investors and corporates is finding and winning the right targets to acquire. A differentiating factor is how much you can technically enable a FM business model further and our current interactions with potential buyers demonstrate how valuations can be maximised for such assets. If you would like to discuss any of the findings mentioned above, please do get in touch. Best wishes for a very successful we hope to have the opportunity to work together at some point during the course of the year. 8

10 EXAMPLE SECTOR TRANSACTIONS Sale of Profile Consultancy to Bellrock Property and Facilities Management Sale of The Landscape Group to idverde Group Sale of Sure Maintenance to Lakehouse Acquisition of Mentor IMC Group by VINCI Energies Sale of AiP Catering to Key Capital Partners/ Management Sale of APC water hygiene division to South Staffordshire Sale of Quadron Services to idverde Group Marlowe plc on its acquisition of Ductclean (UK) Limited 9

11 BDO Presence EXAMPLE SECTOR TRANSACTIONS Foresight Group investment in Tudor Contract Cleaners MBO of Homeserve Emergency Services division Acquisition of Arthur Mckay & Co by Servest Group Merger of CH&Co and Host Management and investment by MML Capital Partners Acquisition of Waterflow Holdings Acquisition of Panztel by CM2000 MBO of YSC to Livingbridge Sale of Integrated Cleaning Management to Compass 10

12 FOR MORE INFORMATION: SATVIR BUNGAR +44 (0) This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. This publication should not be used or relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained in this publication without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any responsibility or duty of care in respect of any use of or reliance on this publication, and will deny any liability for any loss arising from any action taken or not taken or decision made by anyone in reliance on this publication or any part of it. Any use of this publication or reliance on it for any purpose or in any context is therefore at your own risk, without any right of recourse against BDO LLP or any of its partners, employees or agents. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO member firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. Copyright 2018 BDO LLP. All rights reserved. Published in the UK. HB010388