Leadership

Deals of the Year

Dec 08/Jan 09 issue

This year’s dealmakers have needed more than their usual guile and pluck to get transactions done. Nick Britton and Kathleen Hall highlight some of 2008’s most memorable £10 million-plus deals

From January’s stock market crash to December’s job losses, it’s been a tough year for public and private companies alike. Dealmakers, like anyone else, have struggled to raise finance, but perhaps what’s most surprising is how much activity there still is. In the first nine months of the year, transactions worth £17.1 billion were completed in the UK buy-out market, according to research institute CMBOR. That’s well below the £40 billion for the same period last year but only slightly below that of 2006. There have been fewer larger deals and a dearth of AIM activity, especially in the second half of the year, but the mid-market is still looking relatively strong, with 116 deals compared with 126 in 2007.
Here, we examine some of the stories behind the numbers.

January
Company: Circassia
Type of deal: Series B venture capital
Funds raised: £11 million

Anti-allergy drug developer Circassia shrugged off a tough fundraising climate to net another £11 million in an oversubscribed second funding round, bringing its total venture capital (VC) funding to £17 million. New names including Goldman Sachs and Invesco Perpetual came on board, plus existing investors such as AIM-listed Imperial Innovations.

‘Circassia has a management team who are very experienced and entrepreneurial, so from an investment perspective we know they will deliver,’ says Susan Searle, CEO of Imperial Innovations (pictured). The funding allows Circassia to accelerate development of vaccines for cat, household dust and grass allergies. Searle says there are plenty of options for the company, including a listing.

February
Company: Kentz
Type of deal: AIM IPO Funds raised: £66.7 million

With the stock market suffering its biggest falls since 9/11, it wasn’t the ideal time to be on a roadshow looking for £67 million. ‘We had a big, diverse group of investors, some of whom were going through a rough patch,’ recalls Hugh O’Donnell, CEO of oil and gas services group Kentz. ‘Looking at us, some of them asked: what the hell are you guys doing?’

Others, however, bought the company’s story, enabling it to pull off the third-largest AIM IPO of the year (and the largest excluding investment companies). O’Donnell says that though the price of oil has plummeted, the company’s clients are focusing on the long term and orders worth US$240 million (£161 million) have come in during the past two months.

March
Company: Neville Johnson
Type of deal: Secondary buy-out
Funds raised: £12.5 million

Fitted furniture business Neville Johnson has changed ownership twice in the past three years. Private equity group 3i sold it in 2006 to turnaround specialist Endless, and in March this year it was acquired by young VC firm Key Capital Partners (KCP), which invested £4.25 million for a majority stake in a £12.5 million deal backed by Yorkshire Bank.

Mark Buttler, investment director at KCP, explains: ‘We knew there were risks in a consumer-facing business in the current climate. But we felt the management team was
doing a good job.’ Buttler adds that Neville Johnson’s customer base is mainly high-earning individuals who have paid off their mortgage and whose children have left home – a group ‘relatively immune’ to the economic downturn.

April
Company: Stone Group
Type of deal: Secondary buy-out
Funds raised: £28 million

The weeks before changes to capital gains tax came into force saw a widely anticipated spike in deals. The buy-out of school IT provider Stone Computers was one such transaction. Having undergone a £20 million management buy-out in 2005, Stone was acquired by London-based RJD Partners in a £28 million deal.

Clive Bawden is business development director at Catalyst Corporate Finance, which advised on both deals. He says: ‘The hardware market has horrible margins and you’ve got competitors the size of Dell in there. But then Stone offered better maintenance than anyone else. They’re just good at winning and keeping customers.’

May
Company: SLR
Type of deal: Minority investment
Funds raised: £32.5 million

ISIS Equity Partners first invested in environmental consultancy SLR in 2004. In May, it sold its minority stake to 3i in a £32.5 million deal, yielding an IRR of 72 per cent.

Liz Jones, a partner at ISIS and former SLR board member, says demand for the company’s expertise in waste management, contaminated land and renewables grew rapidly during her time there.

‘The challenge wasn’t demand. It was getting enough qualified consultants, keeping them and incentivising them,’ she says. Jones adds that demand for the company’s services is driven by regulation rather than corporate social responsibility policies, leaving it relatively recession-proof.

June
Company: Radius Systems
Type of deal: Private equity buy-out
Funds raised: £100 million

In a world where old certainties seem to be collapsing, it’s reassuring to see money going into essential infrastructure. On 20 June, the day after the FBI arrested 400 alleged mortgage fraudsters, private equity group 3i went ahead with the £100 million buy-out of pipe manufacturer Uponor UK from its Finnish parent company.

