A readiness to lend and a new era of hi-tech entrepreneurs has given life to corporate activity in the region. Gayle Tomlinson reports.
For generations the North East has been known as the powerhouse of the UK. Its wealth of mines, shipyards and steel works made up the backbone of its economy.
While the heavy industries fared the region well during its heyday, when the mines began closing and the yard contracts started drying up in the 1980s the North East had to reinvent itself to keep up with the growing economies in London, Manchester and Leeds.
Now the North East has truly arrived and the atmosphere in the region’s financial sector is buoyant.
Even the recent troubles faced by Northern Rock have done nothing to dampen the spirit of a region that has well and truly shaken off its title as industrial decay capital of the UK.
As this article goes to press the Northern Rock crisis has put a spotlight on the North East, but professionals in the region say it has not damaged confidence and it is business as usual.
In fact the region has been transformed with new leisure, business and housing developments.
Latest figures show 20,000 new businesses were registered in the North East between 2002 and 2005 and over 200 corporate finance deals are completed every year.
Neil Warwick, head of the EU and competition team at law firm Dickinson Dees in Newcastle, says: “The market is buoyant. In the last full financial year we instructed £7bn worth of deals and we are on target now to do that again or more. The small and medium-sized business sector has been very active and we have had a steady flow of disposal work.
“We are finding that deals in the North East range from north of £100m to around £200,000 at the bottom end of the range. In terms of volume we are looking at a market place at £20m. Newcastle is not dissimilar to Manchester now in terms of volume, which is a great achievement.”
Significantly the region’s technology industries are blossoming, with help from the Centre for Life - which aims to establish an environment where science and business develop together - the local universities and also from the region’s heritage in offshore technology.
The North East market relies heavily on entrepreneurs, a spin-off, perhaps, from the days when Stephenson was designing the Rocket.
As a result the region’s smaller businesses often rely heavily on the active support of the group of regionally focused venture capitalists who provide the equity funding to get them up and running.
While many of these are supported by regional selective assistance and other public funds, there is plenty of evidence to show the deals in the region are flowing smoothly.
In July 2007 Union Snack, a pretzel company in Tanfield Lea, Durham, set up in 1996 with help from Northern Investors, Northern Venture Trust and 3i was bought by German snack company Intersnack, showing there is plenty of scope for investors to make their return.
Chris Appleby from BTG McInnes Corporate Finance, and the duly elected Dealmaker of the year at Insider’s Dealmakers Awards, says: “Where we have got a big corporate acquiring a venture capital backed business. It shows there is a realistic route for exit for companies.
“It is always an issue for smaller companies. Once venture capitalists have invested they do need to get out at some point. If you are a smaller company worth less than £20m turnover it is very difficult to find an exit route. However, what is happening now is we are seeing one venture capitalist moving out of the business and another moving in.”
The deal also shows there is still interest from overseas in the North East.
Chris Stott, head of transaction services at accountancy firm KPMG, says: “North East businesses have also enjoyed overseas interest with the UK often being seen as an excellent foothold for European expansion. Notable recent deals include: Babcock and Brown’s acquisition of Teesport operator PD Ports; US conglomerate Parker Hannifin’s acquisition of UK listed filtration business Domnick Hunter plc; Esterlines’ acquisition of aircraft manufacturer Darchem Engineering; and the world’s largest tortilla manufacturer Gruma’s acquisition of speciality bread operation Pride Valley Foods.
“Entrepreneurs in this region build businesses to be proud of. The sheer volume and breadth of recent mergers and acquisitions activity in the region is testimony to the passion of the people and belief that it is possible to build sustainable and internationally competitive businesses.”
Logistically the region has recently been further opened up to worldwide markets with the launch of flights to Dubai from Newcastle International Airport. The North East is now directly accessible to the entire world.
Recent figures indicate the Asia/Oceanic market alone is worth about £825m in exports from the region. Meanwhile, London is just a three-hour train ride away, while the region is perfectly placed for easy access to financial centres like Edinburgh and Leeds.
