FT SPECIAL REPORT Mid-Market Companies

Friday March 8 2013 www.ft.com/reports | twitter.com/ftreports

market, posting 4.1 per cent sales growth in 2012, compared with an average 3.2 per cent. Inside » Efficiency, and an ability to adapt to trading conditions quickly, have been The resilient major factors. Grant Thornton calcu- lated that turnover per employee at Holding the line midsized companies was 18 per cent higher than the UK average. Rail operators pick “Mid-sized businesses are dynamic up pieces after organisations focused on improving middle their own performance in every way – West Coast products, procedures, costs, manage- main line debacle ment and structure,” says Mr Max- well. “They are more nimble than Page 2 large corporates in their approach to innovation and – unlike small entities – have the infrastructure in place to Big vs medium becomes manage change.” He argues that mid-market compa- debate has legs nies grasped the “realities of post 2008 Both sides are markets” – low interest rates and a devalued currency – far more quickly set to keep the that larger businesses. “They are argument going adept at identifying new markets and place to be Page 2 developing the techniques to get into these areas,” Mr Maxwell explains. Trouble in store ‘Mid-sized businesses are Retailers find Britain’s mid-sized enterprises more than dynamic organisations themselves at the match smaller and larger rivals in terms of job focused on improving their sharp end of woes creation and retention, writes Matthew Vincent performance in every way’ on the high street Page 3

f politicians and lexicographers financial crisis, between 2007 and However, it is has not been new are to be believed, the worst place 2010, these mid-market businesses industries leading the way. Grant Investors eye for Britons to be stuck is the “mid- increased their workforces by 26,000. Thornton’s figures show that there dle”. So pressured has the Larger UK groups shed 692,000 staff. are more UK midsized businesses in centre ground “squeezed middle” of the work- They have continued to punch well the manufacturing sector than any Businesses in the Iforce become that it gave the Oxford above their middleweight classifica- other, and the sector has generated English Dictionary its phrase of the tion, in economic terms. According to some of the fastest productivity FTSE 250 offer year in 2011. For their British employ- GE’s research, mid-market companies growth of any segment over the past profitable returns ers, however, the middle appears to be account for only 1.37 per cent of total 10 years. not at all under pressure: mid-market UK businesses but contribute 32 per GE Capital’s sees the UK’s mid-mar- Page 3 companies have continued to defy the cent of private sector GDP, and more ket companies beginning to rival Ger- downturn, to the relief of both work- than one in three UK jobs. many’s Mittelstand – the country’s ers and investors. David Maxwell, partner and mem- multitude of medium-sized, often fam- Brokers hang on In its 2012 study, “Leading from the ber of the national leadership board at ily-originated, manufacturing firms – Middle, the Untold Story of British advisers Grant Thornton, says: “The although the UK businesses are not Hopes remain of a Business”, finance provider GE Capi- UK midsized business segment is the yet achieving German levels of merger recovery tal found that UK businesses with unsung success story of the UK econ- growth. €20m-€1bn in revenues and 150-3,000 omy.” Among the listed mid-market but it would be employees have been “significantly Grant Thornton’s own “Agents of groups, though, share price growth from a low base more resilient” than smaller and Growth” research shows that UK mid- has more than kept pace. Taking the larger rivals in terms of job creation sized businesses – employing 50-499 Pulling a pint: Fuller, Smith & Turner was named 2012 Company of the Year last FTSE 250 as a measure of mid- Page 3 and retention. During the worst of the people – have outperformed the wider night in the PLC Awards (details of all awards on Page 4) Charlie Bibby Continued on Page 2 Downturn survivors find reasons for optimism amid the gloom

“Much of mid-market Prospects companies’ success has been dependent upon the Mark Wembridge sector in which they operate says some fears are and where they have con- centrated their attentions,” receding as hopes of says David Silver, chief foreign growth rise executive of investment banking at Robert W. Baird, a US investment bank. The global economic down- He says: “The ones that turn has not been kind on have picked their targets the UK’s mid-market com- sensibly have come out of panies. When the credit the downturn well. If their crunch began to take hold focus is on specialised in 2007, the subsequent offerings and they have a flight of investors to safety focus on high-growth avoided smaller, and so geographical regions, they potentially riskier, compa- will have withstood the nies. downturn better.” After topping the 12,000- As well as freeing itself of mark in early 2007, the non-core assets, Senior has FTSE 250 index lost more used its cash to buy compa- than half its value over the nies that better tailor it to next 18 months. be a supplier to aircraft But, for those companies makers Boeing and Airbus. that have survived the Such acquisitions include downturn, the outlook Weston, a Lancastrian appears to be getting rosier, maker of turbine blades for with the mid-cap index In a pickle: the Branston brand was sold Bloomberg aero-engines, and US com- passing its previous 2007 ponent maker Damar. peak at the end of last year. Mid-market recruiters, At about the same time, your business plan, it isn’t One example is Invensys, such as SThree, Hays, Rob- Deloitte’s annual survey of too difficult to get funding. the global technology ert Walters and PageGroup UK chief financial officers That was not always the group, which late last year (formerly Michael Page found that some economic case.” sold off its rail division to International) are examples worries were receding. The A separate Deloitte study for £1.7bn. In the of how emerging markets proportion of finance direc- found nine out of 10 FTSE process, it wiped out most can compensate for stag- tors who were fearful of 250 groups and other simi- of its pension deficit and nant conditions in mature another recession and the larly sized private compa- honed its focus on its con- economies. break-up of the European nies planned to sell off trols and operations man- “It has been difficult for single currency had con- parts of their businesses agement arms. UK-centric companies, tracted from more than a within the next three years. Other recent disposals by those that have not had the third in 2011 to about a fifth This was not in an attempt midsized UK groups include ability to export their busi- a year later. to shore up their finances, the move by FirstGroup, ness abroad and target The study also uncovered which had been the case in the transport company, to expanding markets,” says a fall in credit costs and 2009-2011, but in an