Midlands Deal Team Times - blogs

MidlandsDeal Team Timeswww.pwc.co.uk/midlands

November 2012

Lead article

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2 Midlands Deal team times November 2012

Planning really pays dividends

PwC Deal Team works seamlessly to deliver a strategic trade buyer for SCH’s distribution business

PwC Corporate Finance (‘CF’), Transaction Services (‘TS’) and Tax teams, worked together to advise on the disposal of Specialist Computer Holdings’ distribution arm, the Specialist Distribution Group ‘SDG’, to Tech Data Corp for £220m.

Specialist Computer Holdings is one of the largest privately owned businesses in the Midlands having been founded 37 year ago by Sir Peter Rigby. Prior to the transaction the business was one of the last IT groups operating a hybrid model having both IT distributor and reseller arms. The transaction will leave the Rigby family to focus on their reseller business, Specialist Computer Centres ‘SCC’, with Sir Peter Rigby looking to accelerate investment into SCC.

Steve Rigby, who led the project for SCH said:

“PwC did a great overall job and I am delighted we selected PwC for both the TS and CF phases of the project, the result we have achieved is exceptional and a testament to the quality of the business and the preparation of the business for sale”.

The PwC TS team performed an extensive piece of vendor assistance work simplifying the due diligence process and enabling the buyers to quickly understand the standalone position of the SDG business. They provided support throughout the whole transaction from the preparation of the business for sale to supporting in response to due diligence.

The CF team ran a highly targeted process utilising their international network to engage a handful of genuinely strategic multinational acquirers to ultimately arrive at a sale to US listed technology products distributor Tech Data Corporation.

Matt Waddell, CF partner at PwC, led a team advising SCH said:

“We are absolutely delighted to have been able to advise SCH, Europe’s largest privately owned technology group, on this landmark transaction”.

Matt Waddell

0121 232 [email protected]

Sarah Taylor


Jason Davis



Take control of divestment

With businesses thirsty for cash and finance on favourable terms no longer available, the trend for diversification seen in the last decade has now given way to increased shareholder pressure to focus on core competencies. However, finalising the divestment of a non-core asset or part of a company has become increasingly challenging over the last year or two. Businesses are now having to grapple with a new environment, where new skills, knowledge and approach are needed to make a successful sale. The luxury of one seller, one asset, one buyer and one lender now seems like a distant dream.

Lack of available finance in the marketplace has led to an increasing number of situations where more than one buyer or lender is involved in a transaction. As the number of parties increases, sales processes have become slower and more complex and more of management’s time is being increasingly taken up dealing with the various parties requests.

The possibility of multiple buyers has also led to more demand for assets to be presented for sale with a built in option for sub-separation.

We are also seeing other buyers increasingly making offers for only part of the assets for sale, and thereby leaving the seller with the remainder. With market confidence remaining fragile, these types of demands have laid the responsibility for diligent planning and preparation firmly with the sellers. If the information isn’t readily available to bidders, the sales process can grind to a halt while the analysis is prepared, or even affect offer prices amidst perceived risk and uncertainty.

The recent additional demands on the seller are coupled with more longstanding factors relating to the wider implications of the sale of non-core assets on the remaining business, which must continue to be considered by management. For example, we have seen how the sale of non-core parts of the business has the potential to cause parts of the operating model to become obsolete leading to a requirement for further internal restructuring.

Against this backdrop, we have seen increased demand for vendor due diligence (VDD) and vendor assistance (VA) services from sellers looking to take steps to ensure

that marketplace conditions do not have adverse implications on their transactions in terms of both deal value and ongoing internal disruption.

VDD is increasingly being used to maximise deal value as sellers engage PwC to provide robust and objective views over their financial and commercial affairs from a potential buyers perspective, in order to justify well thought through offers. By explaining and quantifying sensitivities and upsides, we are also able to better prepare sellers for the sales process, and give management the opportunity to show how any potential risks or issues can be mitigated and therefore that the asking price is justifiable and reasonable.

Engaging with PwC upfront has also helped a number of our clients to minimise disruption to their business by front-loading management’s time commitments in the due diligence process, and thereby reducing the scope of work that various buying parties or lenders may wish to perform later in the process.

A changing market sees businesses faced with an increasing number of challenges when seeking to successfully realise value for shareholders through the sale of non-core assets.


PwC’s Midlands Deal Team has vast experience of providing VDD and VA services to businesses of all sizes, operating in various sectors. We have been able to work to help our clients meet the changing demands of the modern day buyer to protect value in the deal process, and free up management’s time to focus on core business operations. If you would like to discuss ways in which PwC could support you in your sales process, please contact Russell Worrall.