The business, renamed Radius Systems, now hopes to use 3i’s international contacts to expand outside the UK and Ireland. Its turnover last year was €169.1 million (£151 million) and it has 470 staff at its manufacturing facilities in Derbyshire, Durham and Northern Ireland.

In the same month, Milton Keynes-based warehouse provider and former Wal-Mart subsidiary Gazeley was snapped up by Economic Zones World, an investment company ultimately owned by Dubai’s government. William Megginson, a finance professor at the University of Oklahoma and specialist in sovereign wealth funds, says the UK remains the second most popular cross-border target for state funds after the US.

July
Company: Education and Adventure Travel
Type of deal: Secondary buy-out
Funds raised: £100 million

Public sector-facing businesses are usually good bets in tough times, especially when Keynesian big spending is back in fashion. DLJ Merchant Banking Partners, part of the Credit Suisse group, clearly thought so when it splashed out on the £100 million buy-out of school travel agent Education and Adventure Travel (EAT). Vendor Bowmark Capital, which created EAT through the merger of two school travel companies in October 2007, generated an IRR of 63 per cent from the £100 million deal.

August
Company: Plastic Logic
Type of deal: Venture capital fundraising
Funds raised: US$50 million (£34 million)

Dealmaking slowed to a crawl in August as the traditional summer hiatus coincided with a crisis of confidence in the financial markets. Nevertheless, Cambridge-based Plastic Logic stirred investors sufficiently to raise $50 million, topping up its VC pot to $200 million. The company has yet to commercialise its product (electronic circuits printed on plastic) but has high hopes of doing so next year. Hermann Hauser, co-founder of Amadeus Capital Partners, concedes: ‘We have placed a big bet that plastic electronics is, indeed, a game-changing technology.’ Joining Amadeus in the gamble are Oak Investment Partners, Intel Capital, Siemens, Bank of America and at least seven other intrepid investors.

September
Company: Accura
Type of deal: BIMBO
Funds raised: £37 million

Midlands-based Accura supplies specialised components to the oil and gas industry, often in emergencies. The company was sold by Barclays Ventures to London-based VC firm August Equity in a £37 million buy-in management buy-out (BIMBO). Sam Watkinson, the August partner who led the deal, says both banks the firm approached were ‘incredibly keen’ and offered more funding than was required – proof of the mantra that funding is still available for the right business. ‘We deliberately didn’t overgear,’ he states. With three-quarters of the company’s product exported from the UK, Watkinson adds that it is looking at opportunities to put staff on the ground in new territories.

October
Company: Bodycote Testing Group
Type of deal: Private equity buy-out
Funds raised: £417 million

Public-to-private activity vastly outweighed IPOs this year, though there was nothing on the scale of 2007’s £11.1 billion Alliance Boots buy-out. Materials testing business Bodycote Testing Group, which has clients in relatively resilient sectors including aerospace, oil and gas, and civil engineering, was purchased from LSE-listed parent Bodycote by US private equity firm Clayton, Dubilier & Rice for £417 million.

November
Company: Oxford Catalysts
Type of deal: Reverse takeover
Funds raised: £10.3 million

With the eurozone and the US officially declared to be in recession, there are better times to find yourself on a fundraising roadshow. Undeterred, Roy Lipski, chief executive of cleantech venture Oxford Catalysts, still managed to raise £10.3 million to fund the US$35 million acquisition of chemical processing company Velocys, constituting a reverse takeover under AIM rules.

‘We had proved that we could work together with Velocys since 2007, so the acquisition was the natural conclusion of that,’ Lipski states. ‘By bringing the companies together, our customer base has broadened and we’re positioned to become market leaders – all of which made us very appealing to investors.’

December
Company: Hawksford
Type of deal: Refinancing
Funds raised: £13.5 million

There are times when you have to scrap conventional thinking and take a calculated risk to get a deal done. John Hudson, a director at private equity firm Dunedin, explains that this is exactly what happened when the firm acquired investment trust management business Rathbone Trust International (now rebranded Hawksford) for £23.5 million.

‘We were in discussions with two or three banks but the questioning was intensive and we decided to shortcut the process for the vendors’ benefit,’ he says. Dunedin provided the senior debt itself, cutting the bank out of the deal. Less than two months later, all the senior debt (£13.5 million) was refinanced by Royal Bank of Scotland.

Hudson says he expects the debt market to remain difficult well into next year, though he hopes to see an improvement in the second half of 2009.


