Support Services sector mergers and acquisitions comment – September 2010

Date

Whilst the imminent Comprehensive Spending Review is taking up most available news slots at the moment, we believe a prolonged period of austerity may also bring interesting and innovative M&A opportunities.

In the face of budget cuts and the well publicised plans of certain councils to outsource large parts of their services, we believe there is significant untapped potential to unlock value through public sector carve-outs and asset sales.

Innovative MBO opportunities are likely to be numerous, hinging on the ability to commercialise existing service lines, acquire new customers over time and generate cost efficiencies to mitigate exposure to pending fiscal constraints. Clearwater achieved exactly this when we advised the management of Translinc on their buy out from Lincolnshire County Council. The business was subsequently sold to RJD Partners in 2007 for £50m.

On the subject of public sector services, as we reported last month the demise of Connaught has provided opportunities for other players to acquire scale in the social housing maintenance market, with Morgan Sindall and Mears picking up the bulk of its housing maintenance operations. We believe further consolidation is inevitable, especially in the more sustainable responsive repairs market, as evidenced by Mears’ acquisition of Jackson Lloyd this month, a North West repairs and maintenance contractor, that has significantly enhanced Mears’ position in the region. Clearwater advised the shareholders of Jackson Lloyd on the sale, the second time we have advised on its sale in the last five years.

Finally, it is worth mentioning the Energy Solutions Exhibition at London’s Olympia last week. The show was very well attended, with most of the technical presentations filling every available seat, as the ever growing list of technology and service providers competed to grab your attention with the next new thing in Energy Efficiency and Smart Solutions.

Whilst much of the core technology is older than you think, the current innovation to drive the energy efficiency agenda is hugely impressive, as is the ever improving ability of service providers to commercialise and productise the solution. There is a mad rush across many sectors to get a fair share of this enormous market. In our view support service providers should be at the forefront of this race given their ability to install and maintain the physical kit as well having the technical and support skills to offer a managed service solution over the longer term. Happy hunting.

Deals

Clearwater advised the shareholders of Jackson Lloyd, the social housing repairs and maintenance provider, Mears Group plc on its sale to for consideration of £6.1m. Jackson Lloyd, which has premises in Preston, Skelmersdale and Salford, operates maintenance contracts with social housing landlords and other public sector bodies in the North West. Gloucester based Mears, is a leading social housing repairs and maintenance service provider to local authorities and registered social housing landlords in the UK and has a leading position in the UK local authorities’ outsourced domiciliary care market.

Barclays Private Equity, advised by Clearwater, completed the sale of its majority stake in Yorkshire based contract hire and fleet management provider, Zenith Vehicle Contracts, to Morgan Stanley Private Equity. Zenith, headquartered in Leeds, is one of the UK’s largest independent leasing, fleet management and vehicle outsourcing businesses. Founded in 1989, Zenith manages over 27,000 vehicles on behalf of its corporate clients. The transaction generated a return of 2.7x funds invested for BPE’s investors.

Cilantro Acquisitions, a company formed by European private equity firm Cinven, has agreed to acquire Spice plc for £368m. Spice plc, which has revenues in excess of £300m, is a UK based provider of infrastructure support services to the commercial, public and utility sectors. It represents a premium of 5.3% to Spice’s closing price of £66.50 on 24 September 2010, the last trading price prior to the formal announcement.

CSG Systems International Inc, the listed US based customer interaction management company, has agreed to acquire Intec Telecom Systems plc at an enterprise value of £160m. Intec is a listed UK based provider of BSS solutions with revenues of £168m. The combined company will have 3,500 staff around the world and revenues of $760m, creating a challenger to market leader Amdocs of the US in the business support systems sector. It represents a premium of 27.4% to Intec’s closing price of £56.5 on 23 September 2010, the last trading price prior to the formal announcement.

The management team of NSL Services, the UK based out-sourced services provider, has agreed to acquire a majority stake in the company at an enterprise valuation of £120m from 3i plc. Management were backed by Netherlands based AAC Capital Partners, with debt financing provided by Lloyds Bank, Santander and Investec. NSL employs a staff of 5,000 people in the UK.

Wilmington Group plc has acquired Axco Insurance Information Services, the UK based insurance information and consultancy provider at an enterprise value of £20m (16.3x reported EBIT). Wilmington is a listed UK based provider of information and training to the corporate markets. Axco has sales of c£5.6m. Charles Brady, CEO of Wilmington, commented, “AXCO is an information business of the highest quality and a clear international market leader. This acquisition is the latest step in our plan to build a world class, international, compliance and regulatory information and training business.”

Randall and Quilter Investment Holdings plc, the management consultant, has agreed to acquire Reinsurance Solutions & Reinsurance Solutions LLC, the UK based insurance consultants at an enterprise value of £7m. The RSL businesses specialise in the provision of administration and consulting services to the active and run-off (re)insurance industry, generating combined fees of over $13m in 2009. As well as bringing the efficiency benefits of scale, RSL UK will further establish Randall & Quilter as a leading player in the broker replacement market. In the US, RSL will provide the group with a substantial third party service business to balance the group’s existing operations.

Managed Support Services plc, an AIM listed UK building services provider, has agreed to acquire Environmental Control Services, a UK based provider of mechanical and engineering services, for £3.2m. ECS reported sales of £8.8m for 2010. The MSS CEO said that this was the first of many deals the group was planning over the next few years. “The ECS deal has given us the platform from which to expand”. In its last financial year, MSS achieved revenues of £15.3m.

Future Thinking, a market research business, has acquired SP Market Research, which also provides market research services, for an undisclosed consideration. Post acquisition, the combined entity expects to report sales in excess of £13m through its international network of offices in London, Paris, New York and Oxford.

John Wood Group plc, the listed UK based energy services company, has acquired a significant stake in SgurrEnergy for an undisclosed consideration. SgurrEnergy is an engineering consultancy employing 100 people. The transaction is part of the Wood Group’s on-going strategy to expand and enhance its renewable-energy capability and delivering management services to customers’ wind, wave, tidal and solar projects.