The tough climate is prompting some public companies to leap free of the stock market and go private. But are the funds there to support the move? Andy Coyne weighs up their options for survival.
It’s a bitter irony.
Midlands companies that are keen to delist from the stock market, partly because of the tough operating climate, are struggling to because the credit crunch is making it hard to find alternative funding sources.
Speak to many pundits and they will confirm the boards of many listed businesses are already starting to have the quiet internal conversations on whether to take the business private. This is a move that shouldn’t be rushed, not only because of the time and cost involved, but because a delisting changes an entire operating structure and ethos.
There are regional companies on the London Stock Exchange (LSE), or the AIM, that no longer really want to be on there, but are not in a position to come off. Not able to do a public to private deal, they are in limbo.
As Malcolm Cook, head of corporate finance at accountancy firm PKF in Birmingham, says: “There are discussions going on about coming off the market, but what is affecting that decision is the lack of availability of funding for companies to come off. They need debt or equity to do it.
These cost decisions are unlikely to trouble large companies. It is estimated the delisting process costs about £500,000 – much of it on professional fees. To the likes of Nottingham’s Alliance Boots, which delisted from the LSE in summer 2007, following its takeover by AB Acquisitions, that is small beer. But for smaller companies half a million is no small amount.
However, cost is unlikely to be the main obstacle to delisting right now. Alan Wood, a partner at law firm Pinsent Masons in Birmingham, says: “I would have to be convinced a lot of public to privates are not happening because the cost of transactions is too high. I don’t subscribe to that.
“I would query whether some of the fees likely on a public-to-private deal haven’t come down. There will always be people talking about how public to privates have worked. I’m not convinced the market is right to do a public to private at the moment,” he adds.
And what that refers to is a lack of available funding to take a newly de-listed company on to another level. But why would a listed company want to come off the stock market anyway?
Well, it can be a cruel sea to sail on. Share prices can be turbulent and there are big demands for regulation and compliance. Poor performance is swiftly punished with shareholder sentiment and companies doing well in a poorly performing sector may be overlooked if that particular sector is not flavour of the month with the City.
So, life outside the markets can seem rosier. A good management team may feel that with the right backing from debt or equity providers, off market is better. As Graeme Gladstone, senior manager at Nottingham office of accountancy firm Tenon, says: “A listing on a public market has advantages, the most important being access to funding. But some companies may find their shares are illiquid, undervalued, or both.
“Coupled with the stringent regulations and reporting that comes with a listing, it’s worth appraising the benefits of taking a company private. Once back in private hands, lower regulatory costs and faster corporate decision making should be reflected in the bottom line.”
Professionals also suggest listed companies need to have a clearer idea of why they are listed. Cook says: “The question is why are you on the market? To raise cash for growth? If you can’t do that because of the volatility in the shares or a lack of liquidity, why be on the market? Anyone who goes on should take a long-term view.”
As Cook points out, though, listing has not traditionally been a popular route for Midlands companies. “The region was reluctant to go public in the first place. There tends to be a lot of manufacturing businesses here and products that are made are not always popular in the City.
“There has also been a high degree of parochialism. There is a family-oriented business base in the region and the perception was that they were handing over power,” he says. “There has been less reluctance with AIM as it is more flexible and less regulated, although that is changing slightly. But there’s a reluctance to be in the public eye.”
This may partly explain why there is always a steady flow, or rather trickle, of Midlands companies delisting.
These include Burton on Trent’s Northern Racing, which went private when property tycoons bought it for £90m last year; and Sutton Coldfield-based engineering company Lloyds British Testing, taken private in a £4m deal backed by Enterprise Finance Europe and Bank of Ireland.
The problem is that packages like this – providing acquisition and working capital facilities – are harder to come by. As Cook says: “Perhaps some of the ones that could have been done won’t be done at the moment. There just isn’t the money around for funding.
“You could ask why, if it is a good business, is it not succeeding on the public market. It could just be the City having a downer on a sector, like it has with housing. Housebuilders are struggling to come off, though, because no one wants to lend to this sector.”
Another alternative for funding a public-to-private deal – effectively a management buyout (MBO) of a public company – might be private equity but money is tight here, too. According to figures from the Noggingham-based Centre for Management Buyout Research, founded by Barclays Private Equity and Deloitte, the credit crunch had a grim impact on the region’s private-equity market in 2007.
The total value of deal completions fell almost £1.6bn year-on-year from £3.65bn in 2006 to £2.06bn. The number of completions also dropped from 67 to 62 over the same period. In the final quarter, the deals fell from 14 to 11.
Charles Bond, public markets partner at law firm Cobbetts in Birmingham, says: “There is no doubt the equity market is quiet. It is tough to raise equity and the market reflects all the signs of public to privates coming to the fore: a depressed stock market and private equity looking for new deals.
“But the debt market is tough,” he adds. “In the last rounds of public to privates, in 2002-3, the debt market was more open. But in the past couple of years I’ve only seen a couple attempted in the Midlands.”
Bond is not totally downbeat, though. “I have a bit of faith in the capital markets coming back. There is still some investor confidence but it may not come back until after the summer,” he says. “The debt market is the real problem. It’s a difficult market for public to privates because of that.”
But there won’t be a surge in public-to-private deals anytime soon, says Cook. “There will be more sentiment in terms of wanting to do it but the credit crunch is forcing costs up. I don’t see a huge increase in activity,” he says.
Wood, at Pinsent Masons in Birmingham, says we are in a different place to when we last saw a spate of public to privates. “There was a class of companies that was small and unloved. It was fertile feeding ground so many of them are gone because of public to privates and takeovers.”
Despite the difficulties in financing the move, companies that are determined to delist will probably find a way. Between equity, debt and asset finance options, it should be possible to fund a public to private deal and get working capital in place. But the process is costly, bureaucractic and lengthy, warns PKF’s Cook. “It’s never cheap to come off and it’s a regulated process,” he says. “There’s the City Code on Takeovers and the Companies Act to consider. It is meant to be looking after the shareholders so when you are about to come off there is a conflict of interest.
“It is effectively an MBO of a public company, so the board would need to form an independent committee to appraise the bid,” he says. “It’s about what is in the best interests of a shareholder. It’s no different for AIM. The Takeover Code applies to all public companies. There are also the insider trading regulations. Confidentiality is important because the decision could affect the share price. And it can take up to six months.”