Editor's View Business Bulletin Trailblazers Business Tools Finance Expansion Strategy Leadership Flotation Exits Columns Enterprise News Deal Listings Backchat	Leadership Deals of the Year Dec 08/Jan 09 issue This year’s dealmakers have needed more than their usual guile and pluck to get transactions done. Nick Britton and Kathleen Hall highlight some of 2008’s most memorable £10 million-plus deals From January’s stock market crash to December’s job losses, it’s been a tough year for public and private companies alike. Dealmakers, like anyone else, have struggled to raise finance, but perhaps what’s most surprising is how much activity there still is. In the first nine months of the year, transactions worth £17.1 billion were completed in the UK buy-out market, according to research institute CMBOR. That’s well below the £40 billion for the same period last year but only slightly below that of 2006. There have been fewer larger deals and a dearth of AIM activity, especially in the second half of the year, but the mid-market is still looking relatively strong, with 116 deals compared with 126 in 2007. Here, we examine some of the stories behind the numbers. January Company: Circassia Type of deal: Series B venture capital Funds raised: £11 million Anti-allergy drug developer Circassia shrugged off a tough fundraising climate to net another £11 million in an oversubscribed second funding round, bringing its total venture capital (VC) funding to £17 million. New names including Goldman Sachs and Invesco Perpetual came on board, plus existing investors such as AIM-listed Imperial Innovations. ‘Circassia has a management team who are very experienced and entrepreneurial, so from an investment perspective we know they will deliver,’ says Susan Searle, CEO of Imperial Innovations (pictured). The funding allows Circassia to accelerate development of vaccines for cat, household dust and grass allergies. Searle says there are plenty of options for the company, including a listing. February Company: Kentz Type of deal: AIM IPO Funds raised: £66.7 million With the stock market suffering its biggest falls since 9/11, it wasn’t the ideal time to be on a roadshow looking for £67 million. ‘We had a big, diverse group of investors, some of whom were going through a rough patch,’ recalls Hugh O’Donnell, CEO of oil and gas services group Kentz. ‘Looking at us, some of them asked: what the hell are you guys doing?’ Others, however, bought the company’s story, enabling it to pull off the third-largest AIM IPO of the year (and the largest excluding investment companies). O’Donnell says that though the price of oil has plummeted, the company’s clients are focusing on the long term and orders worth US$240 million (£161 million) have come in during the past two months. March Company: Neville Johnson Type of deal: Secondary buy-out Funds raised: £12.5 million Fitted furniture business Neville Johnson has changed ownership twice in the past three years. Private equity group 3i sold it in 2006 to turnaround specialist Endless, and in March this year it was acquired by young VC firm Key Capital Partners (KCP), which invested £4.25 million for a majority stake in a £12.5 million deal backed by Yorkshire Bank. Mark Buttler, investment director at KCP, explains: ‘We knew there were risks in a consumer-facing business in the current climate. But we felt the management team was doing a good job.’ Buttler adds that Neville Johnson’s customer base is mainly high-earning individuals who have paid off their mortgage and whose children have left home – a group ‘relatively immune’ to the economic downturn. April Company: Stone Group Type of deal: Secondary buy-out Funds raised: £28 million The weeks before changes to capital gains tax came into force saw a widely anticipated spike in deals. The buy-out of school IT provider Stone Computers was one such transaction. Having undergone a £20 million management buy-out in 2005, Stone was acquired by London-based RJD Partners in a £28 million deal. Clive Bawden is business development director at Catalyst Corporate Finance, which advised on both deals. He says: ‘The hardware market has horrible margins and you’ve got competitors the size of Dell in there. But then Stone offered better maintenance than anyone else. They’re just good at winning and keeping customers.’ May Company: SLR Type of deal: Minority investment Funds raised: £32.5 million ISIS Equity Partners first invested in environmental consultancy SLR in 2004. In May, it sold its minority stake to 3i in a £32.5 million deal, yielding an IRR of 72 per cent. Liz Jones, a partner at ISIS and former SLR board member, says demand for the company’s expertise in waste management, contaminated land and renewables grew rapidly during her time there. ‘The challenge wasn’t demand. It was getting enough qualified consultants, keeping them and incentivising them,’ she says. Jones adds that demand for the company’s services is driven by regulation rather than corporate social responsibility policies, leaving it relatively recession-proof. June Company: Radius Systems Type of deal: Private equity buy-out Funds raised: £100 million In a world where old certainties seem to be collapsing, it’s reassuring to see money going into essential