effort to Mr Silver. that finance directors felt refocus their businesses Mr Finlay agrees: “Many credit was at its cheapest and implement longer-term UK mid-market businesses level in five years. strategic plans. ‘People have been are looking abroad for “We had to refinance at “The economy in the UK toughening their growth and doing so quite the end of 2009 and that has not been an overly aus- successfully. They are all was much harder – some of picious background for mid- businesses to deal looking for growth to come the banks were a right nui- market companies but the from overseas markets.” sance. But things are much word that you see coming with the economic Although emerging mar- better now,” says David out of the backdrop over uncertainty’ kets are the main target for Landless, chief financial the past few months is many UK mid-market com- officer of . ‘resilience’,” says Robert panies, Europe’s apparent Mr Landless says the Finlay, head of corporate pare down its UK bus busi- recovery has tempted Filt- FTSE 250 engineer’s recent finance and broking at ness; and ’ rona to eye acquisitions €125m refinancing was Westhouse Securities. bank-mandated sell-off of over the Channel. “smoother and more He adds: “Any real fears assets, which saw the Bran- “We are underweight in straightforward” than pre- of the eurozone collapsing ston pickle brand snapped Europe and would like to vious post-global financial have ebbed away signifi- up by a Japanese food com- make a few acquisitions crisis credit negotiations. cantly. People have been pany in October. there,” says Colin Day, the Neil Jones, finance direc- toughening up their busi- Meanwhile, Senior, the company’s chief executive, tor at ITE, the FTSE 250 nesses to deal with the con- British maker of engineer- who joined the FTSE 250 exhibition group, agrees: tinued economic uncer- ing components, offloaded a plastics and fibre supplier “There is now more of a tainty. Boards have unit that supplies the in April 2011 from Reckitt willingness among banks to adjusted to the new norm of nuclear and construction Benckiser, the consumer lend. If you have a good difficult trading conditions industries to focus on the products supplier. “This is credit rating, are not over and refocused their busi- booming market for com- the moment to get into geared and the bank knows nesses on their core.” mercial aircraft parts. Europe.” 2 ★ FINANCIAL TIMES FRIDAY MARCH 8 2013 MId-Market Companies Big versus medium debate has legs yet

Shareholder value David Oakley finds both sides have arguments to deploy in a discussion that is likely to continue

It is a long running debate among investors. What pro- vides greater shareholder value – a medium sized company or a large com- pany? Looking at the data, the answer seems clear. The FTSE 250 medium sized group of companies has comfortably outper- formed the FTSE 100 large group of companies in terms of both total returns and share price apprecia- tion. Over a five-year period between March 3 2008 and March 1 2013, the FTSE 250 enjoyed total returns of 53.9 Little and large: size provokes endless debate Reuters per cent and a share price appreciation of 37.3 per cent compared with the FTSE largest corporations attract have a diverse board, with 100’s total returns of 32.8 the most talented individu- the right blend of expertise, per cent and share price als. In simple terms, Sir gender and background. appreciation of 9.6 per cent. Alex Ferguson is regarded Looking specifically at Gervais Williams, director as the best manager in the the issue of gender, FTSE Points failure: ‘deeply regrettable and completely unacceptable mistakes’ were made in the franchising process Getty of MAM Funds, has been a world by many football 100 companies have more long-time advocate of fans, which in part explains women non-executives, at smaller companies, saying why he is the manager of about 17 per cent, compared they tend to offer better one of the world’s most suc- with FTSE 250 companies, returns. He says smaller cessful clubs, that have about 11 per cent. companies are often more United. Some investors say the sensitive to domestic In the same vein, Mr Pat- biggest companies are safer Rail operators hold the line growth, increasingly global terson found that the likes and are likely to offer better and flexible, making them of Peter Voser and his pred- returns over a much longer better value-for-money ecessor Jeroen van der Veer period, which means if you investments. at , who are a long-term investor However, other investors were at the top of the FTSE looking to invest in a stock argue that the the bald data 100 league table, providing over a 10 year period, the after franchise debacle do not necessarily provide £3,631 in value between bigger company may prove the answers. They insist June 2008 and June 2012, the better bet. other factors must be outshone bosses in the Over a 10-year period, the assessed, such as quality of FTSE 250. Here Sports statistics do not seem to management, strategy and back this up as the FTSE Transport Failure of West Coast main line bid process still reverberates, says Rose Jacobs corporate governance. 250 has produced a total When it comes to quality return of 347 per cent and a of management, for exam- ‘Bigger companies share price jump of 237 per ransport companies in the requested a judicial review of the deci- nesses is entirely domestic. That has ple, the latest research . . . are more likely cent between March 2003 UK – stalwarts of the mid- sion, arguing the government had not been perceived as a weakness shows that big companies and March 2013. This com- market company scene – failed to properly weigh the risks of because the bus businesses have high come out unequivocally on to come through pares with the FTSE 100, were always expecting 2012 the competing bids. Less than six exposure to the relatively prosperous top. which has produced a total to be an interesting year. weeks after that, Patrick McLoughlin, southeast of and are seen as Simon Patterson, head the most adverse return of 148 per cent and TThe government had been review- transport secretary, cancelled the con- well-run. and founder of remunera- 73 per cent. of circumstances’ ing its approach to rail franchising tract, essentially admitting that Vir- Gerald Khoo, analyst with Espirito tion advisory firm Patter- This does not account for ahead of a busy period for franchise gin had been right. Santo investment bank, says: “They son Associates, a Pearl dividend yields, which tend renewals – the busiest, in fact, since He said at the time his decision was run the business in a very devolved Meyer & Partners practice, Direct International’s David to be higher for larger com- privatisation 15 years earlier – and down to the discovery of “deeply manner – local management of local has produced his own index Forsey led the way, deliver- panies, or for the greater industry felt it would get a good sense regrettable and completely unaccepta- businesses for local people – and that to show that FTSE 100 chief ing £1,995. risks of investing in a medi- of the