Issue 1 of quarterly facilities management update covering key sector activity, review of 2011 and challenges and opportunities in 2012
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FM Insights into facilities management ISSUE 1 • 2012 Facilities management: change continues to bring opportunity At a time when the fortunes of the global economy seem to change on an almost daily basis, making sense of trends and developments is difficult for businesses in all sectors. But, as is so often the case, with change comes opportunity, and we feel that this is especially true of the UK’s facilities management (FM) sector. It is a hugely important sector for the British economy, covering a broad cross section of our industrial base. Its representatives range from the heavily people-based cleaning, catering and security businesses, to firms that offer services involving a high degree of technical, mechanical and engineering skills. FM has historically been one of the higher growth sectors in the British economic landscape, thanks to the long-term trend towards outsourcing in both the public and private sectors. However, in the aftermath of the global financial meltdown, the market dynamics for many FM businesses in the UK have changed dramatically, driven on one side by radical shifts in public sector procurement and on the other by the deterioration in the UK’s financing environment. Yet after the entirely understandable drop in M&A activity during the depth of the post crash recession, the UK FM sector has returned successive years of volume growth in both 2010 and 2011, underlining the presence of interesting opportunities as the sector gets to grips with a rapidly evolving landscape. True, the value of M&A deals in the sector have fallen steadily from the pre-crash levels, but this is to be expected as market participants seek to buy up smaller rivals as a way to build scale in the more commoditised areas or to acquire new capabilities in niche areas. While it is difficult to see the downward trend of M&A values in the sector lasting that long, there’s every chance that the growth in deal numbers will continue as new opportunities are created by the unique conditions we are experiencing. Grant Thornton covers the FM sector via its Business Support Services team and we are delighted to launch a new series of quarterly snapshots, which will comprise statistical updates, covering both public and private markets, as well as topical overviews and comment from senior sector experts. Our intention is to keep abreast of interesting trends, themes and developments in the sector as it navigates a route through the changing landscape of the UK economy. With its balance of challenges and opportunities, we feel that the current market represents a fascinating time for the UK’s FM sector and we look forward to charting the key developments in the area over the coming quarters. • 2011 M&A overview • Quoted FM tracker David Ascott Partner, Corporate Finance Grant Thornton UK LLP
Transcript
FMInsights intofacilities managementIS
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Facilities management: change continues to bring opportunityAt a time when the fortunes of the global economy seem to change on an almost daily basis, making sense of trends and developments is diffi cult for businesses in all sectors. But, as is so often the case, with change comes opportunity, and we feel that this is especially true of the UK’s facilities management (FM) sector. It is a hugely important sector for the British economy, covering a broad cross section of our industrial base. Its representatives range from the heavily people-based cleaning, catering and security businesses, to fi rms that offer services involving a high degree of technical, mechanical and engineering skills.
FM has historically been one of the higher growth sectors in the British economic landscape, thanks to the long-term trend towards outsourcing in both the public and private sectors. However, in the aftermath of the global fi nancial meltdown, the market dynamics for many FM businesses in the UK have changed dramatically, driven on one side by radical shifts in public sector procurement and on the other by the deterioration in the UK’s fi nancing environment.
Yet after the entirely understandable drop in M&A activity during the depth of the post crash recession, the UK FM sector has returned successive years of volume growth in both 2010 and 2011, underlining the presence of interesting opportunities as the sector gets to grips with a rapidly evolving landscape. True, the value of M&A deals
in the sector have fallen steadily from the pre-crash levels, but this is to be expected as market participants seek to buy up smaller rivals as a way to build scale in the more commoditised areas or to acquire new capabilities in niche areas. While it is diffi cult to see the downward trend of M&A values in the sector lasting that long, there’s every chance that the growth in deal numbers will continue as new opportunities are created by the unique conditions we are experiencing.
Grant Thornton covers the FM sector via its Business Support Services team and we are delighted to launch a new series of quarterly snapshots, which will comprise statistical updates, covering both public and private markets, as well as topical overviews and comment from senior sector experts. Our intention is to keep abreast of interesting trends, themes and developments in the sector as it navigates a route through the changing landscape of the UK economy. With its balance of challenges and opportunities, we feel that the current market represents a fascinating time for the UK’s FM sector and we look forward to charting the key developments in the area over the coming quarters.
