When England again beat the odds to rumble the French at home it was fun - but does it mean they can beat the Springboks? Leon Haslam did the double at Donnington and when push came to shove for title positions at Brands Hatch he struggled to make the podium? England keep doing 3-0 games, so does that mean they can put the same score up on Russia? My mate Rob had a great time out with a new "partner" last week-end - but does that mean if I ask her or her mate out it's game on?
Saying that So and So got 2 x sales or 20 x profits means nothing if it can't be translated into a real appreciation of whether that means your deal or the next deal is likely to follow suit in some way. The rash of deals in UK compliance companies recently needs explaining if you are to get any sort of lessons from them.
First - be sure about what you're quoting. You wouldn't take a punt on a horse based on a form sheet of the last 2 races only and not knowing the rider or trainer - but then again plenty do...Forget PE ratios, post tax, pre tax, etc - you need to know the current sales or turnover of the business, the likely operating profit at "ebitda" level (earnings before interest, tax, depreciation and amortisation). Then you need to take a view on what owner benefits or post deal adjustments will do to that profit figure. Much of this is guess work, as companies house data will be 12-18 months out of date, but if you know market benchmarks and take a 10 year + view, you can make the guesses educated and narrow the range for error significantly.
Secondly, time is important, so get as close to the real time deal benchmarks as you can. Wasps rugby can afford to stay cool about losing a few games early in the season, Spurs rush in to change management at the same point - why? Should other managers be especially worried - or maybe only rugby coaches are "safe". Deals take 4-6 months to do, so in a rising or falling market this is key. Is this likely to be the first of many or the last of several? Is this buyer doing a roll up, or dipping a toe in?
Thirdly - says who? Business is the only "game" where you find footballers, rugby players, hockey, golf and cricket players all on the same pitch - each diligently focused on thier ball and trying to cope with the "clutter" created by the other players. Understand the buyer motivation, as well as pricing. VCs, institutional and trade players operate on different benchmarks, and will pay different prices for small/large, high growth/low growth; tuck in/stretch prospects. In compliance markets in particular you now have builders, bookies, and bankers competing with software developers, publishers, trainers and consultancies. Each has their own perspective and hang ups.
So what about National Britania being sold on by their VC shareholders to Connaught? Was £90m too much or not enough? Does it mean anything for other compliance players? (http://www.natbrit.com/)
The last reported sales and profit figures for Nat Brit were £28.2m and £4.3m for the year ending October 2006, but what has happened since then? Is it really saying that x3.2 sales and x21.2 profits is a realistic assumption for other compliance players?
Well - no. Nat Brit put a bit of weight on throughout 2006/7, and their accounts refer to buying 4 companies, the largest of which, CHSS (http://www.chss.uk.com/), generates sales of over £9m pa. Nat Brit was itself on a strong growth path organically as well, and the group could realistically be expected to be on run rates of £48-52m sales and £6-7m profits at the time of the deal. Fine - that means real benchmarks on a current basis are x1.8 (sales) and x14 (profits). No surprises here - effectively a x14 multiple is normal for a business with between £5-10m in profits on a strong growth ramp and with a highly contracted renewal business (a range fo x12-15 is typical). Making less than £5m in profits will deflate the multiple, and Lyceum (the VCs here) have done well to play the multiple arbitrage game very effectively.
The buyers, Connaught (http://www.connaught.plc.uk/), are a listed PLC heavily involved in social housing services - a market which shares many of the characteristics of the construction one, notably an inability to sustain superior profits for too long, and one where 20% profits are rare. McAlpine bought a Nat Brit competitor some years ago, and there is a distinct trend among lower margin industrials (including Bodycote and others) to continue to diversify into compliance because of its high growth and profit potential currently. Share prices have been robust post deal. Two happy bunnies.
So will Rob's friend be chuffed if I ask her out? Maybe her mate will be up for it? Probably not - unless I transform into a real "oil painting" - much as Caerphilly's ugly duckling became this swan over time. This deal has only confirmed x14 multiples for market leaders generating significant profits and growth potential. The only thing it does suggest is that there are probably still plenty of fish in the sea - plenty more pebbles on the beach. Plenty of buyers still around for good players in a market with fundamentals as attractive as this one.
d
David R Johnston
CEO A.R.K. Business Analysis Ltd (http://www.arkbusiness.co.uk/)
For a fuller appreciation of the long term impacts and context for this and the other deals such as Northgate's purchase of First Business Support - see www.arkbusiness.co.uk for details of the Market Reports. The Red Tape Removal Specialists Market 1995-2010 is now available (01280 843900).
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