Insights into

ISSUE 6 • 2013 facilities management

The Facilities Management sector has had a good start to the year FMwith the highest number of Q1 deals in fi ve years. The majority of activity has taken place at the smaller end of the market but the sector has also seen increasing involvement of international buyers in the M&A space. In this issue, as the UK continues on its road to recovery, we look at how FM companies are adopting proactive business David Ascott strategies to make the most of opportunities available. In Partner, Corporate Finance Grant thornton UK LLP particular, we focus on targeting vertical sectors and the international element. Richard Sykes, CEO of ISS UK, also shares his views on how these strategies can work effectively.

Deal value (£m) Q1 2013 M&A overview Robust M&A volumes

The fl ow of mergers and acquisitions More importantly, the good level of in the UK’s Facilities Management activity at the beginning of 2013 comes (FM) sector remains robust despite the on the back of two successive strong wider issues in the economy as a whole. quarters for dealfl ow; as a result the In total 27 FM deals were announced sector has seen the most active nine- during the fi rst three months of 2013, month period recorded since the fi rst one fewer than the previous quarter, but three quarters of 2008. still the highest Q1 fi gure since 2008.

• 2013 M&A overview • Quoted FM tracker • FM sector trends

1 Insights into FM - Issue 6 • Viewpoint FM UK Facilities Management transactions 2008-2013 YTD

120 Volume Value £m 5000 4500 100 4000 As usual, the deals announced 3500 80 during the quarter have predominantly 3000 involved businesses at the smaller end 60 2500 of the market. However, there was 2000 one signifi cant transaction during the 40 1500 quarter in the form of ’s £385 1000 20 million bid (via its UK subsidiary 500 Amey plc) to acquire Enterprise Group 0 0 Holdings, the provider of utilities 2008 2009 2010 2011 2012 2013 YTD infrastructure maintenance, from Source: Zephyr Source: Zephyr private equity investor 3i. This process also led to another transaction during Q1 in which Group acquired the remaining 50% stake in joint venture company Enterprise Mouchel Limited held by Enterprise Group UK Facilities Management transactions 2008-2013 by quarter** Holdings; in this case the consideration 45 Volume Value £m 4000 was not disclosed, although the

40 3500 company had sales of over £200 million. 35 3000 30 2500 25 2000 20 1500 15 1000 10 “There was one signifi cant transaction during the 5 500 quarter in the form of 0 0 Ferrovial’s £385 million bid.” 2008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q1 Source: Zephyr Source: Zephyr **see back page for Grant thornton subsector split between hard and soft FM

2 Insights into FM - Issue 6 FM International flavour BAM Group, Swegon AB and Tyco The Enterprise Group Holdings deal International respectively). Overall, also serves to highlight the continuing this increasingly international flavour trend towards M&A involving to the M&A market in the FM sector is international entities as buyers. Six such helping to make up for areas of softness deals were announced in Q1, bringing elsewhere. the total in the 12 months to the end of Meanwhile, private equity related March to 19 – the highest recorded in M&A is at an especially low ebb in the any 12-month period since before 2007. current market, with financial buyers In addition to the activities of Spanish hamstrung by the difficult leverage group Ferrovial, other international conditions and showing little ability acquirers active in the market during or appetite to compete for targets. The the quarter included businesses 12 months to the end of March 2013 controlled by US, Dutch, Swedish and saw just nine deals backed by private Swiss entities (CUI Global Inc, Royal equity houses; this compares with 25 in the same period of 2007/08. Similarly, while domestic activity remains steady, typically contributing around 20 deals per quarter as it did in Q1 2013, it is some way down on the levels of activity seen in some quarters before 2011.

UK Facilities Management transactions 2009-2013 by acquiror type

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

UK PE International

Source: Zephyr Source: Zephyr

3 Insights into FM - Issue 6 “Across our network we continue to see a wealth of M&A opportunities in the FM sector, whether these involve smaller niche service providers or businesses with much greater scale. the strong interest in May Gurney from groups such as Costain and Kier serves to underline the attractiveness of the sector.” David Ascott FM Corporate Finance Partner UK Facilities Management transactions Q1 2013 by subsector