changes ahead by observing the ble mistakes made by my department has certainly proved to be successful.” executives offer more value Other investors suggest um-sized company. first big contest, for the West Coast in the way it managed the process”. He points to strong passenger volume than FTSE 250 bosses. that big companies tend to Consequently, Mr Patter- main line. An announcement of the Mr McLoughlin assured customers growth as evidence of success. “First- His Patterson index develop more effective son says there are many winner was due by late summer. that the trains would continue to run Group is now trying to do the same.” works out the shareholder strategy because they have variables and shareholder The constitution of the shortlist, and bidders that the government would appear to value that a chief executive the size and muscle to do value depends on a particu- announced in March 2011, already would reimburse their costs. How- have the least to lose from the UK rail offers in share appreciation, so. lar company. said a lot. Two of the four companies ever, he suspended the next three fiasco. It earned a black mark from dividends and share buy- Jim Stride, head of UK Mr Stride agrees, adding battling for the service – which con- franchise contests, leaving the indus- government in 2009 when it forfeited backs for every £1 that the equity at Axa Investment that it is about specific nects Euston to Birmingham, try in something more often associ- the East Coast main line franchise. chief executive is paid in Managers, says: “Big com- stocks rather than compar- Manchester, Liverpool and – ated with aviation – a holding pattern. Since then its rail holdings dwindled salary, bonus and long-term panies have more reach and ing the large-cap index hailed from foreign shores: Abellio, a Shares in all four of the London- as it focused on continental Europe – incentives. can put up barriers. Bigger against the medium-sized division of the Dutch national opera- listed mass transport groups declined mainly – and the US. The key figure shows that companies also have a sur- index. tor, and Keolis, an arm of France’s in the month following Mr McLough- Still, it was shortlisted for the Great the median FTSE 100 chief vival business model and However, Mr Williams at SNCF. This seemed like a success for lin’s announcement. But as the dust Western franchise, one of those sus- executive offers more than are more likely to come MAM says that pound for the government, which had been keen settled, variations began to appear. pended in the wake of the West Coast double the value of his/her through the most adverse of pound, the smaller com- to bring in a greater number of FirstGroup’s win back in August failure. counterpart in the FTSE circumstances.” pany tends to offer better bidders. had got it out of a tricky situation. A And while National Express inves- 250. The median FTSE 100 Other investors argue value and is not necessarily It also made sense for the foreign deterioration in the performance of its tors’ concerns centre on Spain’s econ- boss added £339 for every £1 that bigger companies have fragile financially. A well- groups, which saw the appeal of busi- UK bus business earlier in the year omy, sending shares down 10 per cent he/she was paid compared better corporate govern- run, innovative smaller nesses that generate billions in reve- had analysts wondering whether the since late last summer, management with £120 for the median ance, which they think can company can survive the nues, even if margins rarely creep out group would be forced to fund its 2013 has expressed anger over the govern- FTSE 250 chief executive lead to better returns and ups and downs of the mar- of the single digits. But it spurred fear dividend with debt. The West Coast ment’s handling of the West Coast between June 2008 and increased shareholder kets, he says. among some experts that homegrown revenues would have solved that aftermath. June 2012. value. This is because they In short, this long run- operators would be outbid by groups problem and so, when the contest was Other companies agree and all are Mr Patterson says often have the capacity and ning debate is likely to con- whose balance sheets benefited from cancelled, the company’s shares fell vocal in their hope that the franchis- “big is best” because the resources to make sure they tinue for a little while yet. overseas state coffers. by more than a third – back to their ing process restart sooner rather than As it turned out, the two leading late July levels – and have remained later. The government has said the bidders were UK companies: First- there since. invitation to tender for the relatively Group, the country’s biggest mass Stagecoach, on the other hand, saw small Essex Thameside franchise from transport group by revenues, and Vir- its share price come back late in the east London to Essex should be pub- Contributors » gin Rail, a joint venture between year and it is trading at roughly the lished this summer. The rest of the Richard Branson’s Virgin Group and same levels as six months ago. As schedule remains up in the air. London-listed Stagecoach – and the with FirstGroup, its bus businesses – Martin Griffiths, chief financial Matthew Vincent Companies Reporters Andrew Baxter incumbent on the line. based in the UK and US – gained ‘Go-Ahead runs the officer at Stagecoach, has argued that UK Companies Editor Commissioning Editor It turned out that the West Coast importance in investors’ minds with business in a very there is a silver lining to the West David Oakley Steven Bird contest was not going to be merely an the rail franchising process on hold. Coast debacle, namely a united front Andrea Felsted Investment Editor Design informative case study, controversial But, unlike FirstGroup, those busi- devolved manner – when it comes to lobbying. Late last Senior Retailing Andy Mears only in what it said about franchising nesses are robust, bolstering market year, he said: “Out of this chaos – Correspondent Alistair Gray Picture Editor as a whole. Rather, it was explosive in confidence. local management because it was chaos – comes an Insurance Correspondent itself. That has been the case with Go- of local businesses opportunity and I think the industry Rose Jacobs For advertising details, In late August, less than three Ahead Group, the smallest of the UK has been more together over the last Vanessa Kortekaas Rod Newing contact: Robert Grange, weeks after Virgin learnt it had lost operators by revenues. It is the only for local people’ four or five weeks than I might have Duncan Robinson Charles Batchelor tel 0207 873 4418, out to FirstGroup, the company UK group whose portfolio of busi- thought would be possible.” Mark Wembridge FT Contributors email [email protected] The resilient middle becomes the place to be

