Opinion: Clive Bawden

I've read some interesting research this week from headhunter Norman Broadbent. According to this, British based Plcs will face a shortage of non executive directors in future. This will be driven largely by changes to the city code demanding their more frequent replacement which will put pressure on an already small pool of quality candidates seeking to become NXDs in a quoted concern.

Anyone who knows Catalyst well will know that we are big fans of an experienced non executive director to help guide company direction - indeed, we are lucky to have a great one of our own, Brian McGowan, to help us put things in perspective once in a while and know what value he brings to our board.

Whilst I don't disagree with the conclusions drawn by Broadbent, not least given the importance of objective company governance, it is interesting when set in context against one of my own conclusions drawn largely from the private company sector.

One of the most interesting parts of my role here at Catalyst is meeting with many potential non exec candidates. In the main these are successful entrepreneurs, who have sold a business and now seek to 'keep their hand in' by taking on one or two non executive positions. What I've continually found though is that most are blissfully ignorant to the requirements that a non executive rather than executive position put on one's character and skills, and indeed the failure rate is depressingly high.

Often this is put down to 'a difference of opinion'; however what is particularly interesting for me is how certain private equity firms, who rely upon an NXD to add insight and judgement to the board of one of their investments, are increasingly sticking by one or two NXDs alone rather than seeking new ones for each successive investment. It seems almost like they are starting to work with this small team alone, asking them to act on 3 or 4 of their investments, and turning the role into a serial chair one based on their emotional and political skills as a chair regardless of sector specialisation, which used to be one of the 'old' key metrics.

All of this adds up to a shortage of non executive directors becoming more likely in future. In the public arena due to too many roles and too few qualified candidates to fill them, whilst in the private equity arena too few investments with a limited pool of people retained to fill them.

So plucky, entrepreneurial BSS has finally bitten the dust, acquired by the larger, more aggressive, more margin hungry Travis Perkins Plc.

And the fit looks good. TP's P&H division gets a much needed shot in the arm, enabling it to really kick on and try and maximise Wolseley's current pain, whilst the underground supplies division should add some value to TP's specialist operation. The Price/Buck & Hickman/Birchwood division should also offer some value to bolt onto TP's existing tool operation (Toolstation in particular), whilst the one other remaining certainty is that the vast majority of Leicester's head office team will (sadly) shortly be out of work as TP aim to maximise cost savings factored into the deal.

Looking further ahead, what impact will this deal have for those operating in the mid-market, in particular those few remaining chains of P&H merchants looking for a large acquirer in future? Not withstanding the fact that acquisitions of P&H chains are few and far between (given the speed at which a new P&H chain can be built from scratch), this deal can only be bad news if you happen to own an independent at present. Not only has the buyer pool shrunk by one, but one of the more aggressive and forward thinking ones in BSS is the one that has disappeared, which cannot be good news if you seek value.

Equally there are some other positives from the deal. Saint-Gobain, long touted as a potential acquirer for BSS, will not sit back for long. With its Graham chain long for renewal, Saint-Gobain may take its further demotion in the pecking order to task and start aggressively attacking its old rival TP again, possibly through acquisition to quicken the pace. Grafton too may speed up its UK integration processes and start growing its Plumbase operations again, although call me a cynic but I'm not holding my breathe.

It will also be interesting to see where BSS's highly rated CEO Gavin Slark ends up, particularly given his track record of building up BSS and achieving a significant premium on exit - there are no shortage of challenges in the building distribution and materials market at present and I'm sure Gavin will be getting some calls from recruiters and investors alike over coming months...!

Interesting new research this month from Construct IT, particularly given the huge interest from the funding community in technology supplying the construction sector.

With deals such as Primary Capital's investment in Amtech still hot off the press, to find the amount of money spent by construction firms on IT falling short of most other british industry sectors might seem a surprise.

After all, aren't the private equity guys smart investors, spotting trends and picking the winners?

Well, in the main, yes they do, and they've certainly seen something in the construction sector they like. Inflexion, August, NVM, not to say quoted companies like Eleco, have all put their money where their mouth is and invested in software companies supplying the sector in recent years.

During my time with Saint-Gobain, part of my role was responsible not only for e-commerce development and technology deployment to our customers. Even in the early 2000s it was clear to me that builders and contractors, far from being the technophobes often portrayed by the media, were generally only too happy to use the web for their business, indeed positively sought to do since anything they could do to avoid having to divert to a branch was a massive benefit to them in time and money terms.

