FMInsights into. facilities management. Facilities management market, Q M&A review

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1 FMInsights into ISSUE David Ascott Partner, Corporate Finance Grant Thornton UK LLP facilities management Facilities management market, Q M&A review M&A activity in the FM sector bounced back in the first quarter of 2015, driven by consolidation activity at the smaller end of the scale. Despite this, with no real change to the main trends guiding the market, there are few signs of any meaningful uptick in activity in the short term. Smaller consolidation plays lead Q1 M&A recovery The sharp slow-down in M&A activity in the UK s FM market during the final three months of 2014 was reversed in the first quarter of 2015, with a raft of smaller and mid-cap acquisitions bumping the deal volume figure back up above the 12-month average. In total, 23 FM deals were recorded in the period, representing a 28% rise against the previous quarter and a 44% rise in volume on the same quarter of However, like the last three months of 2014, Q1 also failed to record any significant larger deals in the sector something that had taken place in many of the previous quarters. In fact, the largest deal with a disclosed value (and, more than likely, the largest of any of the 23) was the acquisition by Nordic group ISS of GSH s technical division: the deal valued the business at 53 million, equating to a multiple of around 8x EBITA. It is thought that the remaining deals during the quarter would all qualify as small-cap or lower mid-market plays. This will change in the second quarter, though, as Kier announced last month that it is to acquire infrastructure services company, Mouchel, for 265 million. In terms of subsector activity the recent dominance by the soft FM sectors evened out, with dealflow in these areas only outpacing the hard FM space by one (12 versus 11). Among the soft FM subsectors, security was clearly the most active, as it has been for much of the last few years, driven by wide-scale consolidation. Meanwhile among the hard FM sectors a burst of activity in the M&E area, as well as a handful of utilities deals combined to boost the numbers Q1 M&A review Quoted FM Tracker 1 Insights into FM - Issue 14

2 FMUK Facilities Management transactions by quarter The domestic/ international angle The main component of the deal activity recorded in Q1 came from domestic acquirors, which saw a jump in number from the 11 deals seen in the last three months of 2014 to 17 deals. Among those, Rentokil Initial s acquisition of Peter Cox Ltd is its first foray into the local M&A markets since its acquisition of Green Compliance plc s pest division back in late The stats were also positively affected by the number of acquisitions classified as international, which doubled from three to six. However, among these it could be argued that the majority are actually more domestic than they are international: in many cases they involve companies that have a well-established presence or platform in the UK and it is rarer to see genuinely international businesses looking to break in. In this latest dataset the only deal falling in the latter camp would be the acquisition by French group ID Verde SASU of the Landscape Group Ltd. While, this factor is understandable at a time when the Euro is weak against the Pound, it does highlight the fact that overseas parents are clearly driving their UK businesses to expand and this is a positive reflection of the state of the FM market in the UK. Interestingly, given the relative resurgence of PE-backed acquisitions Q Q Q3 Source: Zephyr 2009 Q Q Q Q Q Q Q Q3 during 2014, there were no deals from this source in the first quarter: it is the first time financial buyers have not completed a deal in the FM space since Q Understanding this dynamic is not straightforward as there are conflicting forces at play: on the one hand there is a sizeable amount of money available to be deployed by financial buyers, as well as a readily available supply of leverage; but on the other, their weighted cost of capital is much higher than trade competitors. What s more, as we have pointed out in previous bulletins, financial buyers still generally find the FM sector a challenging one Q Q Q2 Volume 2012 Q Q Q Q Q3 Value million 2013 Q Q Q Q Q Q1 4,000 3,500 3,000 2,500 2,000 1,500 1, Insights into FM - Issue 14