Continued from Page 1 tions are in small and sectors of the FTSE 250 Investors say this listed and private busi- weakens sterling –the UK technology and software. medium sized or mid-cap index in 2012 were house- high-street resilience was nesses, 26 per cent said they currency fell 7 per cent It will not be easy for all market companies returns companies, and the histori- builders, up 64 per cent, and reflected in the strong share were focusing either on against the US dollar in the of them. A concern outlined to investors, the middle has cal data support this view,” general retailers, up 60 per price performance of “survival or maintaining first two months of this by GE Capital’s research been the place to be. says Richard Plackett, man- cent. “These sectors are kitchen specialist Howden company size”. By contrast, year – mid-caps would be was the inability of UK mid- In 2012, the UK’s listed ager of BlackRock's UK Spe- focused on the UK economy Joinery, car retailer Vertu only 14 per cent of German hit disproportionately. market companies to secure mid-market companies cial Situations fund. and were very under-owned and DIY supplier Topps companies took such a neg- “Falling sterling will be revenues in new markets: achieved an average share Part of this recent recov- at the start of 2012, given Tiles in the second half. ative view. detrimental to companies they lag behind their Ger- price rise of 22 per cent – ery may be explained by the the dire state of the UK They agree with Mr St Although the research that source product from man, Italian and French comfortably outperforming make-up of the indices – the economy,” he observes. John on the housing mar- found that affordable overseas markets and sell it counterparts in increasing the FTSE 100’s 5.8 per cent prevalence of underper- He believes that house- ket factor. “This also posi- finance is not a problem for into the UK market,” Mr St sales to overseas markets increase and regaining their forming resources stocks in builders’ shares responded tively impacted stocks such 55 per cent of UK mid-mar- John warns. other than North America. 2007 high. the FTSE 100 and the to evidence that the hous- as buy-to-let specialist Para- ket companies, achieving For Mr Plackett at Black- Stephen Roper, professor While this represented a greater number of compa- ing market had “stabilised”, gon and St Modwen, a busi- growth in the UK still is. Rock, the onus is therefore of enterprise at Warwick recovery from 2011’s falls – nies exposed to a domestic while retailers’ shares took ness focused on urban “The stock market is ‘Falling sterling will on mid-caps to become Business School, says an the FTSE 250 was down 12.6 recovery in the FTSE 250. off simply because shoppers regeneration. Both these expecting the UK economy be detrimental to internationally focused. inability to maximise poten- per cent that year, against Even without a recovery, didn’t. “The share prices of sectors are well represented to show anaemic growth at “Developing markets have tial growth opportunities the FTSE 100’s 5.6 per cent mid-caps were likely to retailers were pricing in a in the mid-cap universe.” best and this is reflected in companies that stronger growth prospects from the fast-growing mar- decline – investors see make up ground if condi- collapse of consumer spend- The good news – or lack the earnings expectations of and are less burdened by kets of Brazil, Russia, India recent returns as the re-es- tions did not worsen, ing and this did not materi- of bad news – in these few UK domiciled companies,” source product debt,” he argues. and China was a feature of tablishment of a trend. argues Chris St John, man- alise,” he explains. “Market sectors masks the competi- Mr St John says. “A slump from overseas “Therefore we look to the research. “We believe that the best ager of the AXA Framling- expectations were too tive challenges still faced in the UK economy would invest in companies with If UK mid-market compa- opportunities to gain expo- ton UK Mid Cap Fund. gloomy.” by UK mid-market compa- result in UK exposed stocks markets and sell it international earnings and nies are to keep moving for- sure to areas of global To him, it was no surprise Fund managers Toby Bel- nies. falling.” into the UK market’ those with exposure to ward then, the direction is growth at attractive valua- that the best performing som and Robin West at In GE Capital’s study of If low growth further capex, such as recruitment, clear. FINANCIAL TIMES FRIDAY MARCH 8 2013 ★ 3 Mid-Market Companies Austerity and online competition challenge stores

Retailers High street stores that have adapted to the internet age are faring best, says Andrea Felsted, but the evolution of shopping is not over yet

his year is proving to be an Kate Swann to pull out of some cate- unlucky one for British gories of products that were under retailers, with mid-market pressure from the supermarkets and companies under particular online competitors, such as entertain- pressure. ment. TSince January, Jessops, the camera “She was absolutely ruthless about retailer, entertainment chains HMV which lines she kept and which she and Blockbuster and value fashion didn’t. Categories such as music, retailer Republic have all gone into where WH Smith was competing with administration, with the loss of more the supermarkets and online, she than 10,000 jobs. came out of,” he says. Retailers are grappling with weak Given customers’ preference for consumer confidence and the inexora- ordering goods via their computers, ble march of online shopping. tablets and smartphones, having a “It’s pretty easy to see why there strong online proposition is crucial. are losers on the high street,” says John Lewis is reaping the benefits Nick Bubb, the independent retail from the bold moves it made into the analyst. “Austerity measures are kick- realms of the internet a decade ago. ing in, consumer confidence and job Managing the store group’s estate security are weak and there is a lot of effectively has become a crucial ele- pressure on discretionary spending.” ment of successful retail. At the same time, according to “There are some successful busi- Verdict, the retail research group, this nesses that still have these store port- year £1 in every £8 will be spent folio challenges but they have man- online, roughly the same as the aged [them] through the whole cycle,” amount spent in , Britain’s says Mr Williams. biggest retailer. He says Next and Tesco have effec- Neil Saunders, managing director of tive estate management programmes. Conlumino, the retail consultancy, Mr Green adds that some of the says that while some of the pressures companies that are doing well, such are from economic conditions, retail- as Sports Direct and Dunelm, the ers are being forced to deal with home furnishings retailer, do not have structural change. big legacy businesses and are “pick- He says many of the retailers that ing and choosing which outlets suit have collapsed into administration their business”. have not moved with the times. Some investors and analysts sug- “Most of the weaker players were gest that the trend of ordering goods taken out earlier in the cycle,” he online but picking them up from says. “Retailers should have adapted stores could offer an opportunity to their businesses to that. Recent casu- breathe life into the store