Business services revenues maintain M&A appetite

Fortunately, mergers and acquisitions activity was remarkably resilient across the business services sector, despite the potential negative impacts of Brexit and coronavirus.

A snapshot of our business services deals 2020

Discover our key successes in the sector

That resilience is the result of multiple benefits of business service assets:

• high levels of recurring revenue
• future order books
• revenues underpinned by non-discretionary and critical services

This trio of factors enables business service sector assets to be regarded as safer havens and, therefore, reduce investors' risk exposure in turbulent times.

Two of the management buyout deals we worked on last year demonstrate such robust characteristics:

1 Arcus Facilities Management by ESO Capital

2 Cambridge Maintenance Services by Rockpool Private Equity.

Business support acquirers still shopping

We've similarly found that trade acquirers in the sector have remained confident, particularly in comparison to other sectors. Accordingly, there has been continued investment in their M&A strategy.

Two key examples of this are:

1 The sale of elogbooks to Marlowe PLC

2 Mitie Group acquiring Interserve Facilities Management

A trend that emerged, and which we expect to continue, is the divestment of non-core assets. The coronavirus situation has encouraged PLCs and large corporates to focus on their core service offerings and adopt a strategic focus. For example, Skanska divesting its UK infrastructure services business to M Group Services.

Cyclical business support services most impacted

Still, lockdown has not affected all businesses equally, and our observation is that sub-sectors with a cyclical nature have been the most exposed.

The recruitment sector, in particular, has felt the effects of companies taking the decision to defer expansion and divert their energy to streamlining existing operations. However, we expect to see the sector enjoy a bounce back as the economy begins to recover.

On the opposite end are those businesses that have performed well over the last 12 months and perhaps even benefitted from the resulting environment.

Stand-out sectors in business support services

Logistics and distribution businesses stand out, and particularly those who service the online consumer market, as well as infrastructure and healthcare services. Hygiene services have also remained resilient, which is unsurprising given the impact of coronavirus on the corporate priority agenda.

Brexit played a pivotal role on both sides of the Atlantic. Close to home, and in keeping with the theme of divesting non-core assets, European businesses continued to reduce their exposure to the UK market in the business services sector.

Conversely, there has been an increase in American appetite for UK businesses, a decision likely influenced by the UK’s withdrawal from the European Union and further facilitated by a consideration of a possible higher taxation regime under the newly inaugurated President Biden.

Three key trends to look out for

As we look to 2021, we identify the following three trends that will help shape the business services sector:

1 Increased appetite for public sector-underpinned businesses

Twelve months ago, it was clear to us that many trade acquirers were interested mainly in businesses underpinned by the private sector.

This is no longer the case. In light of recent events, businesses with public sector revenue streams have become more desirable due to confidence in the robustness of public sector spending.

2 Increased appetite for technology-driven business service assets

Business services and technology are increasingly beginning to merge, with a noticeable shift away from labour-led models towards technology. We see this, for example, in CCTV replacing the need for manned guarding in many environments.

3 Consolidation

The highly fragmented nature of the business services sector, coupled with its robust characteristics, hints towards further consolidation this year.

There is tremendous cross-selling opportunity between service sector assets, particularly in industries with low margins and a reliance on scale to generate sufficient margins.