3 FM Looking ahead: little change in on-going trends Overall, the Q1 M&A activity gives no indication of any meaningful changes to the trends that have dominated the FM sector in recent quarters. The market continues to be driven by consolidation activity at the smaller end of the scale, with the occasional larger deal. A good example of this in the last few months was the acquisition by Kingdom Security of three security businesses (CDO, Sunwin and MJF). There also remains a clear on-going trend towards consolidation among larger FM providers, which is seeing soft services companies looking to build up their hard services offerings and capabilities and, occasionally, vice versa. The acquisitions made by ISS and Servest in Q1 are good examples of this bulking up in terms of niche service offerings. UK Facilities Management transactions by acquiror type 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% UK PE International Source: Zephyr YTD The steady stream of consolidation amongst the smaller FM players continues and in the broader Infrastructure segment the Kier acquisition of Mouchel demonstrates the case for further efficiency gains from building market leading positions in this case in highways maintenance. The recent election result was also seen as a green light for the public sector outsourcers and this should help the prospects and remove uncertainty from that part of the FM market although cost pressures will remain. David Ascott, Partner, Corporate Finance 3 Insights into FM - Issue 14

4 Quoted FM Tracker Modestly improving picture for quoted FM players New entrants into the quoted tracker Last quarter we highlighted that there were early signs of an improving landscape for the 14 businesses on the quoted FM tracker, after a difficult period in the middle two quarters of Into the first quarter of 2015, that sentiment has proved to be accurate and overall the peer group registered modest share price growth of 1.7% in the period. In fact, only four of the 14 saw any decline in share price and for three of those, the declines were relatively insignificant. Only ISG Plc saw sharp downward movement (a fall of almost 56% following news of heavy losses at the company s UK construction division); stripping this business out of the equation would leave overall share price growth of the remaining peer group businesses at over 6%. In comparison, growth in the other main indices tracked was more solid, with the FTSE All-share rising by 3.7% and the FTSE Support Services index climbing by just over 5%. However, the longer term snapshots are still significantly impacted by the poor spell experienced by many companies in the peer group between April and October last year: although there is modest growth in the six-month measure (1.1%), it compares poorly to the better figures in the other indices; similarly, the annual comparison shows a 7.5% decline for the groups on the tracker, compared with 3.0% and 1.6% growth in the All-share and Support Services lists respectively. Only the twoyear picture looks strong for the FM businesses, with share price growth of 17.6% easily eclipsing the other indices. As far as individual businesses are concerned, the two largest firms on the tracker Compass and G4S - both continued to perform steadily as they had the previous quarter. Perhaps more notably, the third on the list, Serco Group, saw growth for the first time in a considerable period, suggesting that it is beginning to reverse its fortunes. For its part, Rentokil s 12.7% growth suggests that investors are broadly backing the company s reorganisation and its changing strategy focus; positive year end results in February will also have contributed. Lower down the size range scale, the best performer in the peer group was Johnson Services Group, whose shares gained on strong yearend figures and better than expected performances. On the negative side, apart from the ISG figures quoted above, perhaps the most important Q1 development came right at the end of the period, when Mitie issued a profit warning, which wiped out the group s share price gains over the first quarter. Pricing and budget issues in the group s healthcare outsourcing market was responsible for the poor figures, while its FM division made a positive contribution to group revenues. However, arguably the most important development in the quoted FM sector in the first quarter came from the arrival of three new FM businesses onto the stock market. Firstly, the safety equipment specialist Premier Technical Services Group raised 8m after listing on the LSE s Alternative Investment Market (AIM) in February; while its shares fell slightly in the first few days of trading, they finished the quarter up 5.3%. Then, in March, asset and energy support services company Lakehouse listed on the LSE at a price of 89p per share and the stock rose steadily to end some 11.5% up on their first day close. Also in March, gas heating and general building services platform Bilby listed on the AIM, though its shares ended the quarter slightly down on the opening price. All three businesses will form part of an extended peer group tracker in the next quarterly bulletin. 4 Insights into FM - Issue 14

5 FMContacts For any further information, please contact: David Ascott T E david.p.ascott@uk.gt.com Pete Dawson T E peter.dawson@uk.gt.com Martin Gardner T E martin.n.gardner@uk.gt.com Usman Malik T E usman.b.malik@uk.gt.com Grant Thornton Facilities Management subsector map Hard FM Fabric maintenance Fit-out Mechanical & Engineering Fire Protection Grounds Maintenance Utility Maintenance Reprographics Soft FM Security Cleaning Catering Washroom hygiene Textile/Laundry Pest Control Space planning Relocation and Storage 2015 Grant Thornton UK LLP. All rights reserved. Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. grant.thornton.co.uk V25120