After a strong 2017 a dip in cross-border activity is expected, but further consolidation and disposals of unprofitable, non-core assets will keep deals ticking over. The fourth quarter helped activity in the FM sector exceed the five-year average, despite a 27% year-on-year dip in in private equity deals.
We tracked 104 UK deals in the FM sector in 2017 – just one fewer than the previous year. Of the 104 deals, 33 involved an international element. This is above the five-year average of 96 deals, indicating fairly resilient merger and acquisition activity in the sector, particularly when compared to an estimated 10% fall in M&A deals across all sectors in 2017. Average deal value in 2017 was nearly three times higher, at £37.2 million, than the £12.0 million registered in 2016.
The fourth quarter of 2017 was the most active for M&A last year, with 30 deals recorded, a marginal increase on the 29 deals completed in Q4 2016. Average deal value in Q4 2017 was £59.4 million, significantly ahead of the £12.4 million average seen in the same period in 2016.
Domestic deals ahead of overseas
International activity during 2017 was broadly in line with the 2016 total (down one at 17 deals). However, there were just three international deals recorded in each of Q3 and Q4 2017, some way short of the three-year quarterly average of 4.25 deals.
Domestic deals, on the other hand, increased in 2017, with 71 deals compared to 65 in 2016. This included 25 deals in the last quarter of 2017, making it the most active quarter of 2017 on the domestic deal front. However, some of this activity was down to UK companies with overseas funding, such as the acquisition of Ultimate Security Services Limited by Noonan Topco, a transaction on which our corporate finance team advised. Noonan was itself acquired earlier in the year by South Africa’s Bidvest Group Ltd for £159.7 million.
Another notable deal was Serco Group's £47.7 million acquisition of Carillion’s UK healthcare business. Serco saw this as a significant opportunity prior to Carillion’s liquidation, for which shareholder approval remains to be determined.
Much of this increased domestic deal flow comprised lower-value 'bolt-on' acquisitions of smaller competitors similar to those made by Nationwide Cleaning aimed at extending their product offering and market reach or to achieve economies of scale. For example, CH&Co Catering Ltd broadened its service portfolio by acquiring catering and event management services provider, Concerto Group Ltd. The deal means the company can now offer venue finding, booking, catering, production and entertainment services and takes annual turnover to £300 million.
The main focus for some larger listed FM companies, such as Interserve and Mitie has been on addressing well-publicised internal issues, rather than ambitions for acquisitions.
Private equity activity dips
Private equity (PE) deals in the FM sector dipped to 16 in 2017 (compared to 22 in 2016), a decrease of 27% year-on-year. However, Q4 saw a strong recovery in PE activity. For example, Business Growth Fund provided £1.5 million of funding for Nationwide Window Cleaning’s acquisitions of Reflekt Cleaning and Superior Window Cleaning, while Investcorp snapped up safety products installation service provider Kee Safety Ltd, valuing the company at £280 million.
It will be interesting to see whether the problems that led to the collapse of Carillion in January will dent PE investors’ enthusiasm for FM companies with significant public sector revenues.
Active FM sectors
The largest proportion of M&A deal activity was reported in the mechanical and electrical (M&E) subsector with 25 deals, followed by cleaning (19 deals) and security (14 deals). With increasingly commoditised services in the latter two sectors in particular, further market consolidation is likely in 2018 as operators seek economies of scale. We can also expect continued deal activity this year in M&E, driven by the trend towards bundling of services to provide a one-stop-shop.
What is the outlook for M&A deals in the FM sector in 2018 given the uncertainties over Brexit and increased pressure on margins?
There may be a dip in M&A activity in both volume and value terms in 2018 due to heightened uncertainties over Brexit as the deadline draws nearer and with overseas buyers choosing to focus on the integration of the UK assets they have secured over the last few years.
However, the year ahead may see more consolidation and disposals of unprofitable, non-core assets by the larger UK PLCs in the FM sector as increased competition, higher wages and labour shortages continue to put pressure on margins.
We continue to expect M&A and PE activity in heavily regulated areas such as fire safety following the Grenfell tragedy, with acquisitions of some regional service providers a distinct possibility. In addition, we may see further deal activity driven by larger players’ interest in innovations and technology to increase efficiency and utilisation.
Finally, Central Square Holdings Ltd's acquisition of Styles & Wood Group Plc may hint at an emerging trend. The £42.5 million public-to-private deal valuing the company at 8.1x adjusted EBITDA suggests that Styles & Wood may have been undervalued by the market. This may point the way forward for other smaller listed entities to realise greater value by coming off the listed markets and make them more susceptible to takeover.
If you would like to get in touch with us to discuss these developments in more detail please contact Usman Malik.