portfolio. alties have not adapted to the struc- However, Mr Hyman argues that tural changes in the market.” many of the store networks are just Christine Cross, chief retail and not suited to becoming click-and-col- consumer adviser to PwC, the profes- lect destinations. sional services company, says: “The With retailers facing spiralling march of online is a structural trend, costs, including business rates, and as customers view all channels as with there being little chance of an retail channels. This requires organi- store in six empty on Britain’s high Next, the fashion chain, and Sports and that is what you are famous for, Clean sweep: increase in consumer spending, store sations to change their operating streets. Direct, the sports goods retailer, are and that is what you build your busi- WH Smith’s groups must find as many self-help model and potentially their organisa- Don Williams, head of retail at doing well. ness model around. You cannot afford outgoing measures as possible. tional design to support these ‘Most of the BDO, the professional services firm, Mr Bubb says consumers, with cur- to be a me-too, an also ran. chief executive Ms Cross says cutting costs, how- changes.” weaker thinks that many retail businesses, tailed spending power, are looking for “The market before the collapse of Kate Swann has ever, is no longer enough. She says: The migration to ordering goods via particularly those that have expanded value when they shop. Lehman Brothers could support a put profitability “The era of just being able to survive the internet is leaving retailers with players were over the years by acquisition, “have Richard Hyman, president of number of also rans. But increasingly, over sales PA by cutting costs has gone, because too many physical stores. a store portfolio that is built for a PatelMiller, the retail consultancy, this market cannot,” he says. there are probably no more costs left According to the Local Data Com- taken out different era”. says to win in the present Trevor Green, a director of Aviva to cut. pany, a retail information provider, earlier in Yet there are pockets of stronger market retailers must have a product Investors, says WH Smith, the high “You have got to look to change the the recent spate of retail administra- performance. John Lewis was the that appeals to customers. street stationer, has navigated the operating model, recognise how tions means thousands more shops the cycle’ winner over the crucial Christmas “To do well you have got to do at downturn partly as a result of the things have changed and adjust your could close this year, leaving one period, while retailers as diverse as least one product really, really well decision by outgoing chief executive business accordingly.” Investors Brokers hang on in hope increasingly of a reversal in fortunes

tion in the broking sector. explained David Dunckley M&A In the past 18 months sev- of Grant Thornton, the eye middle eral brokerages have administrators that over- Vanessa Kortekaas changed shape and some saw the sale of Seymour discovers that there names have disappeared Pierce. altogether. It is just the latest broker are hopes of a Canadian bank Canaccord to be targeted, but most ground recovery but from a acquired Collins Stewart industry observers agree Hawkpoint after Canaccord the number of brokers is very low base also held discussions with still unsustainable and that Evolution Group. Evolution there will – and should – be FTSE 250 Club does not pose any govern- was later bought for £200m more consolidation. ance issues. For the rare The post-crisis climate has by , the South Afri- Rumours are rife about Businesses in the entrant from the more not been kind to London’s can-based bank and asset who will be next. loosely regulated Aim mar- stockbrokers. “The wining manager. And, at the begin- “More [consolidation] index offer profitable ket – , a supplier of and dining to a large extent ning of last year, US-based needs to happen,” says online gaming software, stopped a long time ago. It’s investment bank Jefferies Peter Lenardos, an analyst returns, writes moved up in July 2012 – the been much harder work for acquired Hoare Govett from at RBC Capital Markets. Charles Batchelor standards of the code will many years now,” Christo- Royal Bank of Scotland. “Despite consolidation and have to be met. pher Getley, the head of Others have been less for- some participants exiting But once the initial Westhouse Securities said tunate. In December, bou- the market, I believe there For the aspiring chief exec- excitement of entry to the recently. tique bank Fairfax went is still too much capacity.” utive, ascent into the FTSE FTSE 250 had died down, An apparent decline in into administration, and Some brokers say there is 250 Index can mark an what sort of a berth does it one of the finance sector’s just last month Seymour as much as double the important step on the road represent for the mid-mar- De la Rue provides bank notes for central banks around the world Alamy favourite pastimes (extrava- Pierce – one of London’s capacity in the market that to corporate recognition. ket company? Is it more gant lunching) is only oldest stockbrokers – was there should be, especially Index tracker funds will than the “squeezed middle” one symptom of a bigger plucked from administra- given the amount of busi- take you more seriously, between the really big boys oped markets such as FTSE 100, where 10 compa- may recover one day. But ailment taking its toll on tion by Cantor Fitzgerald in ness that they are all com- while investment analysts in the FTSE 100 and the Europe and the US. China, nies account for 40 per cent the fall from the FTSE 100 stockbrokers: the lack of a “pre-pack” deal. peting for. will start to play an impor- minnows in the SmallCap India and Brazil feature of that index’s value. may reflect underlying merger and acquisitions The pace of change is But if mid-market M&A tant role alongside the Index? prominently, however, in “There is a broader mix of problems and companies (M&A) among mid-market activity bounces back that retail investors that have Of the 620 companies with the expansion plans of companies compared with may have to undergo a companies. may change the fortunes of previously made up the a full London Stock many FTSE 250 constitu- the FTSE 100,” says Mr period of restructuring The number of high-value some brokers. bulk of your audience. Exchange listing, just under ents. Snell. “There are a lot of before they regain their deals (£100m-£1bn) in the ‘Many of the firms Mr Lenardos says there For example, shares in half appear in the FTSE 250 Many FTSE 250 compa- high-quality businesses and momentum. UK was relatively flat last I worked with in are already small signs that Enterprise Inns rose to an with another 270 in the nies may be ambitious to entrepreneurs in there.” Financial companies – year, the mid-market sector M&A markets are improv- 18-month high as tracker SmallCap Index and a cen- grow but they are likely to Because they are smaller, asset managers, investment was the worst affected. The the