However they were only prepared to do so if the application or site made sense and actually worked around them. And this perhaps is the crux of the problem - until recently, most technology designed for the industry focused on sophistication rather than need, and so to many was simply an unnecessary bolt-on expense which neither saved them time nor money. When the cost of software and upgrades was added, many chose, quite rightly to sit out the debate and carry on as before.

What strikes me now though, and the report itself identifies, is that not only have the means to deliver software as a service changed the economic debate, but the needs of legislators and main contractors for data relating to health & safety, compliance and worker attendance are such that the need for IT and its use outweigh the negatives and have become a necessary (and valued) part of the contruction workers toolkit.

All in all then, construction IT as a sector is starting to look like a far more sound investment proposition, and one that I'm sure will see a good deal of M&A in coming years as consolidation starts to take hold, both here and abroad.

The trade press has been full in recent weeks of new formats springing up within the building distribution and retail industries.

Firstly B&Q announce their re-entry into the trade market (less than a year after an abrupt exit from the Trade Depot excursion) with TradePoint, and then Wolseley of all people announce that they are going to double their Kitchen operation in the UK, apparently to take account of the gap opened up by MFI's decline.

With Wickes too announcing the launch of new dedicated K&B showrooms, it strikes me that either the upturn in the market is more pronounced than I'd been led to believe, or perhaps (with more of a cynical hat on) there are some frustrated sales teams in each of the majors seeking to make their mark before things get worse.

Now there is no doubt that MFI's demise did leave a massive hole in the K&B market in the UK, although I'm to be convinced that a merchant is going to be able to fill their boots in the hole that has been left. Wolseley for one seems to start on the back foot, not least with the unhelpful geographic positions occupied by many of its Build operations - after all if I as a retail punter am not going to make the effort to get to a Jewson/Plumbase/Travis operation on a primary trading estate then why would i go further out of my way to make it to a Build Center branch?

Possibly the most interesting of the three new moves though is that of B&Q. To keep dipping in and out of the trade market smacks of desperation, not least when we are dealing with the trade customer, never one to be impressed with a respray of a marketing campaign. With talk of parent company Kingfisher expanding once more abroad, and the relentless growth of the sister company Screwfix's trade counters, am I the only one surprised that B&Q management have chosen to re-enter the trade market?

Expenditure on repairs, maintenance and improvement (more commonly known as RMI) makes up just under half of all construction output in the UK.

With the new build housing market still near the bottom of its long term cycle and public sector spend hitting the proverbial buffers, it is probably fair to say that most manufacturers have been banking on the RMI market to keep themselves afloat during these grim times for the sector.

And despite more promising results from the DIY sector (especially) in recent months, reporting increases in big ticket expenditure (generally seen as a proxy for improving consumer confidence), I'm still not convinced that 2010 is going to see a particularly strong recovery in the RMI market - indeed things may well get worse before they get better, particularly if mortgage applications begin to falter and housemovers dry up.

Despite all this though, there are still some bright spots within the industry for those looking to invest in new technologies and new product areas, particularly those triggered by legislative change, with the Code for Sustainable Homes being a case in point.

As I've written before, funders that I meet remain interested in the building products market, and indeed are excited about the fact that so much forecast change in the market and its needs is being driven by new legislation. I'm therefore extremely positive that opportunities remain for owners and managers seeking funding to develop carbon efficient building technologies, and not only for those who are looking to market consolidation as a means of driving up profitability.

After all, with building inefficiencies in the UK so vast and the housing and commercial stock in need of so much improvement, why wouldn't you want to invest in a market where the only way is up!?

What is happening at Wolseley then?

This month's trading statement suggests to the cynic in me that one almighty internal political struggle is going on in Leamington and Theale at present as business unit heads jostle for power and the chance to put their mark on the group's various business units.

New Chief Executive Ian Meakins is clearly putting his stamp on the group, with his new financial gatekeeper John Martin as his side. Having sat inside a large corporate myself for a number of years though, I can't help thinking that the very public nature of questioning the future status of a large part of his empire (the so-called 19 performance units) must have a hard impact on morale in these units, let alone supplier and customer opinion as they question the future of their trading relationships (since it isn't hard to work out who the 19 might be!)

Clearly Meakins inherits a mixed bag and the comment I've heard from those I know in the industry suggest he already has a lot of respect from those in the group for the way he has gone about things. The bigger challenge though lies ahead - declaring that something needs to be done is one thing, however executing what needs to be done is an entirely different matter altogether.

