Interesting times

Winners and losers
There is a flip side to the coin, however. Ventures with lower borrowings or cash on the balance sheet can find themselves in poll position to outflank rivals in a high rate environment. ‘There are always winners and losers and companies with high levels of debt can often become targets for cash rich players,’ elaborates Marsden. For those companies unfettered with debt, ‘It is possible for them to buy companies much more cheaply, because there is even less debt-financed competition for targets out there in the market.’
A rising rate scenario shouldn’t send growing companies with a liking for debt-funded deals into panic, however, so long as they are growing profits, generating strong levels of cash and sporting healthy interest cover.
Floated on AIM in late 2004 with the acquisition of Azur, and determined to play a role in the consolidation of the IT services market, Maxima is a venture that doesn’t fear rate rises despite the fact it has dipped into debt to help fund subsequent acquisitions. The most recent of these was the £4.8 million acquisition of QED Business Systems, a deal with an equity element, but primarily funded by bank debt under facilities with Barclays.
Cash generation in the year to May was strong, even though there was a net cash outflow of £12.1 million on acquisitions, and year-end net debt was £3.1 million even after a September share placing that raised £4.8 million. ‘For us, bank debt is the cheapest way of doing acquisitions,’ explains finance director Linda Andrews, ‘because our level of profit means that our interest cover is pretty substantial and also because our shares are undervalued [Maxima floated at 110p and the shares are currently trading at 160p].

‘So, the only way that higher interest rates would affect our strategy would be if they kept rising and rising and our share price failed to move. This is because we think that at the right price, equity has to be the preferred route for doing deals.’ Rising rates would not really play into Maxima’s hands in terms of targets amid the acquisitive landscape, ‘as most of the targets we are looking at actually have cash, with one in particular having £2 million on its balance sheet,’ adds Andrews.
A venture that does have an astute interest rate strategy relating to acquisitions is Lavendon, which rents out ‘powered access’ equipment such as cherry-pickers and scissor-lifters. The group is a European market leader and has a history of high debt. This has been brought under control of late thanks to strong operational cash flows. Last year, net debt reduced by £27.3 million to £61.7 million, helping to slash the interest bill by £1.4 million to £4.4 million.

Needless to say, rate fluctuations are watched carefully, as debt is used to fund acquisitions, of which the most recent was AMP, an operator of a fleet of powered access machines in the South West. The consideration for AMP was £3 million in cash, with an extra sum of between £300,000 and £2.6 million payable in relation to profits. Lavendon used its bank facilities to fund the deal, and has also assumed £2.8 million of AMP debts.
‘Where we can,’ explains finance director Alan Merrell, ‘we try and protect ourselves with a mix of fixed and variable interest rates on our debt, and we take out various interest rates swaps, which gives us a fair degree of protection.
‘So, let’s say we were carrying £100 million of debt, we would have £50 million of that at fixed rates with our banks. If rates move up by a quarter of a per cent then the fixed element would not be affected, even though the variable would be.’
And in terms of rates strategy and debt-funded acquisitions, he says, ‘if we think that rates are on an upward trend, which means that we’ll be paying more for that debt, then we would try and reflect that in the price that we are prepared to pay for the acquisition.’

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