Insights into facilities management

Transcription

1 ISSUE Insights into facilities management David Ascott Partner, Corporate Finance Grant Thornton UK LLP The strong run of M&A activity in the Facilities Management sector continued into the second quarter of 2013, and although the pace of investment has slowed a little it has been the most active first six months since In volume terms deal activity remains centred on the smaller size brackets, but important transactions that will change the competitive landscape further up the size ranges continue to be completed. In this issue, on the back of one such important deal we look at the strategic push by some more domestically-focused players to consolidate the market especially in the area of hard FM services in order to be better placed to pitch for large bundled service contracts. Deal value ( m) 2013 M&A overview M&A volumes remain steady Although M&A volumes in the UK s facilities management sector saw a third successive quarterly decline in 2013, the drop-off is not significant and activity levels overall remain relatively stable. The 25 deals recorded between April and June is only marginally lower than the previous two quarters and the first half of 2013 remains the most active since 2008; in fact, the 52 deals announced in the period is well over 50% up on the first half of last year, with the second quarter of only seeing 13 deals in all M&A overview Quoted FM tracker FM sector trends 1 Insights into FM - Issue 7

2 UK Facilities Management transactions by quarter** UK Facilities Management transactions YTD **see back page for Grant Thornton subsector split between hard and soft FM Volume Value m Volume Value m YTD As has been the case for some time, the M&A market continues to be driven by activity among domestic businesses mainly in the smaller and midmarket segments as companies seek to build scale through consolidation or plug gaps in their skill sets; all bar four of the deals in came via this route. Meanwhile, the trend which has seen international buyers become increasingly visible in the UK FM space also continued in the second quarter, though at slightly lower levels than the previous nine months: two US buyers Centerplate Inc and Ameresco Inc were among the buyers of UK FM businesses in. Although none of the international deals in are thought to be significant in size terms, the potential for larger international acquisitions remains strong as non-uk businesses seek to tap into the expertise of the UK s highly developed FM players; other large international groups such as Ferrovial, Schneider Electric, Bouygues Bâtiments and PGGM have all been active buyers in the UK market over the last year and this trend will certainly figure prominently in the next quarterly release: early in GDF Suez announced its acquisition of Balfour Beatty s WorkPlace subsidiary for an enterprise value thought to be around 190 million. 2 Insights into FM - Issue 7

3 In size terms, the one stand-out deal in the second quarter came via the 221 million merger between construction and support services group Kier and road maintenance provider May Gurney. Coming hot on the heels of the 385 million acquisition of Enterprise Group by Ferrovial s UK arm Amey plc during the first quarter, this latest deal is another sign of the push to consolidate especially in the hard FM space in order to compete for the larger multi-service bundled contracts (see Trends piece, below). UK Facilities Management transactions 2013 by subsector 8% 8% 12% 32% 12% 8% 4% 16% Catering Cleaning Hygiene Security Other Soft FM Maintenance/Fit-out M&E Utilities Other Hard FM Balance swings back to hard FM Although clearly dominated by the Kier/May Gurney transaction, the stats do also show a wider shift back towards activity in the hard FM space, after six months where the balance of M&A events was more on the soft FM side. The maintenance and fitout subsector was especially active during the quarter with eight deals in total (including the Kier/May Gurney transaction), the most recorded in any one quarter since 2008 and more than the other three hard FM subsectors combined. The utilities and M&E segments both fell back during the quarter after periods of reasonably high activity, while the soft FM subsectors were largely quiet, save for multiple deals in the catering and other soft FM subsectors. UK Facilities Management transactions by subsector by quarter 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Other Hard FM Utilities M&E Maintenance/Fit-out Other Soft FM Security Hygiene Cleaning Catering 3 Insights into FM - Issue 7

