ISSUE 5 • 2013
FM David Ascott Partner, Corporate Finance Grant Thornton UK LLP
Insights into facilities management The final quarter of 2012 saw deal volume remain high delivering a strong end to the year for the facilities management (FM) sector which remains hugely important sector for the UK economy. While 2013 may still see activity from the larger end of the sector with continued international growth, the signs are that the acquisitive period may be drawing to an end and the sector may now witness more strategic reviews of service portfolios and disposal of non-core assets which will be a good opportunity for more agile operators in the mid-market to grow their businesses. In this issue, we review the activity of 2012 and take a look at the upcoming trends for 2013, which areas will play a key role for the sector and what role the public sector will have as it continues to be a key focus for FM businesses particularly in the UK.
2012 M&A overview Top 10 Facilities Management Deals in 2012*
• 2012 M&A overview • Quoted FM tracker
1 Insights into FM - Issue 5
Deal value (£m)
Terra Firma Capital Partners
Annington Homes Limited
Advantage Healthcare Group Limited
Other Soft FM
Mears Group plc
Morrison Facilities Services Limited
Reliance Secure Task Management
AeA Technology plc
GCP Capital Partners LLC
Garrets International Limited
G4S Secure Solutions (UK) Limited
Chubb Group Limited's Chubb emergency Response
MITIe Group plc
Utilyx Holdings plc
Maxima Holdings plc’s document Management Service, Intellect and Microsoft divisions
Other hard FM
MITIe Group plc
*by disclosed deal value and involving a UK company
6 Source: Zephyr
FM UK Facilities Management transactions 2008-2012 YTD
Source: Zephyr Source: Zephyr
UK Facilities Management transactions 2008-2012 by quarter** 45
2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q 08 08 008 008 009 009 009 009 010 010 010 010 011 011 011 011 012 012 012 012 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 20 20 Source: Zephyr
2 Insights into FM - Issue 5
**see back page for Grant Thornton subsector split between hard and soft FM
Strong second half boosts annual M&A figures M&A activity in the UK’s FM sector enjoyed a robust recovery during the second half of 2012, adding further weight to the theory that the hiatus in the markets during the spring and early summer may indeed have been influenced by events such as the Diamond Jubilee and the preparations for the London Olympics. Overall, the total number of transactions recorded for the sector during 2012 reached 95 – just shy of the previous year’s total, but comfortably ahead of the volumes seen in 2009 and 2010. In common with the wider UK M&A markets, the second half of the year also saw the reappearance of comparatively large deals: at well over £3 billion, the fourth quarter acquisition of the property services business Annington Homes by private equity heavyweight Terra Firma is by far the largest FM company acquired in recent years. The previous quarter also saw a major transaction in the form of the £840 million UPP Group Holdings acquisition by Dutch pension fund PGGM. Before these, one has to go back to the pre-crash days of 2007 to find deals with a disclosed value of over £500 million.
FM UK Facilities Management transactions Q3 2012 by subsector 7%
70% 60% 50%
Utilities Other Hard FM
Other Soft FM
David Ascott, Corporate Finance Partner
UK Facilities Management transactions by subsector 2011-2012
“As public companies look to reshape and prune some of their support services portfolios, such as Balfour Beatty’s potential sale of their Workplace division, and increasingly chase growth internationally, opportunities should emerge for UK FM players to seize ground and build scale in a changing market.”
30% 20% 10% 0%
Other Hard FM
Other Soft FM
PE players feel the pinch Despite the headline-grabbing deal for Annington Homes, the difficulties faced by private equity (PE) investors in the current market certainly impacted their ability to complete acquisitions in 2012. Only 10 PE-backed deals were recorded during the year, almost half the level seen in 2011 and around a third of the number seen in 2007. Among those to take place during the year were the buyouts of the Londonbased event catering company Rhubarb Food Design Limited by ECI Partners, marine catering services company Garrets International Limited by GCP Capital Partners, and Manchester-based Airline Services Holdings Limited by LDC.
3 Insights into FM - Issue 5
Clearly, the main problem for PE buyers remains the harsh conditions in the leverage market; banks continue to be cautious, lending significantly less than they did pre-crisis and at much higher margins. What’s more, other well publicised failures in the FM space over the last few years (Rok, Connaught, etc) will have further dented banks’ appetite. And the PE players’ problems don’t end there: there are plenty of trade buyers with healthy balance sheets whose financial muscle combine with powerful strategic synergies, allowing them to be very competitive in acquisition processes. True, PE players face these issues across all sectors in the current climate, but the FM market presents them with
an additional, more unique, problem: in tendering processes PE-backed businesses can be disadvantaged by the amount of leverage they carry on their balance sheets, as this is often a key consideration taken into account when clients are selecting contractors. Faced by these issues and a growing realisation that buy-and-build plays in the FM sector carry with them heightened execution risk, it is perhaps not surprising that PE appetite in the sector has cooled somewhat.
