Implications of the CSR for Debt market update VAT recovery on deal fees – private sector industries what’s the latest? page 2 Page 3 Page 4

www.pwc.co.uk Thames Valley Spring 2011

Spring 2011 Deal Team Times

TelecityGroup acquires Internet Facilitators, supported by PwC’s Out of recession in 2010…but just what is in Deal Team Page 2 store for the year ahead? In the Spring 2010 edition of the Deal Team Times, we looked back on what had been a “turbulent and Vendor due diligence delivers challenging 2009, and a far from certain 2010” ahead. Now, a year later, we can look back on a 2010 which value could have been a lot worse than many had predicted – and new reasons for uncertainty for the year ahead. Page 3

Deal Team helps trans-Atlantic 2010 saw the UK come out of But what of the deals levels of companies in immediate deal to complete recession through a slow, drawn- environment more generally? financial difficulty. However, Page 3 out recovery. Consumer and Was the increased level of M&A there is some speculation as to business confidence has broadly activity observed in respect of whether financing banks are (but quietly) held up. Whilst public companies replicated in waiting to see which amongst Group Lotus returns to the grid as there have been some job losses other sectors of the economy? them will be the first to start Lotus Renault with support from (unemployment up 0.1% over Absolutely! The Deal Team has calling in debts after which other the Deal Team the last quarter 2010), and some been extremely busy since May banks may follow – leading to Page 4 notable business failures (Pontins 2010, helping private companies, an increased level of company and Connaught for example), owner-managed businesses and failures. 2011 is a window of opportunity there have also been some inbound clients to realise their for tech M&A positives. M&A ambitions and maximise In the meantime “good book” Page 5 value for shareholders. This M&A activity remains strong, Perhaps the single most awaited very high level activity was despite the availability of debt economic event of 2010 was maintained throughout the still not being as good as it might Thames Valley Deal Awards open the new coalition government’s remainder of the 2010, and into be. The UK remains relatively for entries Comprehensive Spending Review January 2011. cheap for overseas buyers, and Page 5 (“CSR”) announced in October. there remains pent-up demand Although this review may now amongst both financial and seem “old news” the significant So what’s the outlook for private owners to realise existing effects of the announcements 2011? investments. And there remains have yet to really be felt. There It is likely to be the year in which a pipeline of potential IPO will undoubtedly be some the effects of the CSR are first candidates waiting in the wings. suffering, but there are also real really felt. VAT has already increased to 20%, and debate opportunities for segments of the Real opportunities exist for private sector. is continuing as to who is really bearing the additional cost (i.e. private companies to benefit are the increases being passed on from the effects of the CSR Technology, energy and mining sectors were the outperformers of to customers?). The beginning through outsourcing, JV or 2010. More generally, manufacturing industries had a stronger year of a new fiscal year in April consolidation deal opportunities. than service businesses, the former being driven by strong export will mean implementation of And even within the public markets – particularly from emerging economies. The service sector new, tightened public spending sector itself, our Deal Team’s continues to suffer from a relative lack of consumer confidence. budgets, this surely having nationally-recognised experience effects on both the public and in this sector means that we are private sectors. ideally placed to advise and help On the capital markets front, the realise strategic plans relating FTSE-100 index increased by Perhaps the single overriding to (for example) the required nearly 10% over 2010, breaking economic uncertainly governing restructuring of, and increased the 6,000 mark just before the 2011 is the Eurozone debt crisis, role of GPs in, the health sector year-end for the first time since its potential effect on the wider supply chain. June 2008. However, despite this debt markets, and hence the UK real sign of investor confidence economy. Portugal and Spain As was the case this time and a significant level of public have hit the headlines again company deal activity during the last year, there are major recently and Europe is, after all, uncertainties ahead in the year, the anticipated return of the UK’s biggest export market. significant levels of IPO activity macroeconomic environment, did not materialise as planned but we believe that this generates listings were delayed or pulled. There is also increasing concern real opportunities in the deal over the long-term credit- environment, which we would be worthiness of the US. Locally, the only too happy to help you with. Deal Team is seeing relatively low

