FM Insights into facilities management Facilities management market

ISSUE 12 • 2014
FM
Insights into
facilities management
Facilities management market
M&A update, Q3 2014
David Ascott
Partner, Corporate Finance
Grant Thornton UK LLP
The recovery in M&A activity which saw deal numbers in the
UK’s FM sector bounce back in the second quarter of 2014,
following a protracted bear market for the sector, continued
through the summer months. A total of 24 FM transactions
were recorded during the period, the same number as was seen
between April and June and the joint highest level witnessed
since the second quarter of 2013. That said, the exceptionally
quiet first quarter of 2014 means that the year-to-date figures
represent the slowest nine-month period since we began
monitoring the sector in 2007; even if the positive underlying
factors that were discussed in the last quarterly bulletin
(economic recovery, a strong IPO window, the return of PE
bidders, etc) continue to hold firm, it is very unlikely that the
fourth quarter will yield the sort of deal flow needed to match
or exceed the previous three full-year figures. Nevertheless,
despite returning anxiety in the Eurozone, the broader
outlook over the medium term remains a positive one.
• Headline trends for the quarter
• Soft FM deals still in the majority
• Share prices suffer following poor
quarter for quoted FM businesses
1 Insights into FM - Issue 12
FM
Headline trends for the quarter
Once again, this latest quarter has also
provided one stand-out transaction in
size terms, in the shape of the acquisition
by PE buyers TDR Capital and Sun
Capital Partners of Lloyds Banking
Group’s stake in Keepmoat. The deal,
which valued the Doncaster-based
housing regeneration and building
services holding company at a reported
£400 million (believed to be a little
under 7x EBITDA), boosted the value
of disclosed deals to its highest level in
around two years. It follows a succession
of other significant transactions
in preceding quarters, such as the
acquisitions of VPS from TDR Capital,
Initial Facilities (‘IFS’) from Rentokil
Initial in the first half of 2014, and
Norland Managed Services by CBRE
Group in the final quarter of 2013.
Aside from its size, the Keepmoat
deal is also significant in that it again
highlights the renewed interest in the
FM sector among the private equity
community. Although PE buyers only
announced two such deals during
the third quarter, they have almost
reached double figures for the nine
months to date, the highest level
since 2011 and already more than
2013’s full-year figure. What’s more,
PE houses have also been active as
vendors as well as buyers: TDR Capital
has played both roles recently, with
the Keepmoat and VPS deals, while
Bridgepoint Development capital more
than doubled its money on the sale of
the UK energy management services
provider Energy Solutions Group to
SSE plc during the second quarter. As
the overall market conditions continue
to improve and leverage becomes more
freely available and flexible, it is more
than likely that PE buyers will continue
to make their mark on the sector.
International buyers, which generated
an important part of the FM sector
deal flow in the latter part of 2012
and throughout 2013, also returned
in the third quarter of this year after
a quiet first half. Spie and Ameresco,
which acquired Scotshield Ltd and
Energyexcel LLP’s energy consultancy
and energy project management business
respectively, have both been active
buyers in the UK FM sector over the
last couple of years. They were joined by
Epta SpA of Italy and Noonan Services
Group of Ireland in Q3.
Soft FM deals still in the majority
In terms of the split in M&A activity
between soft and hard FM sub-sectors,
the trend which has seen more deal flow
among soft FM businesses over the
last two years continues. In particular,
there has been a spike in activity in
the cleaning sub-sector and signs are
that this may well continue as further
consolidation takes place; Maxim
Facilities Management Ltd acquired
two cleaning businesses (Ross Cleaning
Services and New Life Cleaning
Systems’ contract cleaning division)
during the third quarter and has
announced that it is planning more deals
in the sector. The security and other soft
FM sub-sectors also chipped in with
eight deals between them in the latest
period, continuing their strong run.
2 Insights into FM - Issue 12
Among the hard FM sub-sectors, the
utilities area also continues to produce a
steady flow of interesting transactions,
including the Q3 acquisitions of
Forefront Group Ltd by Renew and
Energy Solutions Group by SSE plc.
What’s more the sector may benefit
from the much-needed £100 million
boost to the Green Deal announced by
the energy secretary Ed Davey at the
beginning of the fourth quarter. The
new money will be used to reinstate the
‘Home Improvement Fund’ cash-back
incentive scheme which had been fully
spent by July of this year.
FM
Quoted FM Tracker
Share prices suffer following poor
quarter for quoted FM businesses
“Whilst some of the larger
listed FM players have
continued to attract
unfavourable headlines and
have suffered sliding share
prices it is encouraging
to see an uptick in private
equity investment in the
sector as highlighted by
the Keepmoat transaction.
This could indicate
how opportunities are
emerging for the larger
private companies in the
sector as the corporate
landscape changes and
less dominated by the
traditional listed players”
David Ascott
Partner, Corporate Finance
3 Insights into FM - Issue 12
The contraction in share prices among
our quoted FM peer group in the
second quarter, which had brought
a prolonged bull run to an end,
crystallised further in the third quarter.
Only four of the group recorded
a positive movement in their share
price over the quarter, with Rentokil’s
increase of 5.75% being the most
notable. The remaining 10 businesses
on the list saw a fall in their share prices
over the period, leaving the average for
the peer group down by a shade over
5%. This compares with a fall in both
the FTSE All Share and FTSE Support
Services indices of 1.8% in the same
three-month window. Over the sixmonth period the decline is even more
pronounced, with the FM businesses
seeing a decline in share prices of 8.5%,
versus falls of 0.6% (FTSE All-share)
and 6.7% (FTSE Support Services).
