Acquisitions made easy
Article Date: Nov 03 2005
AIM eases acquisitions
One of the major attractions of a stock market quotation is the ability to use paper to pay for acquisitions. AIM’s popularity is partly explained by the ease with which such deals can be done, due to its less stringent regulations.
Vendors are also happy to accept shares in an AIM-quoted company rather than fully listed paper, because after two years of holding AIM shares, the tax on any capital gain is reduced to just ten per cent. This is why loan notes are no longer used as much to pay vendors departing from the business.
AIM companies tend to offer their paper in a mixture with cash. Offering vendors some cash, while also locking them in with shares for some of the consideration, allows them the opportunity to take an interest in any potential upside of the combined entity. Getting the mix right is critical and usually revolves around the ongoing involvement of the target’s management.
A source at City broker Teather & Greenwood explains: ‘It really depends on the company and its ability to do deals, and also the strength of the balance sheet. We see a lot of companies raise lots of money at float, and then when they do a deal there is an element of shares issued as consideration. This is because management does not want to use up all of the company’s firepower on just one or two acquisitions.’
Raising money on AIM
Advisers will help a young, listed company tailor each deal for the specific circumstances of both the buyer and seller. If you are adamant that the acquired business’ management should stay on then advisers will tell you they really need to be tied into the future success of the enlarged business.
AIM companies pursuing buy and build strategies – where businesses in a given sector are acquired and brought together, creating a more tightly-run venture that can cut out duplicated costs – tend to do a string of cash and share deals. These have proved a roaring success for Straight, the recycling containers company that joined AIM at 80p towards the tail end of 2003.
A year after joining the junior market, Straight announced the £6.75 million acquisition of Leeds-based rival Blackwall, deciding to use a mix of £1 million in cash from existing resources and new money raised through a £5 million placing at 130p. In addition a further £750,000 of shares were issued to Blackwall’s vendors, who stayed on as consultants for six months.
‘Cash and shares seemed to work for the amount at which we were doing the deal,’ recounts chief executive Jonathan Straight. ‘Raising money from institutions was a lot easier than the first time we did the rounds, when Straight raised £1.5 million at float, because the amount was bigger and we had a bit of a track record by then.’
Completed this January, Straight claims the integration process was completed swiftly, with the key areas of the businesses – sales, marketing and operations, finance and IT – all brought together successfully. The Blackwall deal looks to have been a savvy one, where the mix of cash and shares worked.
Inter Link’s growth plan
A debt and equity mix appeals to many growing companies, among them successful AIM venture Inter Link Foods. ‘We’ve used a mixture of equity and debt to do deals on AIM,’ enthuses Alwin Thompson, chairman of the thriving cake maker, which joined the junior market at 110p back in 1998, and this January made its ninth and biggest acquisition to date, the £12.25 million purchase of Yorkshire Cottage Bakeries.
The takeover was funded through a combination of a £6.2 million bank loan, as well as proceeds from a £8.5 million placing of new shares completed a few months earlier. Some 1.65 million shares were issued to institutions at 515p.
When considering acquisition finance strategy, Thompson is adamant about the importance of ‘modelling’ the deal beforehand ‘from both a banking and an earnings per share position. It really depends on the size of the deal that you are doing. If you can make the acquisition within your existing facilities and without over-gearing yourself, then you would probably do just that,’ he asserts.
However, if it’s an acquisition on a grander scale, ‘and you would be pushing gearing too far, then you would use equity. Say it’s a £10 million acquisition and you raise £10 million of equity, then you would be diluting your shareholders and the deal probably wouldn’t enhance earnings. But if you raised £5 million of equity and used debt for the rest, then that would be a nice equity and debt balance likely to enhance earnings.’