4 UK Facilities Management transactions by acquiror type 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Recent months have seen FM sector activity demonstrate clear signs of a strategic shakeup large public company mergers like Kier/May Gurney and the international sale of Balfour Beatty WorkPlace, point to the reshaping of the landscape as consolidation and portfolio restructuring take hold. David Ascott Corporate Finance Partner 0% UK PE International 2009 Possible M&A hiatus ahead before volumes return? Although the slowdown in deal volumes since the recent peak in has been relatively insignificant, there are signs that M&A activity levels may slow further through to the end of the year, before picking up again. On one level this is to do with the fact that many businesses that have been active in the M&A markets over the last year will need time to digest their recent acquisitions. But it also reflects the fact that companies with non-core assets to off-load have few potential buyers to target with the possible exception of overseas bidders looking for a strategic foothold in the market: to begin with many will not be keen to sell to competitors and also private equity sponsors have effectively been on a goslow while conditions in the leverage markets remain poor Nevertheless, there are signs that the private equity community may be coming back into play as leverage conditions slowly improve: evidence from the Grant Thornton network shows an uptick in PE deal activity early in the third quarter, including a number of deals involving niche operators in the wider business support services area (the buyouts of Veritek, Nigel Frank and York Mailing, among others). Furthermore as economic conditions begin to improve, demand for the highest quality assets will become even higher than they already are and will continue to command a premium. 4 Insights into FM - Issue 7

5 Quoted FM Tracker Share price change to 30 June 2013 Share price change to 30 June 2013 Market cap Sales EBITDA EBIT 3 months 6 months 1 year 2 years Name m m m m % % % % Compass Group plc 15,257 16,905 1,456 1,154 (0.1%) 15.9% 25.6% 39.8% G4S plc 3,250 7, (20.9%) (10.2%) (17.4%) (17.7%) Serco Group plc 3,078 4, (1.7%) 15.2% 15.0% 11.6% Balfour Beatty plc 1,642 9, % (12.9%) (20.0%) (22.7%) Carillion plc 1,189 3, % (12.8%) 0.1% (26.5%) Rentokil Initial plc 1,622 2, (10.8%) (6.7%) 21.5% (6.0%) Mitie Group plc , (10.5%) (4.4%) (3.4%) 5.6% BERENDSEN plc 1, (5.2%) 24.8% 48.9% 36.6% Kier Group plc , (2.3%) (13.7%) (9.0%) (15.8%) Interserve plc , % 30.1% 62.2% 56.9% London Security plc (0.7%) (2.9%) (6.2%) 16.2% May Gurney Integrated Services plc % 59.6% 25.1% 5.0% Mears Group plc % 17.9% 46.5% 37.6% Johnson Service Group plc % 28.7% 73.6% 35.3% ISG plc , % 18.2% 24.4% (16.2%) Green Compliance plc % 8.6% (86.6%) (96.5%) FTSE All Share (2.7%) 6.3% 13.8% 6.2% FTSE Support Services (2.7%) 12.4% 24.4% 25.8% Source: Factset; Datastream. Market data as at 30 June 2013; Financial data as at last announced fi nancial close. Share price performance falters... Following a number of broadly positive quarters for the businesses on the Quoted FM Tracker, 2013 looks on the face of it to have been a difficult period, especially for the larger groups. Only three of the top ten companies by size saw any growth in their share price, and none of those grew by more than 1.5% over the three-month period. In contrast, the second largest group on the tracker and FTSE 100 business G4S saw a very sharp fall in share price from around the end of April, having previously risen for the first few weeks of the quarter; overall its 20.9% drop in share price is the most substantial of any business on the list in the second quarter. Rentokil Initial and MITIE also saw relatively sharp falls in their stock prices, though in both cases, the longer term trend is somewhat more robust. At the other end of the scale, only smaller groups like ISG and Mears Group saw any notable increase in share prices. Meanwhile, May Gurney, unsurprisingly, saw a boost in its share price following the announcement of the move by Kier to merge with the business. The market was a little cooler as far as Kier was concerned, though its share price trend was significantly less negative than the longer term averages....in the face of wider market jitters However, all the indications are that the underperformance of the shares on the Tracker are more to do with broader market jitters than they are of any negative shift in FM sector sentiment. To begin with, the average share price change of the 16 businesses on the list was positive albeit marginally so at 1% while both the FTSE All Share and FTSE Support Services indices 5 Insights into FM - Issue 7

