FACILITIES MANAGEMENT UK OVERVIEW

FACILITIES MANAGEMENT UK OVERVIEW

ABOUT THE AUTHOR Satvir is a Director in BDO LLP s M&A advisory business, which was named the UK s most active adviser in the Experian Corpfin 2011 M&A League Tables. Satvir is an M&A specialist within BDO s national Facilities Management sector, with an associated interest in outsourced insurance services deals. He has acted for entrepreneurs, private equity and corporates both in sale and buy-side roles. EXPERIENCE Satvir joined BDO s Corporate Finance department in 2005, having previously acted as Director of Business Development at a FTSE 250 Group. He is a Full Member of CISI and trained as a Chartered Accountant having been educated at King s College London. SATVIR BUNGAR Director t: +44 (0)121 352 6347 e: satvir.bungar@bdo.co.uk

FACILITIES MANAGEMENT UK OVERVIEW 1 FACILITIES MANAGEMENT IS A GROWING SECTOR Key players use M&A to bolster service capability Facilities Management (FM) is a relatively new sector in the UK. It includes a broad spectrum of services, from hard (such as building maintenance) services to many soft (such as security and cleaning) services that are contracted out to third party companies. The sector has witnessed significant growth in spend over the past 20 years and has been characterised by increasing levels of sophistication from buyers and sellers. In recent years procurement processes have become more structured, negatively impacting on margins which have already been squeezed by Government measures. FM providers are increasingly using M&A as a method of protecting and enhancing profits. A number of providers are able to offer a multi-service capability and, in some cases, pursue strategic FM - a partnership based approach to providing more tailor-made services where innovation is key. FIGURE 1: UK POTENTIAL MARKET FOR FACILITIES MANAGEMENT 2007-2011 122 FIGURE 2: FACILITIES MANAGEMENT: COMPLETED TRANSACTIONS 2009-2011 Number of deals 100 90 80 70 60 50 40 30 20 10 0 Source: Experian Corpfin 2009 2010 2011 Value ( billion) 120 118 116 114 112 2007 Source: MCi 2012 2008 2009 2010 2011 GROWING LEVELS OF M&A ACTIVITY There is evidence of a rising trend in M&A volumes per annum since the 2008 economic slowdown, with growing interest from foreign buyers. Almost 300 UK FM corporate finance transactions were recorded over the three years to 2011, with 2011 recording the highest annual level of activity. In terms of specific FM markets, the hard space has been most active, particularly the M&E and building services market. For example, during 2011 BDO advised the Vendors of Linbrook Services Limited (a leading provider of responsive repairs and maintenance services to the affordable housing sector) on its sale to Wates Group Limited. Market consolidation has seen many large FM groups bolster market positions, such as Carillion plc s acquisitions of Mowlem and EAGA and Compass Group s acquisitions of VSG and ICM. In addition, certain providers in the compliance markets, such as Green Compliance plc, have taken advantage of the opportunities for acquisition-led growth resulting from the continued regulatory requirements and fragmented nature of these markets.

2 FACILITIES MANAGEMENT UK OVERVIEW WHAT IS FACILITIES MANAGEMENT FIGURE 3: EXAMPLES OF FACILITIES MANAGEMENT SITE-BASED ACTIVITIES CATERING TECHNICAL SECURITY CLEANING BUNDLED Schools Hospitality Restaurants Hospitals. Building maintenance & services Compliance: fire, water, pest Storage. Guarding CCTV Incidents Reception. Office Waste Landscaping. Any combination of these We are seeing a move towards a fully integrated outsourcing model (e.g. emphasis on technology platforms and operational efficiency reviews) LONG-TERM FRAMEWORKS / CONTRACTS 2012 deal flow includes India s TOPSGRUP, a leading Indian security group, announcing the completion of the remaining stake in British security firm The Shield Guarding company, valuing Shield at 32 million. Rentokil Initial plc s acquisition by its Initial Facilities Division of Londonbased technical facilities management business Modus FM was another transaction that brought additional technical services capability. LDC recently backed management in its bid for Airline Services Holdings, a provider of a range of services in the area of aircraft presentation and cabin interior, reportedly valuing the business at over 30 million. The economic downturn has created opportunities for integration and expansion of contracted services, as both public and private sector clients seek efficiency gains. The competitive environment has strengthened the position of larger FM integrated providers as they are able to offer greater cost savings to their clients than their smaller, single-service competitors. Anecdotal evidence from industry operators claims that smaller operators, generally with revenues less than 50 million, have found it difficult to grow organically due to increased competition for places on framework contracts and large tenders. MARKET CONSOLIDATING AS PROVIDERS FOCUS ON BUNDLED SERVICES AND MORE STRATEGIC RELATIONSHIPS As Figure 4 shows, contracted-out FM continues to dominate the FM sector. The principal challenge for FM providers has been to grow revenues profitably in an increasingly commoditised and competitive environment. For example, there has been a marked decline in the number of PFI contracts signed as the economic downturn has resulted in an increased reluctance by banks to lend money and commit to these projects. In addition, the curbing of investment by the Government in relation to the Building Schools for the Future programme has sparked delays in the delivery of key facilities, impacting potential FM revenues. FIGURE 4: VALUE OF THE UK MARKET FOR FACILITIES MANAGEMENT BY TYPE OF CONTRACT, 2011 ( BILLION) 38.5bn 9.3bn Total facilities management Contracted out Internal 73.0bn Source: MCi 2012