• 2011 M&A overview
• Quoted FM tracker
David AscottPartner, Corporate FinanceGrant Thornton UK LLP
FMRight across the wider M&A markets in the UK, Q4 fi gures for 2011 were well down on the previous three quarters on the back of Eurozone gloom and poor economic forecasts. But, while deal activity in the FM sector did also slip back, its fall was nowhere near as pronounced as the conditions might dictate. So, adding to the three solid quarters of activity before it, the Q4 fi gures helped to drive the market into growth territory for the second year in succession. In all, 101 M&A transactions were recorded in the sector,
the fi rst time the annual total had made it to three fi gures since 2008.
Ironically, it is the adverse conditions of the last few years generally that has created this platform for growth in the FM sector. In specifi c terms, the effect the downturn has had on facilities procurement patterns in both the public and the private sectors has continually proved to be an important driver of consolidation within a historically fragmented space. For some businesses, especially smaller outfi ts in the lower margin, more
commoditised areas (cleaning, catering and security guard services, etc), the push to consolidate is driven by a need to protect fl agging margins via the pursuit of scale. For other larger multi-line operators, it is about bolting on higher margin niche capabilities in order to offer their embattled clients even more comprehensive bundles of services while driving up – or at least maintaining – net margins.
Clearly, another side effect of the current economic conditions that is creating opportunities for consolidation, is distress. Although this can come about through more fundamental issues such as overly leveraged balance sheets, distress can also be created by factors over which businesses have little control – especially in the private sector: attrition in FM company client bases caused by increasing numbers of insolvencies is one example and is a serious issue. However, in either case the distress caused can open up M&A opportunities for the reasons already covered or simply to benefi t from cost-out synergies.
Finally, the downturn has also forced many businesses to fi nd creative solutions to their revenue problems and one such solution has seen large FM businesses moving into new subsectors via acquisition in order to access their targets’ client bases. During the year the catering giant Compass group acquired Integrated Cleaning Management Ltd, while French group Sodexo acquired the asset management division of civil engineer WS Atkins.
Acquiror Target Sub-SectorDeal Value
£ millionCarillion plc Eaga plc Utilities 306.5
Compass Group plc VSG Group Limited Security 64
The Capita Group plc Right Document Solutions Holdings Limited Other Hard FM 40
Securitas AB Chubb Security Personnel Limited Security 31
British Gas Community Energy PH Jones Group Limited M&E 30
May Gurney Integrated Services plc Turriff Group Limited Utilities 23
Costain Group plc Promanex Group Holdings Limited Other Hard FM 18.8
Balfour Beatty Workplace Limited Power Effi ciency Limited Other Hard FM 18
G4S Managed Services (UK) Limited The Cotswold Group Limited Security 10.2
Management Buy Out team - UK Facilities Service Group Limited Maintenance/Fit-out 9
Source: Zephyr *by disclosed deal value and involving a UK company
2011 M&A overviewResilience to poor conditions drives up deal numbers…
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20112010200920080
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Source: Zephyr
UK Facilities Management transactions 2008-2011
Top 10 Facilities Management deals in 2011*
In contrast, the average value of M&A deals in the FM sector has virtually halved in the four-year data set and this has seen the total market value drop to £656m in 2011 as a whole – down almost 20% on 2010 and nearly 50% on the values seen in 2008. In part, this can be explained by the persistent diffi culties in the capital markets, which is severely hampering the ability of many (especially fi nancial bidders) to raise the necessary funding to complete larger M&A transactions. Meanwhile, without the sort of headline-generating fi re sales seen the previous year with Rok and Connaught, the large well-funded corporates have clearly been holding fi re on major acquisitions, focusing instead on smaller opportunities to bolt on new, niche capabilities. Only one 2011 deal – the acquisition of EAGA plc by Carillion – had a reported value in excess of £100m.
It is also revealing that acquirers are increasingly looking to come up with more creative methods of structuring deals, which might reduce the upfront funding element and therefore affect the overall market numbers: minority stake deals, innovative earn-out structures and vendor loan notes are becoming a more common feature of the market.