Inward investors have been making the most of the links, including Pendragon, which netted Reg Vardy for £506m, securing its place as the UK’s largest motor dealership.
As a result of the sale Vertu Motors was created by two former key Reg Vardy Players.
Vertu Motors’ £25m flotation in January 2007 was hailed as the North East’s deal of the year. It was managed solely by North East advisers, was closely followed by the company’s £40m acquisition of Bristol Street Motors, establishing it as the UK’s 11th largest car dealership.
Andrew Davison, commercial partner at law firm Muckle, says: “Vertu really was a great deal for the region, bringing the North East another plc, giving us another major car dealership and demonstrating that North East professional advisers can provide a service to match anything from London, however complex the deal.
“It was a deal that impressed the City of London, so much so that although the company originally looked to raise £15m it was able to raise £25m, and that was after scaling back applications.”
Vertu has since acquired the trade and assets of a Ford dealership in Morpeth for £2.6m, a deal that pushes it up to 8th in the country.
With a large number of entrepreneurs in the region, the recent announcements by Chancellor Alistair Darling regarding the future level of capital gains tax (CGT) will have many businessmen and women pondering their future.
Matt Collen, partner in the corporate finance team at Muckle, says advisers are preparing themselves for an influx of enquiries on disposals.
He says: “We have seen a lot of disposals with businesses selling to people inside the region and beyond the boundaries of the country.
“The recent changes announced by the Chancellor mean that for the rest of the financial year there will be more disposals around.
“Business owners who are thinking of selling to management in the next year are likely to want to bring that forward and do it now.
“They are up against a timetable for selling a business and will be looking for a buyer before the end of April next year.”
Meanwhile, Andrew Scaife, associate director, corporate finance, KPMG in Newcastle sheds more light on the situation.
"We are currently speaking to numerous clients and contacts who are considering an exit and are concerned about balancing the impacts of both the credit crunch and the Pre-Budget Report (PBR),” he says.
“The credit crunch has received a good deal of press attention and there is a sense that some entrepreneurs considering a sale in the short term may have decided to hold on and wait for more certainty in the economic environment.
“However, the announcement in the PBR that taper relief on CGT is to be scrapped in April 2008, with a flat rate being implemented, means there is now a strong tax rationale for completing an exit before then for many business owners.
“The two issues provide considerable food for thought regarding the timing of an exit and the potential impact of both should be carefully considered in the specific circumstances of the business in question, particularly as the issues may each point to a different conclusion.”
Scaife adds that private equity bosses will now pay more tax, an outcome that was ostensibly the reasoning behind these changes to CGT.
“But entrepreneurs who have built up businesses over their lifetimes and were perhaps looking forward to selling up to fund retirement may well find that unless they can do it before next April, they will pay 8 per cent more tax than they were expecting to,” he says.
“True, the changes mean a single rate will be in force, but the playing field has not been completely levelled.
“UK private equity will be taxed at 18 per cent while non-UK domiciled private equity will be subject to a flat tax of £30,000 per year - and then only after seven years.”
Additionally the dealmakers market can only be further fuelled by recent listings by prominent North East companies.
Energy efficiency provider Eaga Group floated on the London Stock Exchange in April 2007, in which it achieved a listing worth £520m at the end of its first day.
Eaga was already on the acquisition trail even before its float and in June 2007 it acquired heating installation and repair company RG Francis for up to £11.2m.
Flexible pipeline system designer and manufacturer Wellstream has also been raising capital and it achieved a £319m initial public offering in May 2007. The company has yet to make further acquisitions.
Mike Mullaney, area director of Lloyds TSB in Newcastle, says: “One of the problems the North East has is that the mergers and acquisition process means a number of plcs are being taken over and the autonomy of their business is removed from the North East.
“The positive out of the negative is there have been many businesses, like Eaga and Wellstream, with the ambition to go to AIM to get funding. They are the FTSE 100 business of the future.”