Business Services Sector Comment – April 2015

Dato

This month’s sector comment focuses on a very UK-centric trend: the UK legal services market has been and continues to be one of the most active sectors for M&A activity.

The ‘Alternative Business Structure’ (ABS) regime, which came into effect in October 2011 and allows non-lawyers the opportunity to own or invest in law firms, has been a significant contributor – the recent acquisition of Quindell’s Professional Services Division (PSD) by Australian-listed Slater & Gordon (S&G) is a good example.

After a number of months of speculation, alternative business structure Quindell finally announced the divestment of its professional services arm for a total consideration of approximately €970m. Quindell, the technology-enabled claims outsourcing business that was rumoured to be fast running out of cash, has been one of the most active acquirers in the UK legal services market. Financing the deals through a large degree of share placements, Quindell has acquired a number of personal injury firms including Compensation Lawyers (TCL), Pinto Potts and Silverbeck Rymer. S&G, which itself has been highly acquisitive since entering the UK market in 2012, has made no secret of its intent to grow in the highly fragmented €3.5bn UK personal injury market. The acquisition of PSD is a truly transformational deal for the company, which typically focuses on “no win, no fee” arrangements, and will see the group grow its market share in the UK personal injury market from 5% to 12%.

However, with over 80% of S&G’s UK income already coming from personal injury, critics have suggested that the firm is heavily exposed to any further regulatory changes. In 2013, The Legal Services Act significantly changed the way conditional fee arrangements were funded as it looked to address the rising number of spurious and exaggerated claims. Legal fees were capped at 25% of the total damages awarded – helping to prevent inflated legal costs which had been known to reach 100%.

The ABS continues to pave the way for private equity to invest in the sector. One of the most high profile acquisitions is that of Parabis Group which was acquired by Duke Street in August 2012 in a transaction rumoured to be worth €210m. Duke Street has since invested a further €18m to help improve IT systems, property and staff. Other private equity houses to have invested in the sector include Palamon, Palatine and most recently BGF, which took a 26% equity stake in McMillan Williams in February 2015.

Private equity is a particularly attractive option to market participants, as capital raised can be used to buy out partners looking to exit or to acquire other smaller firms to raise the service capacity and diversify the areas of practice. Other key drivers are as per the Parabis example above: additional capital can be used to deploy technology, thereby enhancing the productivity of law firms.

Clearwater International expects the legal services market to continue to be one of the most active sectors through 2015. The highly fragmented market and modest valuations create strong opportunities for private equity backed strategic players looking to grow through acquisition. In addition, with highly acquisitive trade players such as Capita, KPMG and PwC now granted ABS licenses, it is likely that ABS entities will continue to play a key role in shaping the market moving forward.

 

Notable Business Services Deals

ID Verde SAS (Verde), the France-based company engaged in providing landscaping services and a portfolio company of private equity firm Chequers Capital, has acquired The Landscape Group Ltd, the UK-based landscaping company, from Elysian Capital LLP.

Hermes Infrastructure, the UK-based fund management company, and Canada Pension Plan Investment Board (CPPIB) have agreed to acquire a 33.33% stake in Associated British Ports Holdings Ltd, the UK-based transport group specialising in the ownership, operation and development of ports and the management of related properties, for a consideration of €2.2bn.

The management of Espace Europe Ltd, the UK-based company engaged in providing freight solutions to manufacturers, freight forwarders and logistics companies, has acquired the company in a management buy out transaction.

Kone Oyj-B, the listed Finland-based elevator manufacturing company, has acquired Express Elevators Ltd, the UK-based company engaged in providing specialised services in maintenance and repairs of elevators.

Inflexion Private Equity Partners LLP, the UK-based private equity firm, has acquired an undisclosed stake in CloserStill Holdings Ltd, the UK-based organiser of business-to-business exhibitions, from Phoenix Equity Partners Ltd and NVM Private Equity Ltd.

The management of Tulloch Homes Group Ltd, the UK-based house builder, has acquired a 40% stake in the company from Goldman Sachs, the listed US-based investment banking firm.

Palatine Private Equity LLP, along with the management team of Towergate Financial Group Ltd (TFG), has agreed to acquire the company in a management buy out transaction from Towergate Partnership Ltd. TFG is a UK-based company that provides financial planning services, mortgage broking services and healthcare insurance consultancy services.

Oaktree Capital Group LLC, the US-based private equity firm, has acquired SACO The Serviced Apartment Company Ltd, the UK-based company engaged in operating a network of services apartments which provide accommodation to business and leisure travellers in the United Kingdom and internationally.

Doosan Industrial Vehicle UK Ltd, the UK-based forklift truck manufacturer and a subsidiary of listed South Korea-based conglomerate Doosan Corporation, has acquired Rushlift Ltd, the UK-based provider of contract hire, fleet management, materials handling servicing and aviation support equipment.

Hyperion Insurance Group Ltd has agreed to merge with R K Harrison Group Ltd. Hyperion Insurance Group is the UK-based company engaged in providing wholesale and retail insurance, reinsurance broking and underwriting services for service industries.