Thursday 3rd November 2005
Acquisitions made easy
Attractive acquisition opportunities often appeal to ambitious growth businesses, but such deals need to be financed correctly. GrowthBusiness looks at various ways to get your sums right.If your company wants to make an acquisition you have two options: pay the vendors in cash or issue them with shares. However, in practice it’s not that simple. For a start, you have to consider a variety of different ways to raise the cash required: from your own cash flow, from lenders or by issuing shares to new or existing investors. There are also different classes of equity that can be used aside from your shares. Convertible loan notes, which pay holders interest but give them no voting rights in the business, are popular at present. The terms can be negotiated to fit many different scenarios, such as offering different interest rates, levels of security or conversion rights. A growing business will use a mix of these methods at any one time, depending on the particular acquisition being undertaken and whether the vendors are essential to the business going forward. Buy and build
For some businesses, the principal means of growth is by acquisition. Take New Horizons, an operator of children’s homes, for instance. The Midlands-based company has ambitious plans to grow, by consolidating this sector and snapping up rivals. This strategy drew Dunedin Capital Partners to take a large stake in the business at the end of last year so they could support this growth. Dunedin investment director Duncan Macrae says, ‘When we did the deal we over-funded the company because we saw the opportunity to make acquisitions as well as grow the business organically.’ The first such purchase, of Welsh operator Forward Approach for £3 million, has just been completed. ‘We did this by tapping a £5 million facility provided by Barclays Bank,’ he adds. Macrae says that there was a race to fund the deal. ‘The banks are taking quite an aggressive attitude to funding the debt part of private equity deals at the moment. The company’s original banker was the Co-op but it did not come up with as good a package as others, who were offering more competitive rates.’ New Horizons can attract particularly good terms because the debt can be secured against the substantial assets, namely the property, of the children’s homes themselves. ‘Banks are also attracted by the flows of public money funding the homes’ operations.’ Macrae believes it is a good time for businesses to obtain debt to grow, as banks are keen to lend, even against the prospective cash flow of the target. ‘If you can get scale quickly without adding too much risk, then why not take advantage? However, it depends on the sector. Quite rightly, the banks are more cautious about funding the acquisition plans of consumer-based businesses such as retail and leisure.’ New Horizons is ‘actively looking at three more acquisitions at the moment,’ says Macrae. ‘These may be financed differently, because one in particular is a larger transaction where we want to retain the middle management. So we may offer the vendors a mix of cash and equity.’ Debt drawbacks
If you are contemplating a larger transaction then it may be worth considering a provider of mezzanine finance, independently of the banks. Mezzanine is the convertible loan element of a transaction. One of the largest such operators is Intermediate Capital Group. The company has detected the banks moving into its space in recent years, offering innovative loans as well as traditional borrowing, usually called senior debt as it is the first to be repaid in the event of receivership. Managing director Tom Attwood recently pointed out that ‘banks are being more aggressive in the amount of senior debt that they are prepared to offer’ as well as ‘reducing margins and increasing leverage for some mezzanine transactions’. Intermediate has not funded many major acquisitions in recent years. The last one was a £14 million loan in May 2003 to assist greeting cards retailer Cardfair’s £45 million acquisition of Card Warehouse. Debt finance may not suit every small company. A cautious entrepreneur might be reluctant to take on too much debt. A rise in interest rates or a slump in trading could be crippling. However, there are alternatives to traditional borrowing worth considering, such as asset-based lending and invoice discounting against the target’s debtors. Banks again are now offering a complete package involving these elements, as well as mezzanine and senior debt.
James Crux & Christopher Spink
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