Catering 7% 4% 7% Soft FM continues to dominate Cleaning 11% 7% Until the fi nal quarter of 2012, M&A Hygiene activity in the hard FM space had Security dominated the statistics, with the Other Soft FM soft FM deals being outnumbered by 19% almost exactly two-to-one. However, 26% Maintenance/Fit-out in the last two quarters, activity in the M&E security, cleaning and other soft FM Utilities sectors have swung the balance away 4% 15% Other Hard FM from hard FM in numerical terms. As Source: Zephyr has been mentioned before, this could Source: Zephyr be a refl ection of the continuing search for scale or it could still be something of a statistical anomaly. Certainly, in Q1 2013, a sudden jump in deals being UK Facilities Management transactions announced in the M&E sectors boosted by subsector 2011-2013 by quarter

the hard FM almost back to parity. The 100% Other Hard FM utilities also saw dealfl ow during the 90% Utilities quarter, though not perhaps as much as 80% M&E many had expected; this area may yet 70% provide a strong seam of opportunities 60% Maintenance/Fit-out in quarters to come. 50% Other Soft FM 40% Security

30% Hygiene

20% Cleaning 10% Catering 0% 20112011 Q120112011 Q220112011 Q320112011 Q420122012 Q120122012 Q220122012 Q320122012 Q420132013 Q1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Other Hard FM Maintenance/Fit-out Hygiene

Utilities Other Soft FM Cleaning

M&E Security Catering

Source: Zephyr

4 Insights into FM - Issue 6 Quoted FM tracker

FMShare price change to 31 March 2013 Share price change to 31 March 2013 Market cap Sales EBITDA EBIT 3 months 6 months 1 year 2 years Name £m £m £m £m % % % % Compass Group plc 15,353 16,905 1,456 1,154 15.9 23.0 28.2 50.0 G4S plc 4,111 7,501 707.0 467.0 13.6 9.7 6.9 14.1 Serco Group plc 3,126 4,913 394.0 296.9 17.2 8.1 15.6 12.4 Rentokil Initial plc 1,818 2,546 431.4 212.5 4.6 23.2 17.4 11.3 plc 1,617 9,479 222.0 109.0 (14.2) (22.7) (17.8) (31.7) Berendsen plc 1,353.3 985.1 311.7 119.0 31.6 43.9 50.4 63.2 plc 1,172 3,666 216.0 153.8 (14.1) 0.5 (8.7) (28.3) Group plc 1,039.2 1,981 143.9 109.4 6.8 (3.6) 0.5 42.9 plc 634.9 1,958 70.4 35.1 28.4 36.9 71.4 81.4 plc 466.6 2,031 80.6 63.0 (11.6) (9.5) 3.4 (9.8) Mears Group plc 314.5 679.5 36.1 23.5 4.2 20.8 33.8 40.2 Security plc 210.0 94.1 23.0 19.4 (2.1) (4.6) (7.4) 17.1 May Gurney Integrated Services plc 174.9 695.3 46.9 26.3 36.3 96.8 (9.1) (4.2) Johnson Service Group plc 111.1 244.2 47.4 17.0 21.3 32.4 42.2 31.4 ISG plc 45.6 1,281 10.4 4.9 (4.2) 3.8 1.1 (31.1) Green Compliance plc 2.3 21.2 1.8 -1.4 4.3 (70.5) (89.7) (94.8)

FTSE All Share 9.3 12.7 12.6 10.2 FTSE Support Services 15.5 17.3 21.6 33.7

Source: Factset; Datastream. Market data as at 31 March 2013; Financial data as at last announced financial close.

Strong overall performance... and the 11 companies that achieved in the latest quarter than their 12 The first quarter of the year was a busy growth saw an average rise of almost month average. However, the strongest one for the companies on our Quoted 17%. Over the longer-term analyses, performers in the list during Q1 were FM Tracker, with nine issuing year-end the picture is similar, with an average Berensden, Interserve and May Gurney. or preliminary results, and others share price growth of 8.6% over The first two of these have seen releasing half-yearly figures o r interim the one-year snapshot (15.2% if the robust share price growth over both the statements. And taken as a group, the smallest company, Green Compliance, short and longer-term snapshots, on the 16 businesses in the Tracker continued is excluded) and 10.3% over the two- back of successful strategic measures to fare well during the first quarter of year period (17.3% excluding Green to counter poor domestic trading 2013. Overall, their average share price Compliance). conditions. For Berensden, this goes in the period rose by 8.6%, which is As far as individual businesses are back to its 2010 strategic review, sought very close to the FTSE All Share index concerned, the three largest on the to focus investment in growth areas, rise of 9.3% over the period. What’s Tracker continued to outperform the whilst closely managing margins in the more, only five of the group saw any FTSE All Share index comfortably, with non-growth business lines. Meanwhile, decline in share price during the quarter G4S and Serco growing more strongly Interserve’s share price rise has been