Commenting on the Midland Deal Team’s VDD role in a recent transaction, a CFO of a divested PE portfolio company said:

“All of them were experts in their respective fields. We were all confident in PwC. You’ve got to have people that make it simple, as you’re also trying to do a day job at the same time. I got a lot of comfort from PwC – it was rock solid work that they could stand behind, I really felt we were on firm ground”

Take control of divestment (continued)

Russell Worrall



Corporate recovery firm of the year

On 10 October PwC were named ‘Corporate Recovery Firm of the Year (Large Firms)’ at the national Insolvency and Rescue Awards held in London. This is the third time in four years that PwC has collected this accolade and is a testament to value that we bring to our clients.

Our position as Corporate Recovery Firm of the Year was supported by a number of factors. These include our success on high profile insolvencies (including Petroplus, Game and Excalibur), a strong local identity with a dedicated and wide-spread pool of talent, and a progressive approach to improving client satisfaction, for example, though our overhaul of the IBR report which has been fantastically well received in the market place amongst our banking and corporate clients.

The judging panel talked at the ceremony about our ‘very well presented submission’ that ‘showed the depth and breadth of our business.’

Lucy Cannell, a senior manager in our South region, was also named Insolvency Manager of the Year.

As well as winning the overall award and Lucy’s individual award, we were also short listed in the following categories:•Business rescue of the year (<£20m

turnover) for C&G Concrete and FH Gilman•Rising Star Award for Mark Holborow•Business rescue of the year (>£20m

turnover) for Game

Our more avid readers will remember the article we included in our February edition of the Midlands Deal Team Times covering the work we did on C&G Concrete and FH Gilman. To be nominated for the Business Rescue of the Year award underlines the quality of the work undertaken by the Midlands Deal Team on that job.

Matthew Hammond



CARE fertility sold to incumbent management

CARE, which is the largest provider of fertility treatments in the UK, was established by three clinicians in Nottingham in 1997. According to HFEA it has achieved above average success rates in IVF treatments in all of its four clinics which are based in Nottingham, Manchester, Sheffield and Northampton. The clinics and a further nine satellite centres’ provide IVF, non-IVF and genetic treatments in the East Midlands, South Yorkshire and Greater Manchester. In addition, CARE has recently opened its first clinic in Dublin, Ireland which is a joint partnership with the Beacon Medical Group.

Mark Thompson commented: “CARE has a successful business model, delivering a high standard of patient care at each of its clinics and using market leading technical expertise to stay at the forefront of clinical innovation. The experienced Management team has developed a strong brand which has led to sustained organic growth in recent years.”

Nigel Lowry (Finance Director) commented:

In order to ensure a controlled, efficient deal process it is vital that the DD provider delivers a credible, balanced report based upon thorough analysis within a very tight timeframe. Mark and his team demonstrated the experience, technical and commercial understanding necessary to do just that. In addition, they consistently demonstrated a flexible approach enabling management to continue juggling the multitude of other demands through a period of significant pressure.

In anticipation of a sale PwC’s Transaction Services team performed vendor due diligence on CARE Fertility (‘CARE’). The deal attracted strong interest from the buyout industry/PE players as the UK market for fertility services continues to grow. The business was ultimately sold to Management, who were backed by Bowmark Capital, in June 2012.

Mark Thompson

01509 [email protected]


How operational restructuring can increase the value of your company

Whilst many companies have survived recent years with basic cost cutting, the extended downturn, combined with the need to refinance, increase credit ratings or pressure from shareholders who may be looking to exit, means that many companies may need to take bolder actions. Those who do and successfully implement a sustainable change to their operating model are likely to emerge from the recession leaner, more agile and competitive companies.

Implementing change in a stressed or cash constrained environment is challenging. Often there are time constraints, limited funding and multiple stakeholders to consult. Decisions need to be made, and plans developed and implemented, that have an immediate impact on EBITDA. In addition, management must continue to focus on running the day to day business. Getting an advisor on board ensures momentum and often means that greater or faster benefits are achieved and reduces the risk of under delivery for stakeholders.

Our Midlands Operational Restructuring team has recently helped salvage part of a PE backed plastics manufacturing company which was deemed to have no value and was destined to be disposed of. After spending a short amount of time reviewing the business our team outlined to the client and PE backers how value could be generated through implementing a number of changes to both manufacturing and support functions.