FM UK Facilities Management transactions 2009-2012 by acquiror type 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Source: Zephyr Source: Zephyr
UK Facilities Management transactions 2009-2012 by acquiror type 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2008 UK Source: Zephyr Source: Zephyr
4 Insights into FM - Issue 5
Search for scale drives activity in the soft FM subsectors One interesting statistical shift that came to light in 2012 was the sharp increase in the number of soft FM deals being recorded. In the previous two years deals involving soft FM businesses accounted for approximately a third of the annual total. But in 2012, this rose to almost half on the back of strong activity in the latter six months of the year. In part this could be explained by the need to build scale in many of the lower margin, resource-intensive soft FM areas, such as security and catering. But ultimately it may prove to be a statistical hiccup, as there remains significant anecdotal evidence from across the Grant Thornton network that the most significant dealflow will continue to be driven by activity in the hard FM space moving forward.
FM Looking ahead: International ambitions Throughout 2012 many of the UK’s larger FM businesses continued to be active in the M&A markets, but there is growing evidence to suggest that a number of them are reaching the limit on what they can fund from existing resources. Despite this, many of these businesses will be very keen in 2013 to build upon recent successes in non-domestic markets and to grow international revenues significantly. As a result - given that many are reluctant to go to the public markets for new capital – it looks likely that M&A activity in 2013 will be driven to a significant degree by the sale of non-core local assets. Serco’s Q4 sale of its Learning Solutions unit is a good recent example of this trend, as is the £24m acquisition of Morrison Facilities Services Limited by Mears Group, also in the final three months of the year.
Infrastructure and energy related opportunities Looking ahead in terms of sector trends, one hot spot on the horizon is the infrastructure/utilities area. Following the government White Paper in September 2012, there is a strong possibility that M&A activity will grow in areas such as roads and rail, as well as drainage and power infrastructure, which have all suffered from long
5 Insights into FM - Issue 5
periods of under-investment. While these have not seen significant M&A activity to date, they are increasingly attracting interest from the private sector both at home and overseas; in particular, buyers from Germany and France are strong in this area, and this could well lead to a continuation of the 2012 trend towards increasing numbers of international businesses investing in the UK FM market. As for other sectors, energy and energy-related areas will continue to produce strong dealflow, as they have in 2012, especially in the renewables niche. And education is another area that is expected to see good ongoing dealflow on the back of government spending cuts and the need to find further efficiencies (ie via outsourced catering and cleaning). Finally, although important 2012 deals such as the Enara acquisition are unlikely to signal a flood of new healthcare deals, this is an area that should see increasing interest, particularly in niches such as domiciliary care. Overall, though, this is likely to be a trend for the longer term: there is still some way to go before FM players are able to move further into this vertical.
Fewer distressed deals? Deals arising out of distress were certainly a feature of 2012, but this may well be a declining trend looking ahead. With many of the troubled groups either out of the market or significantly
restructured there is a strong argument to suggest that the shake-up within the FM sector is largely behind us. And of course, if there are fewer groups in the market surviving purely by undercutting stronger competitors, those that remain active into 2013 and beyond should see margins recover to more sustainable levels. Overall, both statistical and anecdotal evidence suggests that the FM sector is beginning the new year in relatively good form, and M&A activity should remain solid throughout 2013, driven by a continuing flow of attractive opportunities for consolidation in the industry.
FM Quoted FM tracker
The final quarter of 2012 proved to be a solid one for the share prices of the listed FM businesses on our tracker. In all, 10 of the 16 groups in the sample saw their share prices grow over the three-month period, with the vast majority of these comfortably outperforming both the FTSE All-Share and Support Services indices. If one excludes Green Compliance plc, which has seen its share price collapse since the end of 2011, the remaining 15 companies in the sample saw a share price increase of nearly 7% over the quarter, more than double the FTSE AllShare average.