5 Insights into FM - Issue 6 FM driven by an increasingly international from MITIE’s acquisition of Enara business, as well as by new contract FM sector trends and Interserve’s buyout of Advantage wins bolstered by strategic acquisitions, Healthcare, both in the second half including that of Advantage Healthcare. Proactive strategies in a of 2012, to the two recent healthcare On the other hand, May Gurney’s down market acquisitions made by Compass in the share price, which had seen a decline As is the case for companies elsewhere US (part of the £80 million of spend over the one-year and two-year in the UK economy, the key elements mentioned above). For FM groups timeframes, has undoubtedly been of business strategy for FM firms have already heavily involved with contracts boosted by the acquisition interest first really come under the microscope during for local authorities or in areas such as from Costain and then more recently the economic downturn, such has been social housing, there is a strong rationale (into Q2 of 2013) from Kier. its effect on both the public and private for looking at complementary assets in sector purses. Initially, perhaps, strategy other verticals or in areas where two ... but some weakness in was dominated by defensive tactics, to verticals overlap. A good example is in -related areas protect against the sharp deterioration catering within the NHS, which is seeing Although the quoted FM landscape in the trading environment. But now, a trend towards a multi-service offering generally remains in robust order, the as the sector faces up to the challenge which will provide patients with a range current weakness in the construction of a long and slow recovery, there is of choices from the basic up to more sector is clearly impacting the sample. growing evidence from M&A markets premium, branded outlets. Three of the larger businesses seeing and the trading statements of the larger Meanwhile, it could be argued that share price declines – Balfour, Carillion FM businesses to suggest that the sector the education sector is also underserved and Kier – all have significant exposure might be taking a more aggressive, by FM providers and therefore it is an to the sector. In some cases, this proactive approach in an effort to drive area presenting strong opportunities. By weakness will be providing additional growth, perhaps in recognition that the way of example, recently won a momentum to the drive to strip away market is experiencing a ‘new norm’. contract to provide education support non-core units. services (ie HR, recruitment, back office, Conversely, the relatively tough Targeting new verticals etc) to Staffordshire County Council conditions continue to encourage some Certainly one of the more visible growth- and other major FM players are known larger players (for example, as mentioned oriented trends within the sector over to be looking into building a presence above, Kier and Costain) to look at the past few quarters has been the moves in the sector. Looking further ahead, consolidation opportunities, though as by some in the FM sector to expand into the new breed of education Academies Mears has seen in the period following new verticals. It is a theme that has been coming on stream may well create new its acquisition of Morrison, there can be touched on in previous quarterly releases opportunities for FM businesses with some downsides: it is not unusual for with reference to moves by established capabilities in the area. share prices to be hit for some time – FM providers into the healthcare, Infrastructure is often cited as an area even a year or more – as the benefits of education and infrastructure markets, and of opportunity for the FM sector and integration filter through. it is likely that this trend will continue although this year’s planned government to drive a good flow of domestic M&A spending in the area is perhaps not as moving forward. high as had been hoped, it is certainly As far the healthcare market is going to be more substantial than last concerned, acquisition activity has year’s spend. What’s more, projects featured strongly in recent quarters, such as Crossrail, the High Speed Two

6 Insights into FM - Issue 6 FM (HS2) rail network, and Heathrow’s the BRICs, Australia and Turkey; it companies are becoming increasingly third runway are further cause for also reported having concluded M&A creative in structuring their routes optimism. The fact that Mouchel, transactions amounting to £80 million in into overseas markets. For some this Skanska and Ferrovial (via Amey) are the six months to March 2013, including entails forming joint ventures or other all buying in this area does suggest that acquisitions in North and South strategic partnerships with specialist the larger operators are expecting a real America. local providers. Others are seeking to opportunity for growth to emerge. And But the international angle is not use the existing business footprints there is certainly anecdotal evidence that without its problems. To begin with of their large international clients as deals in this area will continue to be a there is the issue of where to look for the mechanism to ‘land and expand’, feature of the M&A market, with at least viable targets: for obvious reasons, the rather than investing heavily in start-up a handful of infrastructure businesses Eurozone is hardly the most attractive infrastructure, or in acquisitions. currently known to be on the block. region in the current climate. However, opportunities in regions with higher International aspirations growth prospects often have price However, perhaps the most important tags to match – price tags that are Looking ahead: theme in the market currently is the unlikely to reflect the level of risk Overall, international expansion push to combat difficult conditions at they actually represent. In addition, will surely play a central role in the home by targeting international growth there are currency hedging issues to be strategies of many domestic FM markets where the FM and outsourcing considered and, in many cases, limits on businesses. But there are still those model is less developed. This is especially foreign ownership. Finally companies that believe the UK market to be important for the larger FM providers must face the thorny issue of funding robust and diverse enough to offer – as the CEO of ISS noted at a recent these potential opportunities: although the growth opportunities needed, event co-hosted by Grant Thornton and some FM businesses may have healthy be it via the continuing government Barclays – in view of the growing trend balance sheets to draw on, for many outsourcing or through the many towards globalised tendering. And it is the priority remains on de-leveraging niche services offerings that exist no coincidence that many of the larger and carefully managing cash reserves. in the public and private sectors. quoted FM players have focused on As a result, many will need to look at In this case it is likely that the this angle in recent trading updates and divesting non-core or underperforming M&A markets will continue to be annual statements. Serco, for example, subsidiaries in order to free up the boosted both at the smaller end of has managed to offset losses sustained resources to invest abroad – a fact the scale, via the buying and selling as a result of public sector cutbacks, that is helping to drive the relatively of smaller non-core units, and at both in the UK and the US, by securing strong flow of M&A opportunities the larger end as more substantial a record £5.8 billion of new global for local and international buyers. The businesses look to drive major contracts in 2012; it now generates more only alternative for quoted companies economies of scale: the recent than 45% of its revenue outside of the would be to look at cash calls, which is Mears/Morrison and May Gurney/ UK – up from 40% in 2011. Meanwhile, unlikely in the current climate. Kier developments may be a sign of recent updates from Compass focused To combat the problems of funding, things to come. on robust growth in North America, risk and target identification, FM

