Mergers and acquisitions

Filed by Shaun Weston

Zenith International’s Mark Groves

The first point to note is that the current economic climate has impacted upon M&A globally. Transactions are down versus the peak of 2007 by about 50%, and there are trends that are clear to see:

• The debt component in transactions is being reduced.
• Valuations are coming under pressure.
• Larger industry players who were buying smaller competitors are under revenue and margin pressure, therefore tighter limits on capital expenditure are being implemented, and acquisitions are being more carefully scrutinised as companies seek to conserve cash.

You should think about selling your business when you don’t need toMark Groves

The added pressure that’s faced by potential investors in eastern Europe is currency fluctuation. Devaluation of currencies as we have witnessed in the last few months means that investors have seen a deterioration in the value of their existing investments in 2008. However, it means that new investments are now less expensive (when viewed in euro terms).

There’s evidence of some financial investors still looking to make acquisitions, and some of the strategic players are certainly looking to use this downturn to consolidate their positions by buying out smaller rivals. As is always the case, it’s better to sell from a position of strength. You should think about selling your business when you don’t need to; when you know that you can reject offers and continue to run your business successfully.

Generally speaking, businesses in eastern Europe will continue to be sought after, because the markets they operate in are growing faster from lower bases of per person consumption than in western Europe. Average per person bottled water consumption in western Europe was 115 litres per year in 2007 compared with slightly less than 42 litres on average in eastern Europe, and the growth rate in western Europe over the period 2002 to 2007 was 12.8% compared with a significantly higher 62% in eastern Europe.

Business owners should do a number of things to ensure that you’re prepared, and that your business is groomed for sale. This process may take several years. In order to do this, you need to think about what buyers are looking for, which will certainly include the following:

• A profitable business with good operating performance. Many valuations are based on an Ebitda multiple.
• Growth – ideally your business should be showing growth in revenues above the market average. Of course, it’s difficult to get the growth and profitability balance right, but the nearer you get to selling your business, the more the focus should be on profitability.
• Strong market position, with good market share in your region or segment based on a differentiated brand. This would normally be backed up by an excellent distribution network that can be used to sell through brands from the acquiring company.
• Sound management, reflected in good understanding and control of quality and key performance indicators. Take time to develop a set of KPIs that are relevant to your business and ensure that you can demonstrate improvement over time.
• Low risk, in that the business isn’t overly dependent on a few customers, a key staff member or a supplier.

Building your sales

One question you’ll be asking yourself as you build your business is about capital expenditure versus brand building. Buyers will look for security of supply, but they also may have access to other sources or have excess production capacity in adjacent markets that they wish to use. In the bottled water market, there’s normally a direct link between the source and the brand, and protection of your source is vital. But generally, in terms of shareholder returns, I would place a higher value on building your sales than spending capital on lowering production costs.

A useful exercise is to consider the synergies that potential buyers will be able to generate, assuming that you have some strategic insight into the buyers. In any sale process, quantification of potential buyer synergies is important to understand the financial returns that a buyer can generate. That’s not to say that the seller will derive those benefits, but you may get a feel for how much negotiating room the seller has.

You will probably have a good understanding of who the potential buyers are in your market because you’re competing with them on a day-to-day basis, but you should also cast the net outside this limited pool of buyers. There may be other international drinks businesses or financial investors who have an intent to enter your market, and they may represent a better partner for you, particularly if you’re considering a partial sale or joint venture.

A final point – and this is based on my personal experience of selling businesses of my own – use a professional adviser. Having a structured process with an expert to guide you will deliver you better shareholder value. An adviser should ensure that a wider range of potential buyers is investigated, and take some of the inevitable emotion out of the negotiation with buyers who may not appear to understand the risks that you’ve taken to build your business.

Mark Groves is Merger & Acquisitions director at Zenith International. He has been involved in more than 20 transactions in the bottled water market, including selling two of his own businesses, and currently advises clients in international markets on transactions. You can email Mark here.