Opinion: Clive Bawden

It is the time of year again when banks, wealth managers and seemingly every other financial services firm dusts off their in-house economist and asks them to perform for their Christmas meal; at least it feels that way, judging by the number of invites we have had in recent days to attend just such a gathering.

And gloomy stuff it has been in the main judging by two such events this week - I guess not much of a surprise given the wider forces at work in the world just now.

Mind you, ever the optimist, one forecast struck me as particularly interesting in one such lecture this week - namely, that over the next three months there (should) be a significant change in the value of the pound to the dollar, namely a fall from the current (apparently) overpriced £1:$1.54 to nearer £1:$1.45.

This means that the more savvy US headquartered corporates will already be dusting down their chequebooks. With the US economy remaining relatively steady despite their own domestic political and economic issues, and with cash on balance sheets still in seemingly ready supply, 2012 should see a further invasion of the UK should this currency valuation change as predicted and UK assets become less expensive to acquire.

Equally, economists have been known to be wrong before...

An interesting move by grocer Morrisons this week, hiring well-known former Honda and Lastminute.com man Simon Thompson from Apple Inc.

Well-known to anyone who reads the marketing press (I am certainly intrigued to know how much Mr Thompson used to pay his former PR firm...), with Thompson's hire, and the acquisitions of Kiddicare (non-food) and FreshDirect (in the USA earlier this year), there is no doubt that before long Morrisons would appear to be launching a full-on war online for the UK consumers spend (across both food and non-food for that matter).

Now, one could argue that it is about time - after all, Tesco amongst others have shown how the 'grocers' really can 'do' online in the UK for years now.

Equally, these are big hires and big bold statements from Morrisons. Alongside Laura Wade-Gery's recent move to M&S and Waitrose's much vaunted (and for a time much troubled) new online upgrade it strikes me we are about to see a new generation of online shopping enterprises soon from some of the biggest hitters in the UK market. Put alongside flat consumer demand, increased pressure on margins and continued expansion from the online pureplays (led by Amazon), the next few months are going to see some big offers for those consumers still left with cash, and some big losers from those of the grocers that don't sharpen up their act. Which of the mighty will fall though remains to be seen...

"Normally you think of Italy when you think of styling and design - the British though excel in it"

Not the words of a politician seeking to boost investment in Britain. The words of one of the most powerful businessmen in the world, Anand Mahindra, head of Mahindra & Mahindra the Indian engineering and manufacturing conglomerate.

Having welcomed one of Mr Mahindra's key lieutenants, Mr V S Parthasarathy, as speaker to our international engineering conference at the end of last year, I'm not particularly surprised at this statement though. It was clear in Mr Parthasarathy's speech how the Mahindra group values its relationship with the UK and the skills it finds in design and creation here as it develops its automotive and engineering divisions in its target markets across the world.

What is interesting though, as I reflect on some of the work our own Catalyst engineering team is doing at present, is to note how many of the UK's fastest engineering companies are built on design and innovation at their core. No longer does it appear that we have only one or two world-leaders (Dyson and Rolls-Royce come to mind) when you think of british engineering and the word design in one breath, it is increasingly apparent as we work in the market that there is a new wave of talent out there, prospering at present in markets around the world despite the (still) strong market headwinds.

A familiar restrain from politicians maybe, but as the words of our Indian colleague restate, don't underestimate the strengths of British engineering ability just yet!

There is no doubt about it. Cranes are making a resurgence in towns and cities across the UK!

Conspicuously absent over the last two years, I've been struck over recent days on train and car trips to clients across the country how they suddenly seem to be not only there, but more encouragingly in use, hopefully marking the start of a return to construction activity.

It tallies with other evidence coming out of the sector, not only more positive trading results from the likes of Travis and Wolseley, but also promising signs from some of our remediation and demolition contacts, starting new contracts and more importantly recommencing work on stalled developments.

The sector isn't in full bloom yet (news this week of job losses at highly respected Bullivants for example serve as a reminder of this), and i'm certainly not bullish enough to predict a new wave of M&A in the sector. However...

Walking into Excel this week, I could have sworn I was entering another era.

The era of Interbuild, the show that featured incredible new gadgets from all parts of the building industry, which (well almost...) made heavyside sexy, and invariably, indeed inevitably, featured virtually every tool hire company in the UK trying to outdo each other by the scale of its 'challenge a builder' competition and (much more enjoyably) the number of pretty young women each employed as part of its marketing, hmmm, 'strategy'.

Surely the press release I saw the other day from Interbuild's organisers, saying that they had decided to cancel the former Industry 'mega-show' couldn't have been right, surely here it was in all its former glory??

But no. This was Ecobuild, the serious, we all need to save the planet show, promising revolutionary new products in a new era for the industry.

And hasn't it changed since the last show - not only a new venue (and two halls!), a posh new guide, but a presence from the big boys - Wolseley, my old employer Saint-Gobain, Travis Perkins, as well as Toshiba and others. This is no longer the Ecobuild I remember from its formative days, full of small gadgets, small stands and quaint marketing slogans.

And what conclusions did I draw?

