Posted on Friday 16 September 2011 by Ulster Business

The real deal

Pictured left to right: Stephen Burns, Jane Richardson, Barry-John Kelly (sitting down), Johnny Webb, Shane Hall, Gary Shannon and Alan McDaid (sitting down).

After a couple of years of curtailed activity in the M&A market, BDO’s award-winning Corporate Finance team in Belfast told Ulster Business that deal activity and interest in acquisitions is tentatively picking up again

The market for mergers and acquisitions (M&A) undoubtedly changed significantly in the aftermath of the credit crunch.

The number of deals fell, the value of businesses dropped and bank finance became increasingly more difficult to secure as the banks faced the fallout from the property crash.

Yet, through this volatility, the Corporate Finance team at BDO in Belfast has preserved its position as a leading provider of proactive and creative Corporate Finance advice for local businesses.

The firm has been involved in many of the major deals to have taken place in the province in the past few years, and gained recognition from their peers as Corporate Finance team of the year at the inaugural Insider Dealmaker Awards earlier in 2011.

Led by Johnny Webb and BDO Managing Partner Francis Martin, the Corporate Finance team comprises directors Gary Shannon, Barry John Kelly and Shane Hall, as well as Stephen Burns, Alan McDaid and Jane Richardson.

Johnny Webb says the stability of BDO’s corporate finance team in Belfast has been a key factor in its success.

“Francis and I have both been here 15 years plus and some of the team, such as Shane and Gary are not far behind that. In a market that is quite mobile and fluid, we have consistently focused on servicing our local clients on all of their deals, whether in Northern Ireland or further afield. The team was also bolstered last year with the addition of Barry-John, who is concentrating solely on sourcing deal opportunities for our local clients, be it Northern Ireland, the UK or elsewhere.”

BDO’s quarterly PCPI reports have tracked the situation in the M&A market across the UK and the most recent report, covering the second quarter of 2011, indicates that while overall M&A activity is down in the UK, the SME market is actually picking up.

“There are less large deals but more smaller deals going on in the UK. That is a very positive backdrop for Northern Ireland companies that might be looking at opportunities in the mainland. There is more stock available, and there are more opportunities to look at businesses for sale,” explains Webb.

“Coupled with that, 60% of the 121 SMEs we surveyed recently were actively considering an acquisition in the next 12 months. Our recent M&A survey showed that 84% of those surveyed are considering looking at M&A transactions up to £10m in value, a level that brings many local businesses into play, either as buyer or seller.”

The survey also found that 75% of companies have annual turnover growth targets of 10% or more in the next three years. Over 80% of them anticipate making corporate acquisitions to meet those targets because they won’t be able to meet them through organic growth.

“In some specific sectors there is a level of consolidation going on in the UK and quite often Northern Ireland is the missing piece of a jigsaw. Some UK corporates are looking to acquire strategically in Northern Ireland to complete a full UK offering. We have recently seen this at first hand with the acquisition of Duct Products – the Belfast based manufacturer and distributor of ventilation equipment – by the Elta Group, a deal BDO advised on,” adds Webb.

M&A in GB

On the other side of the coin, the BDO team point out that several local companies are looking to make a purchase – and many are now prepared to look outside Northern Ireland.

While the financial crisis inevitably took its toll on the market, sectors such as healthcare, food, IT, manufacturing and renewables remain busy. And with a sharp drop off in local work, many construction companies are also looking to the rest of the UK, either on a contract by contract basis or by gaining a physical presence through acquisitions.

Gary Shannon notes that as well as major deals within Northern Ireland, such as the Moy Park acquisition of O’Kane Poultry, on which BDO advised, and John Henderson Group’s purchase of The Streat, several firms have already tapped into opportunities in GB, both because of a lack of supply close to home and the better margins on offer across the water.

“Last year we saw Ballyvesey Holdings acquire Morgan Elliott Group, TG Eakin’s acquisition of Clinical Innovation Europe – a deal we sourced and advised on – and WR Barnett’s acquisition of Tate & Lyle’s molasses business,” he says.

“Local companies out there are targeting double digit annual growth, but to do so through organic growth in Ireland is currently very challenging. An efficient and effective route to growing market share is, increasingly so in today’s environment, through strategic acquisitions.”

Fellow director, Shane Hall, agrees that with property and stock markets subdued, there is potential for greater M&A activity as businesses look towards such investment opportunities to deliver a greater return.