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2011Q4
2011Q3
2011Q2
2011Q1
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
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2009Q2
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2008Q4
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Source: Zephyr
UK Facilities Management transactions 2008-2011 by quarter**
UK Facilities Management transactions 2008-2011 by acquiror type
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2011201020092008
UK PE International
Source: Zephyr
… but values fall
**see back page for Grant Thornton subsector split between hard and soft FM
FMLooking at the underlying patterns of M&A activity within the FM subsectors, the dominance of hard FM remains a clear trend, accounting for approximately two thirds of transactions completed in 2011. One of the main drivers of this in recent quarters has been a growing concentration of activity within the social housing space, which has had a knock-on effect on subsectors like Maintenance/Fit-out and Mechanical & Engineering (M&E). A number of important deals in this area boosted the annual numbers including, the sale of certain divisions of Kinetics Group to SCP Renewable Energy, the acquisition of Linbrook Services by Wates Group and the sale of certain house building assets by troubled group Rok Ltd. On the M&E side, Centrica business BG Group acquired PH Jones Group Ltd, a central heating installation, maintenance and repair services company to the social housing sector.
0%
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100%
2011201020092008
Other Hard FM
Utilities
M&E
Maintenance/Fit-out
Other Soft FM
Security
Hygiene
Cleaning
Catering
Source: Zephyr
UK Facilities Management transactions 2008-2011 by subsector
UK Facilities Management transactions 2011 by subsector
Other Hard FM
Utilities
M&E
Maintenance/Fit-out
Other Soft FM
Security
Hygiene
Cleaning
Catering
11%
12%
20%
20%
21%
3%
9%
3%
1%
Source: Zephyr
Subsector concentrations:hard FM dominates
FMLooking ahead: emerging trends
The hard FM space is likely to maintain its dominance looking into 2012 and beyond too. There are growing signs that large PFI contractors may increasingly be viewing the maintenance elements of their business as non-core and this could potentially become an important market driver in the hard FM space. Such operations, should they continue to appear in M&A markets, would be viewed by many specialists as highly attractive assets. Similarly, as was highlighted by Balfour Beatty’s acquisition of Kent-based Power Effi ciency Ltd, rising energy costs are driving the number of deals involving energy effi ciency businesses, both in terms of consultancies and developer/manufacturers. On the down side, though, the cut in solar feed tariffs may have a negative impact in the energy area.
Beyond the hard FM space, an area that is attracting increasing interest is the provision of data centre services. As the use of cloud technology grows and businesses look to move their data
away from internal servers, FM players in the data services area will surely attract more attention. Consultancy-based FM businesses are also likely to generate increasing interest among potential buyers, attracted by the higher margins and high barriers to entry these businesses can offer.
There is also evidence of further collaboration between the public and private sectors, for example the recent announcement of the partnership between MITIE and the Prison Service in the bid for management of six prisons. These partnerships enable public and private sector organisations to combine and take advantage of their respective strengths to develop a compelling proposition.
Overall, while the diffi cult conditions are clearly making life
uncomfortable for many in the FM sector, the silver lining is that they are likely to continue to create interesting opportunities for those with an appetite for M&A activity. As Grant Thornton Partner David Ascott concludes: “All the signs are that the market will remain highly dynamic in 2012 and will continue to offer up strong numbers of smaller deals and consolidation plays as the main current drivers continue to shape the FM landscape. The potential for larger deals is also there, though, especially if any of the private equity-backed buy and build platforms that have developed signifi cant scale are put up for sale, or if there are any high profi le failures like those we witnessed in 2010”.
“All the signs are that the market will remain highly dynamic in 2012”
FMQuoted FM tracker
While the vast majority of UK FM businesses are smaller, privately owned entities, many of the most important and infl uential forces in the space are listed.