We worked with management and staff on-site, supporting them through the change programme by:

•Developing solutions that were realistic in terms of time, cost and benefit, and that were fully risk assessed;

•Developing and validating investment cases, action plans, revised budgets and cash flow forecasts;

•Implementing support and mentoring/coaching of the management team to ensure change was embedded;

•Supporting negotiations with the Board and external stakeholders which built confidence and secured their support; and

•Project management including financial monitoring and reporting.

With our ongoing support the company has gone from a £2m run-rate EBITDA loss to a £2m EBITDA profit in less than 12 months, despite a benign market environment. This has allowed the company to successfully refinance and has allowed the PE backers to start planning a more positive exit route.

Alongside the EBITDA improvement programme, we have assisted the company with carve out planning, vendor due diligence, tax structuring, refinancing and seconded an individual as interim CFO.

Despite an increased focus on costs over recent years, many companies continue to underperform against their financial targets and fail to properly control costs.

Angela Dunkerley



Tax can be a significant upside in a transaction but can also contribute to value erosion if not managed properly. Corporate groups are increasingly seeking to drive value from their own tax profile whether through mainstream planning techniques or something more aggressive. Countering this, we know that HMRC (and overseas tax authorities) are actively targeting an increase in tax revenues so it is likely that most medium to large sized companies going through a sale process will have experienced some intervention from one or more tax authorities. Considering tax as part of your strategic disposal planning will ensure you consider all of the main tax opportunities and risks that will arise through the sale process.

If you are thinking of selling then the areas set out below need some forethought to ensure you don’t hit unexpected problems:-

•Presenting a clean compliance position is a positive statement to potential purchasers so making sure all returns are filed and outstanding enquires are closed (even if it means a less than favourable settlement with HMRC) can help minimise the opportunity for a purchaser to price chip.

•Tax assets within the target company (e.g. losses, excess capital allowances) can often be overlooked. The value of a tax asset to the seller can often be different to the value to the purchaser and knowing how these can be utilised should enable sellers to ensure purchasers accurately price the availability of the assets into their bids.

•Understanding the structural requirements of a purchaser and how that impacts the disposal structure is important. Some pre-sale restructuring may enable the purchaser to access ongoing tax benefits, which can be factored into the price.

•As with most tax planning, any pre-sale steps are better done earlier rather than later in order to minimise risk.

•For overseas disposals, withholding taxes and local capital gains taxes can reduce the net proceeds of disposal. Careful structuring in advance of a sale may be required to minimise the impact.

•If you have equity incentive arrangements in place, ensure you have all the necessary valuation agreements and approvals from HMRC in place in order to counter any possible PAYE risk. This is a common issue

in due diligence and an easy starting point for the purchaser to chip away at the price.

•If you know you have some significant tax risks in the target company then you need to think about how these are presented to potential purchasers in a way that acknowledges the risk but minimises disruption to the process. If you are not offering an indemnity, can you instead arrange an appropriate insurance or can you live with a time limited escrow arrangement? Again, proactive thought will minimise the value leakage.

Planning ahead – Tax doesn’t have to be taxing

The M&A transaction process is often stressful and time consuming for all involved. Trying to get a deal away in a difficult economic environment heightens the stress and consumes considerably more management time. It is increasingly difficult for sellers to maximise value from their asset whilst for buyers their ability to appropriately manage all the risks arising in the deal process can directly impact shareholder value.

Nick Hatton



Government makes U turn on the removal of the Quoted Eurobond exemption

You may recall in the June 2012 edition of the Deal Team Times we noted, as part of an article covering the tax budget, that HMRC had issued a consultation document on possible changes to tax rules on interest and deduction of income tax from interest. This document suggested that the Quoted Eurobond exemption from deducting withholding tax was to be restricted in the case of Quoted Eurobonds where the lender is a connected company and/or the debt is not actively traded and that where withholding tax was settled by the issue of further loan notes (‘funding bonds’), the withholding tax would need to be cash settled.

On 2 October 2012 HMRC published a summary of responses and the proposals which the Government intends to take forward. This summary confirmed that the proposals with regards to the removal of the Quoted Eurobond withholding tax exemption for and the cash payment of withholding tax on funding bonds will not be taken forward.

Arguably another piece of good tax news in what remains a difficult economic environment.

Nick Hatton



PwC advises European Care Group

ECG was established in 2000 and is a leading independent provider of health and social care in the UK, providing residential, educational and supported living services which enable people to live as independently as possible.