Jason Wakelam [email protected] Thames Valley Deal Team Times • Spring 2011

Implications of the CSR for private sector industries

The construction sector could see even negative employment growth in the public As widely reported, government larger relative cuts with an output loss of sector and more traditional areas such as is planning to reduce demand in around 5% leading to around 100,000 job manufacturing, energy and utilities, and cuts. This reflects the greater exposure of construction. the UK economy during the course this sector to cuts in public sector capital of this Parliament through a investment. Other smaller sub-sectors, A sector likely to continue to see growth combination of spending cuts and such as office machinery and computers opportunities from spending cuts is and weapons and ammunition, could see outsourcing, and not only in back office tax rises. even larger relative cuts in output and services. As government and public sector jobs given their heavy reliance on public organisations look to reduce their non- It is estimated that the public sector sector customers. The challenge for these core, fixed cost operations, and increase spending cuts could have significant knock- businesses will be to diversify into other the use of private and voluntary sector on effects on private sector gross output markets, both in the UK and overseas. organisations in the delivery of front-line due to the impact on suppliers to the public public services, organisations such as Serco sector (and their suppliers in turn). Almost These effects relate to public spending cuts, are already highlighting opportunities for half a million private sector jobs could be but there will also be material impacts from new business in their financial statements. lost as a result. planned tax rises, although these are harder Many are also seeking to form alliances with to quantify at the sectoral level. There may voluntary sector organisations. The business services sector faces the largest impacts in absolute terms, with also, however, be positive effects from the Similarly, organisations with flexible potential output losses of around 4% and fiscal squeeze in terms of the possibility of supplies of labour, such as manpower over 180,000 job cuts due to reduced interest rates remaining lower for longer service providers, will have new public sector demand in current areas of and a reduced risk of a major financial crisis opportunities in future, such as partnerships operations. On the other hand this may also associated with a bond market revolt of the between government and private sector be the sector that, based on historic trends, kind seen in Greece and elsewhere in the manpower providers to performance will create the greatest number of new Eurozone earlier in 2010. manage and retrain staff, to find new private sector jobs to offset the squeeze on employment for them where possible, and the public sector. In addition, there are signs Quantifying these more positive effects to manage redundancies where it is not. that the coalition government may move the is difficult, although in general we would boundary between the public and private expect (based on the experience since sectors in certain areas, thereby opening the early 1990s) to see labour-intensive up new opportunities for business services service industries being the main source companies – in some cases working with of new private sector jobs in the coming Emma Butler voluntary sector organisations. years, so helping to compensate for [email protected]

TelecityGroup acquires Internet Facilitators, supported by PwC’s Deal Team

TelecityGroup, Europe’s industry- existing presence in the city. The IFL facility will add 1,600 sqm (1.4MW) of high quality capacity leading provider of premium to the existing group estate, and has the potential network independent data centres, for significant further growth. announced on 2 August 2010 that it had acquired Internet TelecityGroup’s data centres act as connectivity hub facilitating the storage, sharing and Facilitators Limited (“IFL”) for distribution of data, content and media. The £21.1m. IFL is a carrier neutral data centres are located in prime positions for data centre based in . commerce and connectivity including London, Amsterdam, Frankfurt, Paris, Stockholm, Manchester, Milan and Dublin. TelecityGroup is expanding its presence in commercial centres across Europe, and management believes that Manchester offers The acquisition followed a period of extensive due prospects for significant growth. The acquisition diligence supported by our Deal Team. of IFL represented a unique opportunity, providing a complementary strategic fit with the group’s

Peter Brook [email protected]