• Firstly, the word 'eco' should be banned, at least from marketing campaigns in the trade. This show demonstrates to me, much like the use of 'organic' or 'home-made' in food retail, just how meaningless its use has become.
• The trade must be recovering in part from the depths of the recession. For the majors to have spent their money on stands, teams and slogans, something must be much healthier this year, which is encouraging for us all.
• M&A in the mid-market, whilst it will not suddenly see a kick-off any time soon, holds promise in the medium-term. Lots of major players with an interest in the sector, lots of small stands with start-up ideas and not a huge lot in the middle - the recipe for consolidation once the 'winning' start-ups come through and mature.
• Lastly, the chaps at Cyclepods Ltd are the smartest marketeers in town. By ticking every single product category on their application form, they've bypassed the organisers system and are credited on every single page of the Exhibitor guide, making them specialists in not only (presumably!) cyclepods, but roofing, cladding, heat pumps - you name it, they do it. Great to see British imagination still shows no barriers.

Will Interbuild be missed? Not on this form - it has simply been upgraded!

A great column from entrepreneur Luke Johnson in the Financial Times this week on the role and responsibilities of the finance function, and in particular some of the things it is not (illustrated neatly by quotations).

I find myself agreeing with (pretty nearly) all of what Luke writes on this occasion. After all, when it seems that every finance CV we read at Catalyst these days starts of with the words, "strategic" finance director (and by implication not the chap who does the books!), it is refreshing once in a while to reflect on what the real role of finance is in most organisations, certainly the ones we want to work with. Namely to manage cash accurately and efficiently, be a voice of reason on the board and stand up to the CEO/owner and protect the assets of the business.

It has always surprised me how few truly talented finance directors there are in the SME space, at least if some of my private equity and recruiter contacts are to be believed.

Given that the recruiters that I know are reporting sudden upturns in role advertisement and availability over recent months, maybe now is a good time to dust off your CV if you are seeking one of these much sought after finance roles within the private equity world and reflect on whether it truly meets some of Luke's well chosen maxims or whether you might be too strategic for your own good!

2010 was undoubtedly a year when the UK mid-market private equity firm saw an opportunity in the retail industry.

Hobbycraft, Snow & Rock, Poundland, Cath Kidston... the list goes on (and on) in terms of deals done during the year.

What is most interesting to me about this trend, is not simply that the mid-market PE firm has seen an opportunity in retail again (buying at the bottom of the cycle?), rather it is that there is no one single point of differentiation on which the investors have focussed. 2010 opened with a focus on the discounting market as the one to follow, and whilst the Poundland and to a lesser extent Mountain Warehouse deals were important within this market niche, there are few strands that draw together the target markets of Hobbycraft, Cath Kidston and Snow & Rock (snowboarding, fashionable blue peter modelling fans?!) except that each knows its niche, focusses hard on differentiated product and has room to grow, both here and abroad.

I've been working on some analysis of this market which we will start publishing in early 2011. In the meantime, I'm sure private equity's interest in the retail market will not diminish in early 2011, indeed I'm sure some of the best investments are yet to come.

Retail is far from dead yet!

A trip to Boston this week to work with our US partner on an important opportunity has brought home the enormity of President Obama's forthcoming decisions on economic policy, at least as far as the US private equity market is concerned.

In common with most other markets where mid-market private equity is a maturing asset class, the last couple of years have not in the main seen its finest moments, the bubble and froth of 2006 and 2007 leaving a bad taste in many mouths in 2008 and 2009 as deals fell apart under the duress of excess leverage and poorly prepared and executed deals.

A real eye opener though this week - virtually all of our US PE contacts have been working flat out through the traditionally quiet period of August evaluating a flurry of deals, with books being sent out by advisors left right and centre!

It turns out though that the real reason is not new found optimism for the general state of the economy, sadly no. Rather fear that forthcoming Obama policy decisions will signal a severe downward turn in economic recovery, owners and their advisors are literally rushing to the door to try and beat the news out later in the year, not unlike the phenomenon seen in the UK market in 2008 following Alistair Darling's sudden policy shift on CGT allowances.

Lets just hope though that unlike the mess caused by Darling's sudden change of tack, which resulted in some poor decisions being made and more importantly lots of well thought through and prepared processes being broken in the sheer rush to the door, that this wave of fresh activity in the US mid-market is additive rather than destructive to the wave of recovery which I'd detected when working in the states over recent months.

Based on this week though I'm not too sure...

Probably bolstered by one of the warmest summers in recent memory (which is staggering in its own right given the rain near me in recent days!), the last few months has seen a hive of activity in the outdoor/activity market here in the UK.

Not content with Blacks Leisure seemingly recovering from the (nearly) dead, the appointment of seasoned veteran John Lovering to the board of Go Outdoors (ahead of a flotation if the deluge of press coverage is to be believed), LDC's investment in the tertiary buy-out of Mountain Warehouse and LGV's investment in Snow & Rock suggests the PE guys think this specialist market is no longer a niche, more like a growth niche with money to be made!

When you add the fast growing private equity owned businesses Wiggle & Evans Cycles to the mix, you realise that despite (or maybe because of?) our all terrain weather, outdoor exercise (and importantly I guess given we are Europeans, looking good at the same time!) is increasingly big business here in the UK.

To my money though, not all of these buy-outs can work in the long-term - surely there must be consolidation further down the line, not least given the variable nature of business models employed here suggest real potential synergies may exist (contrast Go's big box tier 3 locations and low cost stocking model versus Snow & Rock's branded city centre approach for example).

It will be interesting to see in the fullness of time too how many of these business cases were predicated by the words 'in the run up to the Olympics in 2012' (no pun intended!). When thoughts turn to exit (presumably post 2012?), it will be interesting to see who the winners are.

Retail can be a great investment for the mid-market PE community, as some of our recent research into the sector's performance over the last 10 years shows. However, when it goes wrong, retail tends to 'really' go wrong, so fresh from doing our research, I'll be following the future of these particular deals with real interest as we near the Olympics and beyond.

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...