ECG previously rented the care homes and the decision to acquire them is part of a strategy to take direct ownership of the properties and enhance the company’s profitability. To coincide with the acquisition, ECG has taken the opportunity to refinance the business and has successfully secured funding for the group’s plans through to 2017.

The Midlands CF team maintained a strong relationship with Ted Smith (CEO) and David Manson (FD) having previously worked alongside them in 2008, when PwC advised on the sale of Craegmoor to Advent. Matt Waddell commented “it was great to work with Ted and David again, this transaction will provide them with a great platform to continue to develop the ECG business”.

The CF team was led by Matt Waddell supported by Sarah Taylor. In addition, Chris Pedley and Rupert Hutton provided tax advice on the deal.

The PwC Midlands Corporate Finance team led by Matt Waddell is delighted to have advised European Care Group ‘ECG’ on their £88m acquisition of 27 freehold care home properties from listed property investment company: Public Service Properties Investments Limited.

Matt Waddell



Poor working capital management has cost UK business £125bn

Cash for Growth reveals that if all the UK companies currently in the bad performers category had improved and achieved the same level as the good performers, they could have potentially generated cash to the tune of £125bn – or 22% of sales. Individually, that means each large company could have generated a substantial average of £248m.

Across Europe as a whole, the least efficient companies could potentially have generated £615m per company on average - or £400billion in total (equivalent to 30% of sales). Northern European countries are at the lower spectrum of the improvement range, as traditionally working capital is lower in these countries, predominantly driven by local business culture and different locally accepted payment terms.

Working capital presents a huge opportunity for companies to release cash from their balance sheets and operate more effectively. Managed well, it enables growth without additional funding requirements. Good performers are able to fund their own growth and release cash, while the bad performers have to find additional capital to fund their growth.

As the economy recovers, working capital performance is going to be crucial for companies wishing to fund their own growth. The working capital requirement in a growth period can actually be a multiple of sales growth, and having an adequate level of working capital often represents an additional challenge for growing businesses. Therefore, companies have to take extra care as the European economy enters a recovery.

The survey, which looks at working capital as a percentage of sales performance of the largest 4000 companies in 34 European countries in the period between 2007 and 2011, splits them into the best performers and worst performers.

It found overall that the companies that were most efficient at working capital management got better, and those that were least efficient got worse.

Typically, companies grow their working capital in line with sales. We found that the top quartile across Europe improved their working capital both in relative and absolute terms. They reduced their working capital by on average £91m despite growing sales by 40%. By contrast, the bottom quartile

increased their working capital both in absolute and relative terms with an increase of £226m on average per company.

Successful companies move away from short term year end window-dressing towards more sustainable levels of good performance, where every day key decisions are made with cash in mind. Put simply, those organisations with an embedded cash culture fare better.

There is no silver bullet to achieving good working capital performance, but the key is to delve into the detail and small day-to-day operational activities. The route to successful management of working capital might sound like common sense, but in reality we often see half-hearted attempts at improving working capital which barely scratch the surface.

This is largely due to the fact that companies either do not have the bandwidth or the resources, or they lack the necessary skills and technical expertise.

Innovators who lead the field and constantly adapt to a new regulatory environment achieve significant reductions in working capital and will fare better in the upturn.

The UK’s largest companies have failed to free up £125bn of cash in total over the last five years due to inefficient working capital management, compared to £400bn across Europe, new PwC research shows.


Poor working capital management has cost UK business £125bn (continued)

The survey suggests that typically, the good performers are adept at managing four areas of their business effectively: commercial terms, process optimisation, process compliance and instilling a cash culture. In short, success comes to those organisations with an embedded cash culture and clear key performance indicators and this is no different whether we’re talking about the largest companies in Europe or small owner managed business in the UK and all companies in between.

For further information on pro-active working capital management, please contact Sara Binns of the Midlands Deal Team.

Sara Binns



Innovation to manage and solve a persistent challenge in transactions – how pensions can impact and be managed as part of re-financings and dealsThe PwC Pensions Support Index tracks UK Plc’s ability to support the pension schemes that they sponsor. Since June 2007 the PwC Pension Support index has fallen almost 25%, indicating the level of support provided to schemes by the FTSE 350 has decreased substantially. This is despite considerable action having been taken by companies and trustees over the last six years to improve the funding to their pension schemes.