Disposals will surely follow over coming years, and there may well be even tougher decisions which need to be made. Getting value for shareholders, as the recent sizeable losses incurred in extracting itself from the Republic of Ireland have shown, is another matter altogether and may prove more elusive to Mr Meakins and his team.

This story still has a long way to run...

The news that Nectar has at long last overtaken Tesco's Clubcard to become the UK consumers card of choice, brings yet more confirmation that knowledge, and the power to acquire and interrogate data to generate knowledge is rapidly becoming one of the most sought after commodities within the business world.

Lest we forget, Nectar itself, or rather its parent company Loyalty Management Group, fetched a reputed £368 million when sold to Canadian Groupe Aeroplan in December 2007, earning its venture capital backer Warburg Pincus a handsome return on its investment, a price that Aeroplan no doubt considers well worth it given its continued success post deal.

Since then M&A activity in the information industry has been (relatively) prolific in an otherwise moribund market, particularly as 2009's economic challenges saw providers seek to consolidate towards year's end. Example deals include Springer's recently announced investment from private equity fund EQT Partners, and nearer to home Vitruvian Partners acquisition of Callcredit from Skipton Information Group, whilst there continues to be speculation surrounding giants such as Experian and Reed Elsevier.

The power of harnessing data to improve the efficiency of marketing activity has been growing in profile even since Tesco started using its Clubcard powered by its own investment in the space, Dunnhumby. In the value-conscious economy that we now occupy, I am positive that private equity funders have also seen this opportunity and so I expect 2010 to see a continued improvement in M&A within the sector.

As we finish 2009, I think most people in the M&A world are surprised at how few companies have been spun out of quoted conglomerates this year, one that started with most predicting a deluge was about to ensue!

I'm particularly surprised that this hasn't happened in my old industry, building distribution, which appears to have been hit harder than most with the massive decline in building activity during 2009.

Wolseley, Grafton, SIG - all seemed to end the year with significant issues still to resolve internally, and shareholders starting to bay for blood.

What does that mean as we start 2010? With the banking climate now starting to settle, and people starting to call the bottom of the market, whilst sadly the building industry is still largely on its knees, I am pretty sure that we are going to see some deal doing in the industry in 2010, no doubt good news for some of the more dynamic MBI candidates doing the rounds currently in the industry.

It will be interesting to track where this goes next year, although I am pretty positive in this assertion - we will end 2010 with the industry in the UK in a considerably different shape to how it starts the year.

New research shows that investment by the world's 31 major sovereign wealth funds (public investment funds set up by governments of countries with surpluses) has hit its lowest level since Q4 2005 with only 26 deals done in Q1 2009.

Given the way the world has changed in the last twelve months, it is understandable that these investors have slowed their pace of investment. Our own recent experience at Catalyst indicates that SWFs and their respective UK offices are more inclined to look at disposing of assets rather than investing at present.

It will be interesting to see how long it takes for the pendulum to turn, particularly given the weakness of Sterling – something we at Catalyst do not see changing from some time to come. The UK is home to some fantastically strong firms and technologies, not least in our supposedly 'forgotten' sectors such as engineering. The combination of attractive world-class assets, a highly competitive exchange rate

making assets prices much lower and a supportive Government should mean that it will not be long before SWF investment activity in the UK begins to pick up again.

As with many other trading updates from the sector, Grafton's posting of another decline in performance for the first six months of 2009 is not unexpected.

Indeed, rumours abound within the sector of significant cost cutting at Grafton at recent months.

Given its significant growth by acquisition, and its 'light-touch' integration policy of leaving incumbent management largely untouched post deal, it is perhaps not surprising that the group is burdened with too much overhead in a shrinking market.

The question now though is whether in its urgent need to cut overhead Plc management will simply remove redundant overhead, or more damaging in the long-run, cut through to the bone and remove the layers of experience which mark out Grafton from its peers. It will also be interesting once the economic cycle starts to turn again whether Grafton change their historic acquisition policy and start getting tougher post acquisition with its targets.

News that Chip Hornsby has stepped down at Wolseley will not be a great shock to those within the building distribution world.

The question is where now for incoming CEO, and newcomer to the distribution industry Ian Meakins? Will someone with a fresh eye on the business, unencumbered by a long history within Wolseley like Hornsby see opportunities for disposals and a radical re-shaping of the business?

The recent rights issue will have given Meakins some breathing space and there are after all a few signs of housing market recovery in both the US and UK markets in recent weeks. Despite this however I don't think we have yet seen the last of rumours that M&A activity will follow at Wolseley.

Watch this space...