market have ing this year, which would funds scrambled to buy 6m- tury’s worth in the FTSE lack adequate means to do the FTSE 250 constituents, trusts and private equity volume of M&A transac- offer brokers some respite. plus shares ahead of its 100. The FTSE 250 accounts so. “They are more are more likely to be houses – also make up a big tions worth £10m-£100m disappeared over “Mid-market M&A activ- entry last December into for about 15 per cent of restrained in resources involved in mergers and chunk of the mid-market dropped by 6.2 per cent in the past two years’ ity is starting to improve the FTSE 250. total market value. Accord- across all parts of their acquisitions than their index. They can be cyclical, 2012 compared to 2011, but off of a very low base,” Meanwhile, United Drug, ing to a recent PwC study, business,” says David Snell, FTSE 100 counterparts – amplifying market swings according to Experian, an he says, comparing it to the another December entrant member companies gener- PwC partner and author of even if, at present, there is both up and down, and will information services com- last few months of 2012. following its defection from ate combined annual reve- the firm’s 2011 study, FTSE not much activity (see arti- generally not buy each pany. such that it is difficult to “It probably gives some of Dublin to the London Stock nues of more than £200bn cle, right). “The very big others’ shares. Lower M&A activity has keep track. the smaller players in the Exchange, rose 3.5 per cent and employ more than 1.5m companies are unlikely to But for investors, FTSE meant brokers are fighting “Many of the firms I have market hope that if they’ve in a week in advance of the people. be taken over,” comments 250 companies have proved over less business. Industry worked with within the lasted this long they might switch. Unlike the global natural Companies Richard Penny, manager of to be a profitable long-term executives say the competi- market have disappeared continue to hang on This increased level of resources groups and banks frequently move Legal & General’s UK Alpha investment. The FTSE 250 tion among brokers to win over the past two years,” because of improving M&A investor interest poses a that dominate the FTSE 100 Trust. “The FTSE 250 is a Index delivered a total both clients and advisory says Mehboob Dossa, head markets,” adds Mr Lenar- challenge to companies in Index, FTSE 250 constitu- between indices, more dynamic market return of 348 per cent over fees has become fierce. of equity capital markets at dos. the shape of a greater focus ents are more likely to be where people are looking to the 10 years to the end of Brokers’ margins are also law firm McGuireWoods. The $28bn buyout of on managing investor rela- headquartered in the UK so fallers may make money rather than [in February compared with under pressure because the “Many of the teams Heinz, led by Warren Buf- tions. “You have a bigger and reflect the state of the recover one day the FTSE 100], avoid a 150 per cent from the FTSE number of initial public within firms that I worked fett, has raised hopes that brand to protect so you UK economy. But even at loss.” 100 and 170 per cent on the offerings is far below pre- with just six months ago, the so-called mega merger have to devote more time to the mid-market level, busi- An index as broadly FTSE All Share (covering crisis levels, leaving few are no longer there,” he will spark more M&A activ- investor communications,” ness has become increas- based as the FTSE 250 also all the indices), according corporate transactions to adds. ity. says Adrian Lowcock, ingly international. “It’s 250: Realising Ambitions for has its share of less than to Thomson Reuters data. advise on, while income Seymour Pierce’s search Even if mid-market M&A senior research analyst at fair to say there is a UK Growth. “Fifty five per cent exciting constituents. Some Over the shorter term, from secondary commis- for an urgent cash injection picks up in 2013, there may , an bias but there are few pure of respondents to our study companies drop down into returns have also out- sions has remained low. or an outright buyer was still not be enough advisory asset manager that is itself UK plays in the FTSE 250,” said the availability of the index after their share stripped the other indices. In 2006, there were 462 prompted at least partly work to save those brokers in the FTSE 250. He adds: says Mr Lowcock. talent and skills was an price has sagged in the The FTSE 250 achieved a flotations on the Alterna- because of the difficult trad- who are surviving deal to “You must make sure that De la Rue, a security issue for them. FTSE 100. , a capital return of 32.5 per tive Investment Market ing environment. But the deal, of which there are you don’t get distracted printer founded in 1821, pro- “Expansion into new mar- water and waste manager, cent over five years com- (Aim), London’s junior mar- strain it came under is not “myriad”, by some esti- from running the business vides bank notes for central kets requires a big upfront came down in December pared with 12.8 per cent for ket, which raised £9.9bn. an isolated instance. mates. but you must address this banks around the world; investment to gain a foot- while ICAP, an interdealer SmallCap stocks and 8.3 per Last year the exchange “Seymour Pierce has “It has still got to be issue because it could have Invensys, an engineering hold in these territories. broker, and Ashmore, an cent for the All Share, says hosted 71 issues that raised struggled financially in tough [for some brokers],” an impact on your share group, has global customers Until investor confidence investment manager, Mr Penny. Over one year £707m. “It’s very difficult to recent years with problems says Mr Lenardos. price.” for its control systems; returns, where is the money dropped into the FTSE 250 the mid-market index make money,” says one reflective of the mid-market He adds that the changes For companies that step while easyJet flies to more to come from?” in September. returned 17.6 per cent, just City broker. stockbroking sector, with to the stockbroking land- up from the SmallCap than 30 countries. But The breadth of sectors At the margin, companies under the SmallCaps at 19 However, the scarcity of corporate finance mandates scape in the past few years index, already subject to many lack a true global covered by the FTSE 250 frequently move between per cent but well ahead of mid-market dealmaking difficult to execute and fall- are likely to have little the stock market’s Com- reach, which has meant a appeals to investors over indices at the quarterly the All Share at 7.7 per has, ironically, helped ing secondary commission impact on mid-market M&A bined Code, FTSE 250 entry focus on struggling devel- the more concentrated reviews, so these fallers cent. spawn a wave of consolida- in its target markets,” in the future. 4 ★ FINANCIAL TIMES FRIDAY MARCH 8 2013 Mid-Market Companies 2012 PLC Awards Stories of achievement from the centre

Profiles FT readers’ votes have helped decide which companies and individuals deserve prizes, announced in London last night