7 Insights into FM - Issue 6 “Big clients want that brand protection – they don’t want an endless list of suppliers that could potentially destroy their brand overnight through the actions of one FM bad security guard or cleaner, etc.”

However, where ISS does see But now, what ISS is seeing is a Viewpoint market growth is in the education market that is increasingly about space, which has witnessed a lot more self-delivery. Customers see that as Richard Sykes, CEO of ISS UK, outsourcing, especially in some of the a real advantage: at one level it really discusses growth strategies based soft services such as catering. There does drive cost savings, but more on targeting new verticals and are also other pockets of outsourcing importantly it offers brand protection international expansion. activity – back offi ce and even some and brand value. Big clients want There is certainly evidence that of the actual teaching provision – and that brand protection – they don’t FM businesses are seeking growth by this is defi nitely a new twist to the want an endless list of suppliers that unlocking new verticals, and areas such marketplace. could potentially destroy their brand as healthcare and education have been overnight through the actions of one in the spotlight. For ISS, healthcare Internationalisation bad security guard or cleaner, etc. is probably more of a horizontal and The whole area of internationalisation So there is a real drive around brand it is a case of providing more for the is hugely important. FM markets in protection in the global outsourcing customers we already have. So our the UK are still way ahead of the rest market, and that has driven the self- strategy in the space is to look more of the world in terms of complexity delivery concept. Of course, self into niches like dietetics and patient and competition, and this has driven delivery requires a major outlay in administration, rather than the core many operators to seek out the greater building up international infrastructure: FM products; our view is that the core margins available in areas like the ISS alone acquired 500 companies over healthcare market has actually been BRICs and Turkey. On the fl ip side, the course of one fi ve-year period in fairly static in terms of outsourcing FM providers without an extensive order to gain a presence in 53 countries. activity and we have not seen any major international network are having to That is the kind of investment it took growth in the area. focus on public sector outsourcing at to build the ISS platform and it will As far as domiciliary care is home because they cannot compete take other businesses some time to concerned, there have been a few in the private sector market. The big catch up if they decide to go down the acquisitions in this sector, but ISS blue chip corporates are increasingly acquisitive route. remains cautious. In fact we believe that looking to outsource at a pan-European policy u-turns and tighter regulations or global level and over time this has could catch out the unwary, because led to the evolution of a group of historically, in terms of process and providers with global capacity, albeit via quality the NHS has imposed a higher outsourced partners. bar for the private sector providers than it has for its own. Consequently, when something goes wrong, private sector providers can attract a huge amount of negative attention from the Care Quality Commission.

8 Insights into FM - Issue 6 Contacts FMFor any further information, please contact:

David Ascott Pete Dawson Martin Gardner T 020 7728 2315 T 020 7728 3197 T 020 7728 2847 E [email protected] E [email protected] E [email protected]

Grant Thornton Facilities Management – subsector map

Hard FM Soft FM Fabric maintenance Security Fit-out Cleaning Mechanical & engineering Catering Fire Protection Washroom hygiene Grounds Maintenance textile/Laundry Utility Maintenance Pest Control Reprographics Space planning Relocation and Storage

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