Thankfully for the FM sector, 2011 did not see a repeat of the events that led to the collapse of two major listed businesses during the previous year. Nevertheless, in order to help give a meaningful overview of the general conditions being experienced by London-listed facilities management companies, we have created a 17-strong sample set of businesses that best represent the broad range of activities within the sector as a whole. What
Quoted FM tracker at 31 Dec 2011
follows is an overview of this group, taking into account size, profi tability and recent share price performance. It is based on a snapshot taken at the close of business on 31 December 2011. Over the coming quarters we will continue to track the fortunes of these important quoted FM businesses, as well as looking into the threats and opportunities that are defi ning their current strategies.
Share price change to 31 Dec 2011Market cap Sales EBITDA EBIT 3 months 6 months 1 year 2 years
FTSE 100 8.7 (6.3) (5.6) 2.9FTSE All Share Support Services 7.2 (7.6) (2.9) 16.9
Source: Factset; Datastream. Market data as at 31 Dec 2011; Financial data as at last announced fi nancial close
Market capAlthough the majority of companies selected would fall into the mid- and small-cap brackets of the FTSE, refl ecting the main driving force behind the sector as a whole, there is a wide disparity in terms of market cap between them. At the top end, three of the current list - Compass Group, G4S and Serco Group - sit within the FTSE 100 list, with market caps of approximately £11.6bn, £3.8bn and £2.4bn respectively. At the other end of the size range, four businesses have a market cap of well below £100m. In gross sales terms, the sample ranges from nearly £16bn (Compass) down to £18m, with an average of £3.2bn (£1.5bn if the top three are excluded).
Earnings comparisonsAcross the board, the 17 businesses in the sample generated positive EBITDA fi gures in the last trading period, and were valued at an average EV/EBITDA ratio of 6.4x. However, it is interesting to note that the larger groups – those with a market cap of £1bn or more - generally outperform this, with an average EV/EBITDA of 7.7x.
In PE ratio terms, the performance of the 16 businesses in the sample where a fi gure is known compares favourably with the FTSE 100 average, with an overall PE average of 10.2x just eclipsing the FTSE 100 (10.1x). They do, however, fall some way behind the average price earnings ratio among FTSE All Share Support Services businesses, which stood at 16.3x at the
end of 2011. Among the larger groups to outperform the FTSE 100 index are Compass and G4S, with PE ratios of 12.8x and 13.5x respectively, while mid cap businesses Berensden and Kier Group also performed strongly (12.2x and 15.7x respectively).
Share performanceAnalysing the share price performance of the sample reveals some positive trends for the FM sector. After an understandably rocky period over the last year, when 11 of the companies in the list saw signifi cant falls in their share price (on average by around 25%), the fi nal quarter of 2011 showed some signs of improvement. Only three of the top 12 companies by market cap saw any falls in their share prices between October and the end of 2011, compared with seven of the top 12 in the six-month snapshot and six in the one-year period. Nevertheless, against both the FTSE 100 and the support services indices, the FM businesses are lagging some way behind in most time periods.
In terms of individual FM company performances, Compass Group, returned very solid fi gures in the two-year period, rising from around 450p per share at the beginning of 2010 to over 610p at the end of December 2011, equating to a 37% rise. Compass made four UK acquisitions within the FM sector during 2011, buying Integrated Cleaning Management, Cygnet Foods, PPP Infrastructure Management and VSG Group. Its FM peers in the FTSE
100 did not perform so well, though: G4S’ share price did show limited growth in most of the time periods, but its performance will have been seriously hampered by the group’s bid to create one of the world’s largest companies through the acquisition of ISS from its private equity backers, which failed late in 2011 following opposition from shareholders. Serco, meanwhile, has seen its share price drift steadily lower since reaching a peak in spring of 2010, despite putting in a performance described as strong in the light of market headwinds. The most impressive showings among the sample, however, came from mid-market groups London Security PLC and Interserve PLC, whose share prices have grown by 126% and 66% respectively over the two-year period.
Overall, this picture reveals the strength of the major players through their diversity, international reach and growth opportunities and delivery of resilient fi nancial performance. The small to medium companies, demonstrate opportunities to out-perform but also give examples of a sector suffering from further debt related problems.
FMContactsFor any further information, please contact:
‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd (‘Grant Thornton International’). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occassioned to any person acting or refraining from acting as a result of any material in this publication.
