Opinion: Steve Currie

Despite the forecast tightening in consumer spending over the next 12 months, the branded consumer good and retail sectors have seen a number of high profile transactions in the first quarter of 2010 including Pets at Home, Cath Kidston, Minivator Stairlifts and Nationwide Autocentres – with more deals in the pipeline for the second quarter particularly in the discount retail sector.

All these businesses have shown strong growth over the previous 12 months but given the relatively high prices that have been paid for theses businesses, the key question is: can this growth be maintained over the next 12 months in an economic environment where the consumer will experience higher tax rates, higher interest rates and negative wage inflation?

Market views appear polarised on this question. A significant number of investors have turned their backs on the sector for the next couple of years. However, other investors remain positive about the resilience of certain business models and also the attractiveness of rolling out innovative retail concepts in a market where high street rents are depressed.

The evidence from the market in the first quarter is that attractive prices are available for the right assets if they have a clear understanding of what their customer wants, a differentiated product offering and a clear strategic vision beyond the next 12 months.

What is the true cost of making an acquisition? The headlines are usually made by the level of consideration being paid for a business as highlighted by the current Kraft bid for Cadburys. However there are a significant number of other costs that need to be factored in when considering the total cost of an acquisition such as acquisition costs, integration costs, deal fees and working capital. The impact of these costs can increase the actual cost of the acquisition by ten to twenty per cent. These costs are often ignored when analysing whether a deal represents good value or not.

In the current market, the definition of "normalised working capital" can have a material impact on the total acquisition cost particularly in the manufacturing sector, and most notably in automotive and aerospace industries, which have seen significant destocking in the supply chain over the last 12 to 18 months. Most businesses in these industries have seen a reduction in volumes and a flattening in profits over this period but have been significantly cash generative as they have sought to reduce stock levels and stretch creditor days. In many cases working capital is at an unsustainable level given forecast trading levels over the next 12 months and the cash cost of the replenishment of stocks must be built into the total cost of the acquisition.

Therefore before making a bid for a business make sure that all the acquisition costs have been factored into the investment analysis to ensure that the deal is value enhancing for your current shareholders.

Pressure on private and public sector spending in 2010 and beyond is leading organisations to consider more innovative and cost efficient ways of managing their property assets. This often means the outsourcing of services to specialist, cost efficient third party providers, such as Capita, Mitie and Balfour Beatty who have all experienced significant growth in recent years and will continue to do so in my opinion.

The market for the provision of property services though such as property management, facilities management, architectural services, energy management and asset management remains relatively fragmented and significant economies of scale exist from the consolidation of these services.

The combination of an increased desire to outsource property services to an operator that can offer a bundled provision of services is likely to lead to significant consolidation of the property services market in 2010.

2010 is a year where businesses need to decide whether they are the consolidator or become the prey, since I am positive that those businesses which choose to stand still are likely to see shareholder value eroded over the next 12 months.

In early 2009, there was a lot written about the need for highly leveraged PLCs to sell non-core subsidiaries in order to generate cash to reduce debt levels. However, there has been limited evidence of this during the course of this year as PLCs have successfully negotiated revised banking deals. Correspondingly the need to raise cash in the short term has not existed.

However, are we about to see a change in the market as PLCs begin to look forward towards the December and March year end reporting seasons? The public markets usually respond positively to PLC Boards taking proactive action in relation to the disposal of non-core subsidiaries especially when the cash tied up in these assets could generate a higher return if it was invested elsewhere in the group. Furthermore the risk of management distraction is removed at a time when full attention is needed on the core business.

Therefore whether you are a PLC Director or a management team in a non-core subsidiary or division interested in pursuing a management buy out, now is the time to be taking corporate finance advice before you stand accused of procrastination.

There has been a lot written about the impact on the market of the Legal Services Act.

However are any law firms actually preparing themselves for the commercial opportunities that lie ahead? Based on meetings with 40 of the largest law firms in the UK over the last 18 months, I would categorise law firms into 4 categories: ostriches, peacocks, magpies and swans.

The ostriches are those law firms who do not believe that there will be any impact on their business and therefore have chosen to stick their heads in the sand.

The peacocks also believe that there will be no impact on their business but are proud enough to tell anyone who is prepared to listen.

The magpies have spotted the opportunity and believe that they can cash in, however their plan is to do nothing and wait for someone else to show them how to do it.

Finally there are the swans who are serenely moving forward seemingly without a care in the world - in practice they are paddling very hard below the water to ensure that they will be the ones to take advantage of the opportunities.

The swans are currently leading the way, although time is still on the side of the others. My advice is not to wait until 2011 or 2012 to take action.

Significant strategic business planning is required now to ensure that your goose is not cooked!

A big dilemma exists for mangement teams in businesses that have undergone private equity transactions between 2005 and 2008. There is a high probability that their equity is currently underwater due to the price that was paid for the business so do they sit tight and be content with their salary and short term bonus arrangements or do they force the issue and attempt to put a revised medium term equity incentivisation arrangement in place?

We are regularly having this debate with management teams and subsequently engaging in this debate with their private equity backers. Given the sensitivity around these discussions it is usually helpful to involve an advisor to ensure that the relationship between the management team and the private equity house does not come under strain as part of this debate.

At a time when significant economic uncertainty exists in the world and lack of liquidity exists in the banking market, it may not appear to be an obvious time for a management team to be considering a buy-out. However, the pressure that exists on corporates with highly leveraged balance sheets to either renegotiate their current banking package or to generate cash from the sale of businesses is likely to remain for the next few years.

The behaviour of the banks is different in the current recession as compared to previous downturns. The banks appear more interested in maximising their short term income rather than recognising bad debts on their already beleagured balance sheets. This may give the shareholders of these businesses some short term breathing space but this does create an opportunity for management teams to force the issue and push for a management buy out.

One of the hardest questions for a management team to answer when thinking about a buy-out is "When should I raise my head above the parapet?" In some cases it is often easier for an advisor to approach the parent company to find out whether they are considering the sale of the business and therefore avoid the risk of any confrontation from the management team's perspective.

There is a significant shortage of high quality opportunities for mid market private equity houses to invest in at the current time. The owners of businesses do not want to engage with these private equity houses as they are terrified by their negative perception of the funding markets especially the debt markets. However, there are great deals available for good businesses as they are a scarce asset in the current market.

The key to knowing which private equity houses to approach is understanding where they are in their fund raising cycle and what is going on in their portfolio companies. This information can only be gained from a regular dialogue with a large number of private equity houses.

There are a number of mid market private equity houses with money burning holes in their pockets. However, there are others with significant portfolio issues who are under very close scrutiny from their LP's. The key things to consider include where are the PE houses in their fund raising cycles and do they have the support of their existing LP investors?