FACILITIES MANAGEMENT UK OVERVIEW 3 BUY AND BUILD REMAINS AN ATTRACTIVE OPTION FIGURE 5: FACILITIES MANAGEMENT: TRANSACTIONS BY SECTOR Number of transactions 30 2009 25 20 15 10 5 0 Catering Relocation / storage Cleaning Mechanical and engineering Building maintenance 2010 2011 Waste Compliance (including pest control / fire / water) Security Garden / landscape The growing trend to extend the range of services around bundled contracts is expected to continue and this is one factor behind the high level of M&A activity. As the market has developed there has been some evidence of increased rationalisation, with smaller players being scooped up by larger organisations. During 2012 we have seen continuing consolidation of soft FM subsectors such as the cleaning and security markets and growing activity in the waste management space. BUY AND BUILD REMAINS AN ATTRACTIVE OPTION IN FM Private equity funders have historically been active in FM. Unlike many sectors in which private equity operates, the highly fragmented nature of the FM market lends itself to the buy and build strategy, where a platform business is acquired to be supplemented by further acquisitions to create scale. Lyceum Capital has implemented this strategy in the drainage services submarket with portfolio company UKDN Waterflow, the UK s largest independent (non-franchised) specialist drainage contractor. Since Lyceum Capital backed UKDN in January 2010, BDO has advised the business as part of its execution of an organic and acquisition-driven growth strategy which has seen UKDN more than double its turnover to 55 million. Source: Experian Corpfin

4 FACILITIES MANAGEMENT UK OVERVIEW COST PRESSURES AND SKILLS REQUIREMENTS TO DRIVE FURTHER M&A BIG IS BEAUTIFUL There is also an ongoing trend of large single service providers merging with organisations with a different skill set in order to diversify. We have seen FM companies pursuing strategic FM, adopting a more partnershipbased approach and providing more tailor-made services, including the operational management of services and the control of budgets. Strategic FM groups have been looking at ways to add value to their clients through increased efficiency and current trends reflect this. For example, large FM groups such as Rentokil Initial plc are building capability to capture multi-service contracts where efficiency is seen as key. Recently, it stated that the rollout of these initiatives have yielded cost savings to its customer operations of 8-12% on multi-storey offices. Another example is to promote better planning and scheduling resulting in fewer people per square foot. OCS Group recently introduced clean smart, a system based on lean engineering principles to increase cleaning productivity by 25%. The NEC Group has appointed OCS Group UK to deliver soft services contracts following a review of the groups facility management requirements. OCS Group demonstrated its ability to deliver an innovative and efficient approach to the delivery of soft services, by committing to implement over 130 innovations during the life of the new contract. This includes a dedicated OCS Academy that is aimed at attracting, recruiting, training and retaining more than 2,000 OCS employees. Another key initiative is the proposal to deliver zero waste-to-landfill from day one. There are also encouraging signs regarding the award of some of the larger, more complex local authority support services contracts that are designed to help authorities deliver savings, while maintaining good quality services. In April 2012, Carillion plc secured a 700m contract with Oxfordshire County Council to provide property and facilities management services. The contract, which runs for an initial 10-year period, is the first time the council has grouped all of its property and FM services into one contract and this is the first local authority contract of its kind in the UK. The continued trend towards outsourcing is expected to ensure future growth opportunities for FM companies, with bundled services and strategic solutions in particular showing the strongest growth potential. On the downside, many are achieving higher turnover but at lower margins as significant pressure on cost-reduction is set to remain a feature of FM contracts. FM groups will continue to be selective in the assets they acquire. Strong valuations will be achieved by only the highest quality FM assets, which offer genuine differentiation from their peer group and are capable of making a real and immediate difference to the buyer. Additionally, many of the key deal drivers in FM are underpinned by the many defensible qualities that these companies have, such as resilient end-markets and good earnings visibility. With such forces in mind, strong transactional activity in the FM sector is expected to continue for the foreseeable future. ABOUT BDO CORPORATE FINANCE BDO Corporate Finance, the UK s most active M&A adviser (Experian Corpfin January 2012) is an award winning business. We provide independent financial advice to shareholders, private and public companies, financial institutions and the public sector on buying and selling companies, raising finance, IPOs and strategic advice on complex reorganisations and shareholder value. We advise across all sectors and complete over 200 transactions a year making us active advisers in the UK. We routinely carry out cross border M&A and financial investigations and leverage the strength of the BDO International network of firms and 1,000 offices around the world. Around one third of our transactions controlled from the UK involve an overseas counterparty.

CONTACT SATVIR BUNGAR Corporate Finance Director +44(0)121 352 6347 satvir.bungar@bdo.co.uk This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. BDO LLP is the Data Controller for any personal data that it holds about you. We may disclose your information, under a confidentiality agreement, to a Data Processor. To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please contact Katie Murray on 020 7893 2391 or email katie.murray@bdo.co.uk Copyright 2012. BDO. All rights reserved. www.bdo.co.uk