2 Thames Valley Deal Team Times • Spring 2011

Debt market Vendor due diligence update delivers value A PwC Deal Team drawn and now employs over from across the South East 3,500 people in the UK, US, has provided vendor due Germany, Italy, Norway, PwC’s latest Debt Markets Update report showed diligence services to Siemens Spain and Australia. that despite worries over the euro-zone and fears UK in relation to the sale of of a double-dip recession, Q3 of last year saw the Roke Manor Research Ltd to Commenting on the sale of Chemring Group plc. Roke to Chemring, David markets record a strong period. Here, we take a Smith, Managing Director look at the trends revealed by the report and the Roke Manor Research of Roke said: “Joining Ltd is a leading centre the Chemring Group will future of the debt markets. for advanced technology provide the independence research and development, and investment required The low interest rate environment will be significantly impacted by based in Hampshire. to enable our continued has generated high levels of liquidity the Government’s Comprehensive Working in collaboration growth. Our focus remains and the bond markets in particular Spending Review. Whilst there is an with government agencies, on leading innovation have responded with high levels of undoubted long-term requirement consortia and industrial in communications, issuances and tightened pricing. for infrastructure projects, the partners, Roke has information systems But whilst markets have responded current round of austerity measures established a world class and electronic sensor positively to the increased chances of being implemented across Europe is reputation for developing technology.” further quantitative easing (or QE2 as dampening demand for new finance in and delivering innovative it has become known), this only serves the short-term. advanced sensors, signal Speaking about PwC’s to highlight the fragility of the current processing, communications vendor due diligence report and network solutions in global economic environment. With the coalition government budget and process, Andy Bown of the defence, security and cuts spelling the death knell for Siemens stated, “PwC’s VDD industrial markets. The short-term outlook for lending programmes like Building Schools for report was an important part remains positive but there is still the Future and the Comprehensive of the divestment process a risk that markets will be subject Spending Review likely to result in Chemring Group plc is a and was very well received to further volatility in response to a number of other projects facing global defence business by the bidders it was shared macroeconomic developments. In the the axe, the outlook for project listed on the London Stock with. The report was a good leveraged market, the large number financings in the UK for the first half Exchange, with a market balance of analysis and of deals coming through at the end of 2011 is a continued low level of capitalisation of over £1bn. writing, allowing bidders to of 2010 had caused some concern activity, that may not be helped by the The group specialises in the quickly understand the Roke amongst market participants as to rising speculation about a potential manufacture of energetic business. Overall, we were whether the still-fragile European imminent increase in interest rates. material products, providing very pleased with PwC’s markets will cope with the level of deal solutions for highly contribution to the project.” demanding requirements flow. The successful syndication of To download the full Debt Market in the Countermeasures, these deals underlines the continued report visit: http://www.pwc.co.uk/ Counter- IED, Pyrotechnics recovery of the leveraged finance pdf/premium/uk-debt-market- and Munitions markets. The market. update-q1-2011.pdf innovation and development In contrast to buoyant levels of bond issuance and the recovery Alex Pascoe [email protected] in leveraged finance, other credit David Rolfe markets are more subdued. Long term [email protected] project and infrastructure finance

Rapid relationship-building and team “brilliance” helps trans-Atlantic deal to complete On 5 October 2010, the board of London main market listed The complexities of the deal process and the performance of AEA Technology plc, which provides environmental consulting work concurrently in the UK and US, meant that strong pro- services to businesses and governments, announced that it active communication (both internally and externally) was key had entered into an agreement to acquire US-based ERG (also to ensuring that the project remained on track. an environmental consulting firm) for approximately $83m. The ability of the PwC team to rapidly build relationships with The transaction was funded by a placing and open offer, further both client and target was critical to the successful outcome complicated by a capital restructuring and reverse takeover of the acquisition process – with the client describing the PwC rules, which required a multidiscipline PwC team to undertake team as “brilliant”. the role of Reporting Accountant and provide financial due diligence, tax and structuring advice.

Jason Wakelam [email protected] 3 Thames Valley Deal Team Times • Spring 2011

VAT recovery on deal fees – what’s the latest?

One of HMRC’s recent areas of focus has been to review the recovery of VAT by taxpayers on professional fees relating to activities such as corporate restructuring, re-financing, PE acquisitions and other types of deals.