6 were down 2.7% over the period. The FM peer group also outperformed the All Share index over the six-month timeframe too (9.7% up versus 6.3%). In addition to this, the news coming out of the businesses themselves has not been especially negative, though clearly trading conditions remain challenging. According to the G4S interim management statement, the business is continuing to see decent levels of organic growth despite the macroeconomic headwinds in Europe. Overall the company is seeing organic growth of 12% in developing markets and 4% in developed markets (6% overall), though the group s overall margin is down by 0.6%. Compass Group also reported a good start to the year, with reported revenue up by 4.4% and a slight increase in operating profit margin. The company also notes strong progress in its plans to counter the difficult trading conditions in Europe. So overall, while the challenging operating environment at home and in many other developed markets are certainly of some concern to many of the FM businesses on the tracker, it seems more likely that the share price issues evident in the second quarter are more a result of contagion from other sectors which have been hit by fears over slowing growth in China and the potential for the Fed and other national banks to scale fiscal stimulus strategies. Trends in the FM sector, 2013 Consolidation in the larger FM market With economic pressures biting both at home and abroad, we have been looking in recent quarters at some of the strategies UK FM businesses have been rolling out to find growth from targeting new verticals to aggressive international expansion. Another trend in the sector, which has come through strongly in the stats in recent times, has been the larger consolidation plays being seen between domestic and international businesses that could potentially alter the competitive landscape in the larger FM space. But how is this unfolding and what effect will it have on the sector overall? The most obvious recent signs of this consolidation have been in the hard FM space, where there have been two major transactions in as many quarters. The most recent of these came in the shape of Kier s agreement to acquire and merge with May Gurney; with combined revenues of some 2.7 billion the companies are important players in the domestic hard FM market and their union will create a more powerful business with a greater reach into the local authorities. The news of this deal came shortly after Costain failed in its own bid to buy May Gurney in an attempt to balance out its soft and hard FM offerings. And before that, Amey Plc, part of the large Spanish contractor Ferrovial, paid 385 million in the first quarter of this year to acquire utilities infrastructure maintenance business Enterprise Group Holdings from 3i. But it s not just in the hard FM space where consolidation plays are being put together: press reports in June suggested that the large-cap US private equity group Clayton Dubilier & Rice, was working on a plan to buy and combine Balfour Workplace and Rentokil FM, two relatively high turnover, lower margin businesses. In the event, this transaction did not go ahead, with GDF Suez announcing in early August that it was to acquire WorkPlace in an effort to boost its energy services and facilities operations in the UK. Targeting multi-service bundled contracts Clearly, seeking opportunities to create major economies of scale is important in the current environment, but it goes beyond that. The very largest groups like Compass, Serco and G4S are driving much of their growth from international operations, but this is less of an option for FM companies that until now have mainly been focused on the domestic market: targeting international growth markets 6 Insights into FM - Issue 7

7 FM requires major investment and is risky. Instead, the big strategic driver for more domestically focused players is to consolidate in order to position for bigger, bundled local authority contracts. It makes sense: they have strong existing links with the local authorities and these agencies are looking to focus their spend on fewer outsourcers in order to achieve the cuts that have filtered down from the government spending review. As an example, several London boroughs recently combined to tender for a 150 million contract to supply a variety of services including building maintenance, catering and landscaping. Amey was awarded the work and will run the contract over 10 years. And it is not just local authority work the trend towards multiservice bundled contracts in the B2B segment is also clear. MITIE targets both, and last year the group secured its largest ever win with the 775 million contract to supply integrated FM services to Lloyds Banking Group over five years. MITIE specifically alluded to this strategy in its most recent preliminary statement in which the chief exec was quoted as saying We expect outsourcing opportunities will continue to grow, with a trend towards more clients seeking to access integrated services. However, there is some conflicting 7 Insights into FM - Issue 7 opinion on this strategy, with reports that some of the public sector buyers might be inclined to turn away from bundled services. In part this shift in sentiment is down to a feeling that multi-service providers can t live up to the quality delivered by more specialist single-service contractors. It might also be on the basis of the risk that the buyer might be left with all of its eggs in one basket should problems arise with a bundled service provider. Changing landscape, blurring boundaries But how will this affect the structure of the FM industry? Certainly the process is going to result in a sector where fewer, larger players are geared firmly towards chasing a smaller number of more significant contracts. In this sort of environment, winning the big, headline-grabbing contracts will need to become a more regular event and failure to capture them could have a significant impact on investor sentiment. The other clear trend that is likely to continue as the market consolidates further is the drift in core service offerings, which is seeing some hard FM specialists become more capable in soft FM areas and others going the other way. Inevitably this will continue to blur the boundaries between the two areas of the market. We expect outsourcing opportunities will continue to grow, with a trend towards more clients seeking to access integrated services.

8 FMContacts For any further information, please contact: David Ascott T E [email protected] Pete Dawson T E [email protected] Martin Gardner T E [email protected] 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 2013 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 V23226