The only positive comparison for the
FM peer group is in the longer term
analysis: over the last two years the
valuation of the listed FM businesses
on the tracker has grown by almost
34% - some way ahead of the other
two main indices.
However, despite the weak
comparisons over the latest two
quarters, it is worth highlighting that
the statistics are somewhat at odds with
the general mood across the sector,
and for a number of important FM
businesses the most recent company
results have actually been relatively
positive. For instance, Compass, which
saw a decline of almost 8% in its share
price over Q3, recently reported a
relatively healthy growth in organic
revenues of around 4%, though this
news came towards the back end of
the quarter. Likewise, G4S, which
has endured a difficult trading period
over the last couple of years, has also
been able to issue some good news of
late, with positive interims in August
and the successful sale of a Swedish
subsidiary the month before; yet it
too saw its share price fall, albeit by a
much smaller margin (1.76%). Finally,
Rentokil has seen fluctuations in its
share price (and is up over the last
quarter), but its latest set of interims
suggest that its operations continue to
perform well.
Overall, much of the damage to the
peer group’s average price has clearly
come from the two top-five companies
that have seen the biggest declines:
Serco’s stock has suffered the most,
with a 21.7% fall in the last quarter
and a 50%+ slide over the last couple
of years, amidst sliding revenues and
margins. Meanwhile Balfour Beatty has
also seen its stock fall by almost 20%
over the last quarter and over 37% over
the last two years. The business recently
reported an additional £75 million
profit shortfall in its construction
business and has announced that
KPMG will conduct a detailed review
on cost controls.
FM
Pressures on cash flow and
working capital continue
With competition in the FM sector increasingly
intense and with continued pressure on margins,
the emphasis on driving cash flow and optimising
working capital has never been greater.
Cash flow is the lifeblood of any
organisation but in the FM sector
especially, it can be the difference
between having a funding structure
that supports growth and one that
restricts it.
However, the challenges in
optimising cash flow in the FM sector
are many and varied. From the initial
contract tender and negotiations,
through to the establishment of
efficient processes and tight internal
controls that support timely billing
and cash collection, there are multiple
levers which can, if not appropriately
managed, drive excessive working
capital requirements.
So how well are FM companies
responding to the challenge?
Benchmarking net working capital
levels (as a percentage of a company’s
turnover) for 85 of the UK’s top FM
companies is indicative of the difficulties
4 Insights into FM - Issue 12
faced in optimising working capital in
the FM sector. Over the last four years,
average working capital levels for this
group have increased by 0.9 percentage
points. For the companies in our sample,
this equates to a staggering £654 million
of additional working capital required to
fund operations.
Clearly there are winners and losers
and a company’s size along with the
number and nature of FM services
provided will influence what ‘good’
looks like. Regardless of these factors,
however, there is still plenty of ‘selfhelp’ available, with those companies
who treat working capital as an
organisational responsibility, rather than
simply a finance problem, being the
ones at the forefront of best practice.
FM
Some of the practices we are working with leading FM companies to implement
are as follows:
• Robust Bid Stage Cash Flow
Forecasting during the contract tender
process with clear and well understood
business rules driving the negotiation of
commercial terms with both customers
and sub-contractors
• Elimination of ‘Cash Leakage’
through enhanced focus and control
over the capture of timesheets, subcontractor invoices and other backing
documentation required to support full
and timely bill issuance
• Investing time and effort during contract
set-up to build Understanding of
Client Accounts Payable Processes,
especially where there are specific
requirements for Purchase Orders or
invoice pre-approvals to be obtained
before invoicing takes place
• Developing Contract-Level
Operational Metrics to support
account managers in making more
effective decisions and taking timely
actions around working capital, with
appropriate alignment of incentives and
bonuses for strong performance
Mark O’Sullivan
Partner, Working Capital Advisory
T 020 7728 3014
E [email protected]
5 Insights into FM - Issue 12
• Building trust and confidence with
suppliers and sub-contractors through
Transparent and Consistent Payment
Policies that are adhered to, moving
away from an approach of making
tactical payment holds around reporting
period ends
• Clear Organisational Roles and
Accountability for Credit Control
including segmented customer
collection strategies, escalation paths
and processes for timely and effective
issue/dispute resolution
What is clear is that adopting
a proactive approach to
managing commercial
agreements, driving consistent
processes based around an
understanding of best practice
and tightening controls can
have a transformational impact
on cash flow.
Mark O’Sullivan, an Advisory partner at Grant Thornton, has spent the last
seven years specialising in the area of working capital management. He has
worked extensively across the FM space supporting companies, ranging from
owner-managed to FTSE100, in identifying and delivering transformational and
sustainable improvements in working capital performance, often in the range of
5 - 10% of annual turnover.
FM
Contacts
For any further information, please contact:
David Ascott
T 020 7728 2315
E [email protected]
Pete Dawson
T 020 7728 3197
E [email protected]
Martin Gardner
T 020 7728 2847
E [email protected]
Usman Malik
T 020 7728 2321
E [email protected]
Grant Thornton Facilities Management – subsector map
Hard FM
Soft FM
Fabric maintenance
Security
Fit-out
Cleaning
Mechanical & Engineering
Catering
Fire Protection
Washroom hygiene
Grounds Maintenance
Textile/Laundry
Utility Maintenance
Pest Control
Reprographics
Space planning
Relocation and Storage
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