Company of the Year Recycling at Shanks Group Winner: Fuller, Smith & Turner (Achievement in Sustainability), Shortlist: Cranswick, Dechra insurance at Direct Line, (New Pharmaceuticals, Galliford Try, Company) and Sepura (Turnround of the Year) – radio supplier to Award sponsor: College Hill British Transport Police Bloomberg, PA

he year 2012 was a tough existence,” says Sion Kearsey, from time to be a pub company. Kelso Place Asset Management, Pubs across the UK had to whose funds bought the company for contend with everything £1 in 2003. “It understood the market from wet weather ruining and was very close to the customer. Tthe prime beer-garden season to ever It was the DNA of the company and increasing duties on alcohol, cut many people had been around a long price supermarket lager and a time, so it was all they knew.” downturn squeezing punters’ wallets, Following a strategic review, it writes Duncan Robinson. was decided to address the equally Fuller, Smith & Turner, the large commercial sector and to London-based brewer and pub chain, expand globally. It has transformed has shrugged off these distractions to itself and serves 1,300 customers make 2012 about growth, rather than from a wide range of industries in just survival, and cementing its 109 countries. position as one of the best run pub Its latest interim results showed an chains in the UK. adjusted operating profit of €3.6m Fuller’s – as it is better known – compared with a loss of €1.6m a year has nearly 400 pubs across the UK, website that he has been “very FTSE 250 company has ridden the positives notably in the US and Line, which runs the Churchill and earlier. The improvement was with around half of these in the encouraged by how seriously the wave of demand for its China, it is unclear whether these Green Flag brands as well as its attributed to diversifying the environs of London. The pubco Shanks team takes its nanotechnology – specialised tools will prove to be transient.” eponymous insurance business, was customer base, strengthening wants to push into “Waitrose responsibilities to the environment, that can fabricate, manipulate and indeed being turned round. margins, improving cash generation territory” chasing high value employees, and the wider analyse matter at the atomic and New Company of the Year The plan has involved taking on and reducing the cost base, a fairly customers in the wealthy bits of community. I am determined that molecular level, writes Mark Winner: Direct Line Insurance fewer risky drivers, quitting common formula. suburban Britain – and paying a under my overall leadership we will Wembridge. Group unprofitable lines of business and “It always comes down to premium to reach them if necessary. continue and enhance our efforts in Its high-tech tools and systems are Shortlist: Bank of Georgia Holdings, implementing more sophisticated execution,” says Mr Kearsey. “It was Recent investments include a £7.5m these important areas.” used primarily for industrial and Energy Assets Group, NMC Health, pricing models. like an oil tanker that only ever deal for two managed pubs in Bath, academic research, with their Playtech The group is cutting £100m worth thought ‘police, fire and ambulance’. on top of the dozens of pubs it added Best Performing Share popularity contributing to a near-50 Award sponsor: Canaccord Genuity of costs, a programme that includes We had to completely change the to its roster in the past few years. Winner: Enterprise Inns per cent jump in its share price over reducing the number of sites that it mindset, culture, routes to market, “They have been picking up assets Award sponsor: Winterflood Securities the past 12 months. Managers at Direct Line faced big operates. language, understanding of quite shrewdly – and they’re picking The company, which was the first challenges promoting the company For hundreds of employees, the commercial customers’ requirements up high quality assets because It was hardly a brilliant year for commercial spinout company from when the insurance arm of Royal past few moths have been far from in markets with very different they’re a high quality investment,” Enterprise Inns. In November it Oxford university, is a regular at the Bank of Scotland, compelled to sell rosy. Direct Line has cut 1,200 jobs. dynamics and drivers. The only says one analyst. The market has announced a fall in 2012 pre-tax PLC Awards, and a year ago walked by European competition authorities, effective way to do that is to bring liked this strategy, too. Shares in the profits from £157m in 2011 to £137m off with the top gong after being unveiled plans last September to list Turnround of the Year in executives who completely buy company are up almost 15 per cent in 2012, and chief executive Ted named Company of the Year. on the , Winner: Sepura into the new strategy, have no over the past year, despite the firm’s Tuppen said there was nothing in The awards mark a solid comeback writes Alistair Gray. Shortlist: Invensys, Qinetiq Group, baggage from the past and can already full valuation compared the economy that was going to for , whose In addition to the market for new TalkTalk Group, St Ives execute on it.” with its peers. Fuller’s set trading alight over the industrial products division was issues being almost non-existent, continued its good form next year. “It will be a battered during the worst of the investors were cautious about the Sepura designs and manufactures into 2013, with 4.5 per period of flat calm,” he global economic downturn. prospects of the fiercely competitive digital products and systems for cent like-for-like sales added. The company, which developed the and price-driven UK motor insurance private radio networks, which were growth in its managed The shares had a superconducting magnet that led to sector. predominantly used by the UK fire, About the awards division for the first great year, though. the invention of MRI scanners, was The insurer overcame the sceptics police and ambulance services, part of the year. They had hit their in 2011 promoted to the FTSE 250 to become one of a small number of writes Rod Newing. The PLC Awards, sponsored by PwC, The pubco has been lowest price for a index for the first time in its 52-year fresh London listings last year. True, Shortly after its initial public are open to all companies on the aided by its focus on decade in January history, and has since gone from investors had been lured to Direct offering in 2007, the forecast market London Stock Exchange outside the London, which, by 2012, and recovered as strength to strength. Line by the conservative pricing set growth of 20 per cent did not FTSE 100. Seven awards are based on comparison with the trading stabilised and Oxford Instruments’ by investment banks on the deal – materialise, following government votes by FT readers and a City panel, rest of the UK, has been the balance sheet was nanotechnology has become an reflected by a strong rally since the budget reductions and project while the Best Performing Share and largely