In this period we have seen the Pensions Regulator become more proactive, placing increasing emphasis on the sizes of pension schemes relative to the market values of the companies that support them. At the same time, we have seen some interesting outcomes for corporates and their pension schemes. For example, the Financial Support Direction issued against the Lehmans’ administration giving the pensions creditor a super-priority compared to other creditors, including secured lenders. Another example was the treatment of the BMI pension scheme and its entry into the Pension

Protection Fund, together with a number of cases that have not hit the public domain.

The combination of continued low gilt yields, the impact of a potential further downturn in the UK economy, and growing pressure from Europe for pension schemes to be funded on a more prudent basis, represents a potential triple blow for future pension support. This means historical pension liabilities look set to continue to be a significant drag on some companies unless action is taken.

Many companies will need to focus more of their resources towards addressing their pension scheme deficit, meaning management time and company cash being diverted away from operational activities. But companies who are in a strong position at the higher end of the Index should be able to articulate this strength resulting in better outcomes in the way scheme financing is agreed. Freeing up finance and cash allows investment in the business and an improved return for shareholders.

Whilst the pensions environment may be challenging, we are helping companies undertake normal corporate activity to take advantage of value creating transactions whether this is acquisitions, disposals or purely maximising income from a particular investment.

Companies can improve their position by using non-cash funding solutions rather than cash contributions (see our article below on Role of non cash funding – The value of asset backed contributions), taking actions to remove risks from the pension scheme and passing pensions risks onto insurers for little or no cost. The message for companies or trustees with relatively large defined benefit schemes is to ensure they understand the position and act now or risk these deficits growing further. For companies who are taking on a pension scheme as part of a transaction, it is critical to set the pensions price adjustment at a level which ensures that they are fairly compensated for the significant risks they are taking on.


Innovation to manage and solve a persistent challenge in transactions – how pensions can impact and be managed as part of re-financings and deals (continued)Our pensions’ team can provide actuarial, legal, financial, tax and investment advice, coupled with years of experience of supporting clients through transactions whether it be a new deal, an exit or pure refinancing of existing arrangement. Working closely with lead deal advisors means we understand how pensions fit into the bigger picture and how best to manage the issues. If you would like to discuss this issue in more detail, please contact Dickon Best who leads our Pensions Credit Advisory team in the Midlands.

Dickon Best



Role of non-cash funding – The value of asset backed contributions

One form of non cash funding is to make an asset backed contribution to the scheme, which can be a cost effective way to finance pension schemes even for smaller companies.

Asset backed contributions replace cash contributions with a promise to pay the Pension Scheme income generated by a business asset. This is achieved by transferring the assets in to a special purpose vehicle. The Pension Scheme will then be granted a right to income on the assets, which is typically rent, royalties or interest. Assets used have included real estate, IP, stock, debtors, investments and loans.

Income stream

This provides an income stream to the Pension scheme (e.g. rent)

Company transfers non-cash assets (e.g. property) to a Seperate entity

Assets

Company

At end of period

Separateentity

Pensionscheme

Chris Pedley


Our recent pension funding survey reveals 62% of companies provide some form of non-cash security to a pension scheme. Given the current market conditions and the Regulator’s statement in April 2012 regarding funding of Schemes, the use of non-cash assets is likely to increase as they provide a means of agreeing recovery plans that are longer or more optimistic than might otherwise be the case whilst still being acceptable to the Regulator.

Our tax deal team works closely with Pensions Credit Advisory. If you would like more information on the tax aspects of non cash funding solutions, please contact Chris Pedley.

Regulatory capital benefits

Benefits

Tax reliefDeferral of cash

PPF levy reduction

Potential refunds of

surplus

Covenant enhancing

Immediate recognition

of future asset value

The use of an asset backed contribution (‘ABC’)structure can achieve a number of benefits including:

•20-25% cash savings compared to normal pension scheme funding

•Acceleration/deferral of tax relief (whichever suits the tax payers profile)

•Improved cashflow (pension scheme can be paid off over longer period)

•Improved ‘security’ for pension scheme trustees

•Regulatory capital benefits as ABCs can be structured as IAS 19 assets.


Meet the Midlands Deal Team

Corporate Finance

Restructuring

Transaction Services M&A Tax

Valuations

Matt Waddell


Russell Worrall


Chris Pedley


Capital markets and structuring

Sophie Rooke


Nick Hatton


Suzanne Houghton


SPA Advisory

Jeffrey Nye


Sarah Taylor


Mark Thompson


Matthew Hammond


Jason Davis


John Rugman


Leon Keller


Matthew Tombs


Andrew Skinner


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Midlands Deal Team Times - blogs