Until recently the taxpayer’s success in the BAA case and the AB SKF • The company therefore did not receive the services wholly for the case appeared to have stalled HMRC in this respect. However, HMRC purposes of its business and the VAT was not input tax proper to the have recently succeeded with their arguments at the Upper Tribunal in company. the MyTravel case. HMRC’s success is likely to give fresh impetus to their efforts to restrict the recovery of VAT in similar circumstances. • It acknowledged that although MyTravel had been involved in the appointment of the advisor, received a copy of the report and may have received some benefit from the report, this did not entitle it to recover The My Travel case concerned a tripartite agreement between MyTravel, a the VAT as input tax. number of financial institutions and a third party advisor. MyTravel sought to reclaim the VAT on the services provided by the third party advisor as its input tax. The Upper Tribunal restored HMRC’s decision to disallow the The My Travel case confirmed the principles which should be used to company’s claim for input tax. The court’s reasons can be summarised as determine whether a taxpayer should be able to reclaim VAT on deal costs. follows: It may be possible to differentiate the MyTravel decision from other types of deals and there are actions which can be taken to strengthen the VAT • It took the view that the there was a single supply of services by the recovery position. third party advisor. • The single supply of services was, in fact made to the financial institutions and not to the company, Gavin Orpwood [email protected]

Group Lotus returns to the grid as Lotus Renault with support from the Deal Team

PwC’s Thames Valley Deal Team provided targeted financial and taxation due diligence to support Group Lotus’ strategic alliance with the Renault F1 team, a partnership which brings the Lotus car manufacturer back to F1 in 2011.

Based in Enstone, Oxfordshire, Renault F1 is one of Formula 1’s most established names, having won both the Drivers’ and Constructors’ World Championships in 2005 and 2006. Under the terms of the agreement, Group Lotus has entered into a seven year sponsorship arrangement with Renault F1, with the team being rebranded Lotus Renault GP.

Jason Wakelam [email protected]

4 Thames Valley Deal Team Times • Spring 2011 News

2011 is a window of opportunity for tech M&A

The alignment of cash-rich trade buyers, private equity sponsors with funds to invest and continued improvement in financing liquidity is opening a window of opportunity for technology merger and acquisition activity, according to PwC’s recently published Technology M&A Insights report. To download the full Technology M&A Insights report visit: http://www.pwcwebcast.co.uk/dpliv_mu/technology_insights_Jan2011.pdf

Corporate Finance partner and technology sector leader Andy Morgan Compared with the cyclical low in 2009, technology sector deal volumes said; “More high quality assets are now being brought to market as sellers recovered over the course of 2010, while deal values rebounded more seek to take advantage of the presence of cash-rich corporates with a strongly. Some 393 deals completed in 2010, (up 32% from 2009) with a renewed appetite for mega-deals, a resurgence of private equity buyers and total value of €75.7bn – more than double the value completed in 2009. improving capital markets. The recovery in M&A activity remains relatively cautious with both deal volumes and values still some way off the highs of 2007 and 2008. “We are seeing a change in deal dynamics as appetite returns. The number of pre-emptive deals is on the rise with buyers originating deals rather than competing in traditional auction processes. Growth is firmly back on the corporate M&A agenda.”

Thames Valley Deal Awards open for entries

PwC is delighted to once again sponsor the Management Team of the Year award at this year’s Thames Valley & Solent Deal Awards.

The Management Team of the Year award recognises the business leaders behind the deals that have shown exceptional leadership and vision, and acknowledges the hard work that goes into managing a business through the deals process.

Last year, we saw some inspiring examples of management teams that not only managed through a tough economic period but built significant value in their companies through successfully achieving a key merger or acquisition.

Nominations for the awards are open until Friday 4 March for deals between 1 January 2010 and 28 February 2011 and the winners will be announced at a gala dinner on the 7 April.

For further information about the Thames Valley & Solent Deal Awards or to enter, please visit www. dealsawards.co.uk

PwC corporate finance partner Andy Morgan with Nick Bray of Micro Focus, winners of last year’s Management Team of the Year Award.

5 Thames Valley Deal Team Times • Spring 2011

Meet the Thames Valley Deal Team

Jason Wakelam David Rolfe Transaction Services Corporate Finance Tel: 0118 938 3366 Tel: 0118 938 3242 [email protected] [email protected]

Andy Morgan Nigel Hopes Corporate Finance Transaction Services Tel: 0118 938 3191 Tel: 01895 522085 [email protected] [email protected]

Peter Brook Julia Holgate Transaction Services Tax Tel: 0189 552 2086 Tel: 0118 938 3133 [email protected] [email protected]

Joanne Swali Stuart Maddison Valuations Business Recovery Services Tel: 0118 938 3289 Tel: 0118 938 3282 [email protected] [email protected]

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