infrastructure. On 20 June, the day after the FBI arrested 400 alleged mortgage fraudsters, private equity group 3i went ahead with the £100 million buy-out of pipe manufacturer Uponor UK from its Finnish parent company. The business, renamed Radius Systems, now hopes to use 3i’s international contacts to expand outside the UK and Ireland. Its turnover last year was €169.1 million (£151 million) and it has 470 staff at its manufacturing facilities in Derbyshire, Durham and Northern Ireland. In the same month, Milton Keynes-based warehouse provider and former Wal-Mart subsidiary Gazeley was snapped up by Economic Zones World, an investment company ultimately owned by Dubai’s government. William Megginson, a finance professor at the University of Oklahoma and specialist in sovereign wealth funds, says the UK remains the second most popular cross-border target for state funds after the US. July Company: Education and Adventure Travel Type of deal: Secondary buy-out Funds raised: £100 million Public sector-facing businesses are usually good bets in tough times, especially when Keynesian big spending is back in fashion. DLJ Merchant Banking Partners, part of the Credit Suisse group, clearly thought so when it splashed out on the £100 million buy-out of school travel agent Education and Adventure Travel (EAT). Vendor Bowmark Capital, which created EAT through the merger of two school travel companies in October 2007, generated an IRR of 63 per cent from the £100 million deal. August Company: Plastic Logic Type of deal: Venture capital fundraising Funds raised: US$50 million (£34 million) Dealmaking slowed to a crawl in August as the traditional summer hiatus coincided with a crisis of confidence in the financial markets. Nevertheless, Cambridge-based Plastic Logic stirred investors sufficiently to raise $50 million, topping up its VC pot to $200 million. The company has yet to commercialise its product (electronic circuits printed on plastic) but has high hopes of doing so next year. Hermann Hauser, co-founder of Amadeus Capital Partners, concedes: ‘We have placed a big bet that plastic electronics is, indeed, a game-changing technology.’ Joining Amadeus in the gamble are Oak Investment Partners, Intel Capital, Siemens, Bank of America and at least seven other intrepid investors. September Company: Accura Type of deal: BIMBO Funds raised: £37 million Midlands-based Accura supplies specialised components to the oil and gas industry, often in emergencies. The company was sold by Barclays Ventures to London-based VC firm August Equity in a £37 million buy-in management buy-out (BIMBO). Sam Watkinson, the August partner who led the deal, says both banks the firm approached were ‘incredibly keen’ and offered more funding than was required – proof of the mantra that funding is still available for the right business. ‘We deliberately didn’t overgear,’ he states. With three-quarters of the company’s product exported from the UK, Watkinson adds that it is looking at opportunities to put staff on the ground in new territories. October Company: Bodycote Testing Group Type of deal: Private equity buy-out Funds raised: £417 million Public-to-private activity vastly outweighed IPOs this year, though there was nothing on the scale of 2007’s £11.1 billion Alliance Boots buy-out. Materials testing business Bodycote Testing Group, which has clients in relatively resilient sectors including aerospace, oil and gas, and civil engineering, was purchased from LSE-listed parent Bodycote by US private equity firm Clayton, Dubilier & Rice for £417 million. November Company: Oxford Catalysts Type of deal: Reverse takeover Funds raised: £10.3 million With the eurozone and the US officially declared to be in recession, there are better times to find yourself on a fundraising roadshow. Undeterred, Roy Lipski, chief executive of cleantech venture Oxford Catalysts, still managed to raise £10.3 million to fund the US$35 million acquisition of chemical processing company Velocys, constituting a reverse takeover under AIM rules. ‘We had proved that we could work together with Velocys since 2007, so the acquisition was the natural conclusion of that,’ Lipski states. ‘By bringing the companies together, our customer base has broadened and we’re positioned to become market leaders – all of which made us very appealing to investors.’ December Company: Hawksford Type of deal: Refinancing Funds raised: £13.5 million There are times when you have to scrap conventional thinking and take a calculated risk to get a deal done. John Hudson, a director at private equity firm Dunedin, explains that this is exactly what happened when the firm acquired investment trust management business Rathbone Trust International (now rebranded Hawksford) for £23.5 million. ‘We were in discussions with two or three banks but the questioning was intensive and we decided to shortcut the process for the vendors’ benefit,’ he says. Dunedin provided the senior debt itself, cutting the bank out of the deal. Less than two months later, all the senior debt (£13.5 million) was refinanced by Royal Bank of Scotland. Hudson says he expects the debt market to remain difficult well into next year, though he hopes to see an improvement in the second half of 2009.