The past quarter brought such a flurry of global M&A activity that, with two weeks still to go, it had already reached a level not seen since 2007. In Europe, it was the busiest quarter for at least two years and that was reflected in print and packaging where there was a 300% hike in the number of reported deals versus Q1 and a 150% increase year-on-year.
Two deals that bore all the hallmarks of the improving market conditions were the MBO of Macro Art and the BIMBO deal at Creative Graphics International. Both were sales by owner managers to a combination of existing management and external investors and both were backed by private equity funds.
While deals such as these have not exactly been absent from print and packaging over the past few years (Benson Group, Pensord and Showcard Print all spring to mind) they have certainly been few and far between, with the bulk of M&A activity being either of a distressed nature (in print especially) or involving large corporates and private equity (PE) funds.
While one strong quarter does not necessarily equal the start of a new boom, taken with improving economic conditions, growing business confidence and the availability of cheap debt, it does suggest that we are on the verge of a new M&A cycle.
The question of why MBOs in particular have become so rare in print and packaging in recent years is not one that has a single answer. As Moorgate Capital partner Nicholas Mocket points out, to have an active M&A market you need willing sellers and willing buyers (see Opinion).
Chris Price, investment director at Mobeus Equity Partners, which backed the recent CGI deal as well as last year’s £11m MBO of Veritek, argues that many would-be buyers and sellers will have been sitting out the past few years waiting for conditions to improve.
“The period after 2008 was a tough one for owner-managers, with many finding they had to step back into or re-focus on their core businesses,” says Price. “The wider economic climate made potential acquirers a rare animal and many owner managers were concerned about entering a sale process with limited visibility on performance. Available transactions in the print sector were therefore sparse for private equity.
“Whilst there was an availability of private equity through this period, the larger deals were not possible due to a lack of bank debt (the lifeblood of large buyouts). Activity in our market (buyouts of £5m-£20m) continued as we tend to fund our deals without bank debt, but there were fewer owners prepared to consider a sale for the reasons outlined above.”
All of that now seems to be on the turn, with sellers returning to the market for medium-sized deals, while at the larger end of the scale not only is debt easily and cheaply available, but many large corporates have built up sufficient reserves through reining in capex during the downturn to fund deals out of cash. Raising equity capital to fund deals is also made easier by the rising demand for shares, which has pushed stock exchanges back close to the record highs of the past.
Certainly from an economic perspective, this suggests that timing is a key aspect in leading a successful MBO. James Jennings, who led the recent MBO of Macro Art and is now its managing director, agrees that “luck and circumstance always play a part in these things”. However, the fact that he and the rest of the team that ultimately undertook the MBO were all in place from 2010 and by 2012 had grown the business more than 20% would suggest they made their own luck.
Having a track record of growing the business is vital when it comes to getting funding to back an MBO so while Jennings and his team may have been in the right place at the right time to a certain extent, they were responsible for getting themselves in that position.
Focusing on the factors you can control in this way is key to your MBO chances believes Benson Group managing director Mark Kerridge, who argues that “timing is a case of making sure you are prepared so that when an opportunity presents itself you’re in a position to take it”.
For many would-be MBO candidates, that opportunity may be about to materialise and it would be reasonable to expect an increase in MBOs in this sector over the next 12 months as some of those deals that have been put on hold for the past few years come back to the table.
“There is certain to be some pent-up demand in terms of deals that weren’t able to get away during the downturn that are now returning to the table as economic conditions in the US and UK are returning and as a result I would expect M&A activity to increase across the piece,” says Kerridge. “The increased health of the economy will drive both an increase in activity and in values, where we’re already seeing some modest improvement.”
Price adds: “There is a wealth of private equity available at the moment across the market and for owners considering a sale to private equity, or management teams looking for backing this is a good time. Multiples being paid by private equity are comparable to those available from trade buyers and the level of funds available means vendors can be certain of getting a good result.”
Opinion: Low cost of capital is driving M&A market
Nicholas Mockett, partner, Moorgate Capital
The big macro issue that is affecting the whole market is quantitative easing. QE has increased demand for real assets, and shares are real assets. Stock markets are at, or are close to, their highest levels and quite a lot of that is down to quantitative easing.
St Ives is a case in point: around two or three years ago its enterprise value was two to three times EBITDA, now it’s something like seven times. It might have had a re-rating, because they’re more about marketing services and less ink on paper, but what we’re seeing there is part of the rising tide of enterprise values going up, which effectively lowers the cost of raising equity capital that can then be used to fund M&A.
Corporates across all sorts of sectors have currently got a lot of money on their balance sheets and certainly in print and packaging a lot of companies have been quite conservative – they’ve reined in capex, laid people off or not taken on new people and they’ve built up a war chest. A number of those corporates have become prolific serial deal-doers in recent years, like Graphic Packaging and RPC Group, and a lot of other deals have been done that have been PE to PE.
The PE market has become more concentrated and debt is readily available now and also very cheap. That plus cash-rich corporates means there are a lot of willing buyers out there now that confidence is returning; hostile bids have risen by a considerable factor this year - probably close to pre-recession levels – because people are looking to use those war chests.
But for deals to be happening you need willing buyers and willing sellers and you get willing sellers when the PE investment cycle comes to an end. PE deals fell off significantly in 2008-2009 because there wasn’t any debt available; they came back quite a bit in 2010 so three years on from that you’ve got people looking to sell.
Reader reaction: What factors are key to implementing a successful MBO?
Mark Cornford, managing director, Integrity Print
“I think you’ve got to make sure you have everything aligned. I got my deal away in 2008 and if I’d left it another 12 months I probably wouldn’t have got the funding, so timing is critical. But you’ve got to make sure you have everything else in place and you’ve got to make your own luck. The secret to my MBO was that it opened the floodgates in terms of the other print management companies we could work with and it has allowed us to diversify into data, transaction and labels.”
Simon Moore, managing director, Eclipse Colour
“There will be shareholders out there that maybe didn’t have an MBO team in place and didn’t think they could get a deal away for the past few years, so I think we’ll see a rise in deals in the next 12 months as confidence returns. But the most important thing is getting a realistic valuation and the other big thing is confidence. As management you need to have absolute confidence that you will be able to deliver what needs to be delivered to fund the debt and as a business owner you need to have confidence in the management team.”
Mark Kerridge, managing director, Benson Group
“In terms of going through an MBO there are clearly factors you can control in terms of the internal performance of the business, but you can’t control external market forces. Ultimately, M&A activity reflects the overall health of the economy, so it’s no surprise that post-2008 M&A activity slowed down as the ability to source funds to enable that activity dried up. As a management team you can only focus on what you can control and then do everything you can to be prepared, if the opportunity presents itself.”