“There is cash out there, it is just in different places, it is not in the property market any more. But it is there. People who are sitting with surplus cash, or equities or strong property portfolios are looking very much towards trading businesses as a source to provide potential higher return on their investment, and are now willing to put the time and effort into running a trading business as the returns on other investments are so low,” he says.

While many transactions currently taking place are self funding, as firms have built up cash reserves, Hall also says bank funding is available for good business opportunities.

“A limiting factor to Northern Ireland activity levels in recent years has been the availability of finance to fund many transactions. However, we are seeing a slight change in recent times, with transactions receiving bank support, even if it is perhaps by different means than previously.

Historically it might have been on a term loan with favourable rates, now it is more likely to include invoice discounting and similar products, which are using the balance sheet to raise finance, although still with a strong focus on the future cash-flows of the business,” says Hall.

Johnny Webb adds that BDO has certainly seen the appetite of banks to support trading businesses make acquisitions improve in 2011 compared with the early part of the credit crunch.

“With the right structures and for the right acquisitions, we’re finding that we can generate some bank support,” he says. “The flow of money into the SME market is better than it was, although it is fair to say that the availability of finance for acquisitions perhaps remains stronger in GB than in Northern Ireland. We have, however, seen this work to our client’s advantage in recent situations where the target is based in GB.”

Nervous Vendors

Johnny Webb concedes that what activity there has been in Northern Ireland of late has often happened through necessity.

“We have witnessed that a relative number of deals in Northern Ireland over the last year have had a distressed or accelerated element to it, often driven by associated property issues. We see that trend continuing,” he says.

“The positive side of this is that we are seeing jobs saved and the values of companies preserved. Indeed, our Business Recovery team in BDO has worked with many distressed businesses across Northern Ireland, several of which have been sold to ensure future viability and return to growth.”

However, one of the problems BDO has encountered is that many business owners now fear putting themselves up for sale for fear of being seen as distressed.

Barry-John Kelly confirms that, while there is no dearth of buyers, this fear means there is a scarcity of investment opportunities.

“There is a perception that businesses don’t necessarily want to be seen as being for sale, because the automatic assumption is that they are in trouble. So there is a shortage of product, a shortage of people who are prepared to go into a sale process. There’s a perception at the moment, that if they try to market themselves, people think there is a skeleton in the closet,” says Barry-John.

“There is also a view that there isn’t funding out there, that there isn’t money to complete acquisitions. The market for debt finance is correcting itself. However, there are well resourced, family owned businesses that have been more prudent over recent years and are in a position to make acquisitions. Finding those acquisition opportunities is the challenge that we have,” he adds.

Barry-John also notes that there has been an upturn in the amount of interest being shown in Northern Ireland businesses by private equity houses – if not quite an upturn in investment as yet.

“There is a shortage of supply not just in Northern Ireland, but also in the UK. So the UK private equity companies are fishing in deeper waters,” he says.

Turbulence on world financial markets has also caused nervousness among business owners, but Johnny, who frequently acts as an Expert Witness in valuation disputes, is quick to note that this volatility has had a relatively limited impact on the value of SMEs – which have also fallen far less than property values.

“From the peak values of SMEs in 2005 and 2006, the BDO PCPI shows that current values of privately owned companies are down around 20% in the UK, across all sectors. But that is at a gross value level, which is only half the story for business owners more concerned with what their net proceeds will be”.

In fact, where in the mid 1990s there was up to 40% tax on any business sale – and with a huge amount of tax planning this could maybe be reduced to a 30 something % overall effective rate – sellers may now basically be paying as little as 10% on gains up to £10m per shareholder.

“The tax climate has changed very favourably for business owners and with the recent increases in the entrepreneurs tax relief you can get less for your business ‘gross’ but walk away ‘net’ a lot better off than some years ago. And when you compare that to property it does start to hit home. It does surprise me, therefore, that so few people are thinking of selling currently,” says Webb.

BDO also puts the logjam over the past few years down to a significant downturn in Management Buyout activity, something Northern Ireland has always lagged behind in, but which Webb and the Corporate Finance team are confident will improve.

“MBOs have been particularly badly hit. That is because MBOs don’t have corporate backing, they are usually individuals going to the banks to get the leverage. That is something that, between the upturn we’re seeing in bank finance for SMEs, coupled with the upturn in interest by private equity players in Northern Ireland, and the potentially favourable tax position for vendors – hopefully, should stimulate the level of MBOs in Northern Ireland.”


Follow us

Subscribe to Ulster Business Magazine

View Our Digital Library

A L Top 100 2019 button