In a few cases, share prices were helped by positive annual results announcements during the quarter. For example, year-end figures from Compass Group showed revenue and EBITDA growth of approximately 7% and 9% respectively. Just before the beginning of the quarter, Kier announced improved annual profit figures, while Interior Services Group revealed a healthy boost to the top line. Nevertheless, share performance was generally weaker among the largest groups, with three of the largest four groups (G4S, Serco and Balfour Beatty) all seeing erosion in their share price. MITIE, seventh largest by market cap,
also showed a decline in the final quarter after a relatively strong period previously. Looking at the sample over the full year, the picture is similar, with 10 of the 16 on the list seeing a share price increase. At the head of the list, Compass Group recorded a strong year in 2012 with share price growth approaching 20%, while other major players such as Rentokil Initial, Berendsen, Interserve and Mears also put in very strong performances. Again excluding Green Compliance, the average growth across the list is 12.3% well above the All-Share average.
Share price change to 31 December 2012 Share price change to 31 December 2012 Name Compass Group plc
3 months 6 months
1 year %
2 years %
Serco Group plc
Balfour Beatty plc
Rentokil Initial plc
MITIE Group plc
Kier Group plc
London Security plc
May Gurney Integrated Services plc
Mears Group plc
Johnson Service Group plc
Interior Services Group plc
Green Compliance plc FTSE All Share
FTSE Support Services
Source: Factset. Market data as at 31 December 2012; Financial data as at last announced financial close.
6 Insights into FM - Issue 5
FM Looking ahead to 2013
Before looking at the trends likely to dominate the quoted FM market this year, it is worth noting that more than half of those featured on the tracker have a calendar yearend and therefore will shortly be releasing their 2012 results. These should give a clearer indication of the forward-looking strategies likely to be employed.
However, it is reasonable to expect that the main themes in the FM space will continue to centre on those that have dominated the trading environment over the last year or two: developments in public sector outsourcing, a further shift towards bundled services and an increasingly international view will surely figure strongly in the outlook of quoted FM businesses. On the domestic front, clearly a significant driver of strategy will be the public sector: despite the ongoing cut-backs in government spending, recent statistics suggest that the overall value of outsourced government contracts has actually doubled in the last four years and now stands at about £20 billion. Within this, there are a number of key areas that are likely to be of significant interest for FM providers. Among the most important are infrastructure, where improvements to the road and rail networks are expected to result in new contracts in
7 Insights into FM - Issue 5
2013, and defence, which is expected to see new contracts worth well over £3 billion in the military FM area. Another area expected to drive growth is nuclear decommissioning: £6.1 billion of nuclear decommissioning contracts across 12 sites in the UK are currently in the tendering process, with key FM businesses such as Babcock and Serco believed to be in the running. Finally, both healthcare and education are likely to continue to offer interesting opportunities for the FM market. The trend towards bundled services is by no means a new one, but it does seem to be gathering pace: recent research by Frost & Sullivan estimates that integrated FM will grow from around 12% of the global market in 2011 to over 15% in 2017. In pure revenue terms this represents an increase from approximately $64 billion to $96 billion. Certainly, the activity in this area over 2012 suggests that the larger, and potentially longer term, bundled contracts is where the FM players with real scale are likely to derive much of their growth in the foreseeable future. Finally, faced with difficult conditions in the domestic market and economic shrinkage among Eurozone nations, many of the largest FM businesses have indicated that they will be seeking growth from their operations further afield. Both Compass and Balfour Beatty, for instance, have highlighted issues with their European business during the final quarter of the year, but have high hopes in other regions. A number of
other groups have major plans for their non-European operations: Carillion is aiming to double growth in the Middle East and Canada by 2015, while Balfour Beatty’s strategy looking forward is more heavily based on emerging markets. Meanwhile, Rentokil Initial announced at the end of 2012 that its acquisitions in the US have made it the third largest pest control provider in the market. Overall, the comparatively strong performance among the quoted FM businesses, as well as the key ongoing trends in the market, suggest that prospects for the sector are reasonably solid. It is also worth bearing in mind that the 2012 performance was delivered in spite of the negative press that dogged the market during the year. Certainly many in the sector will be hoping that 2013 does not see a repeat of that sort of attention.
Martin Gardner Partner Grant Thornton UK LLP E [email protected]
For any further information, please contact:
David Ascott T 020 7728 2315 E [email protected]
Pete Dawson T 020 7728 3197 E [email protected]
Martin Gardner T 020 7728 2847 E [email protected]
Grant Thornton Facilities Management - subsector map Hard FM
Mechanical & engineering
Textile / Laundry
Relocation & Storage
© 2013 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ means Grant Thornton UK LLP, a Limited liability partnership. Grant Thornton is a member firm of Grant Thornton International Limited (Grant Thornton International). References to ‘Grant Thornton’ are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provide services to clients. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. grant-thornton.co.uk V22632