unaffected by the strengthened by a sell-off integral part of efforts by ’s shares’ debut. deferments. Fund Manager of the Year awards are economic downturn. That of most of the company’s emerging economies to bridge the Also crucial was managers’ ability “The company served the public based on performance alone. said, with pubs in places lower-value pubs, writes technology gap with the west. to convince investors that Direct safety community through its entire ranging from Birmingham to Andrew Baxter. This has enabled Oxford Bournemouth, the company has By December, the share price Instruments to diversify its revenue not been completely isolated from had reached an 18-month high on base away from Europe, where its the austerity. Punters are drinking hopes that they would shortly enter technology is used in areas as broad less beer in pubs – opting instead for the FTSE 250 index. Promotion, ranging as criminal investigations by cheap supermarket alcohol – and the which duly took place, meant index police forces, to museums analysing whole sector has had to adapt, with tracker funds had to buy the shares, fine art samples. Fuller’s leading the charge. which ended the year at 102.6p. A focus on food and on new Fund Manager of the Year products, such as its in-house coffee Best Investor Communication Winner: Dunedin Smaller Companies brand, brings in new customers, Winner: Provident Financial Investment Trust even as the wider pub industry Shortlist: , Great Award sponsor: Espirito Santo contracts. Fresh products are not Portland Estates, Petra Diamonds, Investment Bank just gimmicks, says one analyst: Shanks Group “Their business is more about long Award sponsor: Broker Profile Dunedin Smaller Companies term style rather than fashion.” Investment Trust has shown Good quality beer still lies at the Provident Financial’s business is versatility in volatile equity markets heart of the company. Its headline relatively simple – it lends moneys and an ability sharply to outperform brands such as London Pride are and collects it – but it puts a lot of its benchmark, writes David Oakley. near household names, while their effort into investor relations because The trust, part of FTSE 100 listed vintage ales, such as Fuller’s award- the investment community’s Aberdeen Asset Management, has winning 1845 label, are well-respected demographic is very different to its comfortably beaten the FTSE by connoisseurs of a pint. customers, writes Andrew Baxter. SmallCap index over the past five The company believes its IR years with a cumulative share price Achievement in Sustainability programme fits with that of a large appreciation of 93.8 per cent. Winner: Shanks Group FTSE 100 group. Innovations last Its focus on smaller companies in Shortlist: AZ Electronics Materials, year include a web app to enable the UK has enabled it to pick some DS Smith, Morgan Crucible, shareholders to view key website stocks that have great long-term Shaftesbury data on their table devices and growth potential, which is the aim of Award sponsor: PwC mobile phones including videos, its mandate. It is one of the flagship presentations and results trusts of Aberdeen, aiming to gain a Shanks, the Milton Keynes waste announcements. superior investment performance management business, offers Independent research found that through superior active management. recycling and energy recovery Provident Financial had a well Its clients insist it has done so. solutions to public and private sector presented, comprehensive user- Fund manager Ed Beal says the customers, writes Andrew Baxter. friendly best practice annual report. fund is well-placed to continue Among performance achievements The website has plenty of best delivering returns as the equity in managing sustainability issues practice content – strategy, markets have started 2013 well. He last year, the company’s overall marketplace, investment case, reported for the first month of the recycling and recovery rate edged up webcasts and evidence of thought year that they had risen 6.4 per cent from 77 per cent to 78 per cent, leadership. in total return terms, the best 1.28m tonnes of carbon were avoided, January since 1989. and its reportable accident rate Best Technology He cautioned that the growing improved by 13 per cent. Local Winner: Oxford Instruments recognition that equities are cheap neighbourhood complaints fell by 32 Shortlist: Anite, Aveva Group, AZ relative to other asset classes has per cent. Electronic Materials, Renishaw been fuelling the strong performance Peter Dilnot, the former army Award sponsor: Jefferies of markets. helicopter pilot who took over as “We remain of the view that there Shanks’ chief executive in February Thinking small is a big part of are still significant uncertainties,” he last year, says on the company’s Oxford Instruments’ technology. The said. “Although there are some Well-tailored success for ‘father of Ted’

Entrepreneur helm of a full luxury brand. on advertising, preferring From small beginnings, of the Year Known as “the closest word-of-mouth as a means the company floated in Winner: Ray Kelvin of man to Ted” Mr Kelvin’s of spreading the name. 1997 at 135p a share, Ted Baker motif has become never to Ted Baker operates from valuing it at £60m, when Shortlist: Will Adderley, be photographed full a former Post Office pre-tax profits were £1.12m. , Mike profile. sorting office behind Kings Today the market Ashley, Sports Direct He began working at his Cross station, known as capitalisation is more than International, Doug Emslie, uncle’s hosiery store in the “The Ugly Brown £500m. Pre-tax profit was Tarsus Group, Greg Enfield at the age of 11, Building”. It boasts quirky £24.3m in the year to Fitzgerald, Galliford Try. and his late mother, interior design and a January 2012, on sales of Award sponsor: finnCap Trudie, worked on the restaurant serving bistro £215.6m. shopfloor at Ted Baker’s style menus from a kitchen Ted Baker boasts about Ray Kelvin dreamed up the store in that cost £100,000 to 300 outlets, including mythical character of Ted London, and at its Harrods install, in line stores in Europe, Asia, Baker when he founded concession from the early with Mr Kelvin’s the US and Australasia the clothing chain of the 1990s, all the way until a philosophy of and a new art deco- same name, originally a few years ago, when ill treating staff themed flagship on men’s shirt business within health prevented her from and suppliers Fifth Avenue, New Goldbergs, a department continuing. well. York. store in Glasgow, in the Throughout the Ted late 1980s, writes Andrea development of the would be Felsted. business. Mr Kelvin has most Eventually, Ted Baker retained a tight control of proud. emerged from within the brand, insisting that Goldbergs, and Mr Kelvin, everything from the Closest its chief executive, packaging to shop fittings man to expanded the business and signs is designed in- Ted: chief from shirts into men’s, house, so that everything executive women’s and children’s is homogenous. Nor has Ray wear, until he was at the Ted Baker lavished money Kelvin