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Management buyouts early exit options

29/05/2007

Just two and a half years on from a £1.35 billion management buyout of insurance group Saga, there are reports that a £2.5 billion flotation is being planned.

The company, which targets the over fifties market, is said to be gearing up for an initial public offering (IPO) later this year.

The typical life of an MBO or similar deal has been shortening, at least the period from the initial deal to some form of sale, IPO or refinance through a new generation buyout.

This is the view of Adam McGiveron, a corporate law partner at Birmingham and London law firm Martineau Johnson.

“Market conditions are good for deals at the moment and exits are attractive where the business fundamentals are right” he said.

“Whether we are talking about a trade sale or a secondary or tertiary buyout, or even an IPO, there are currently arguments in favour of an early exit.

“This factor is leading both MBO teams and their private equity backers in the same direction. We are seeing more cases where exits are successfully sought within two years or so.”

Mr McGiveron draws a comparison between this trend and the more typical longer duration of buyouts in the past.

He cites the example of MHL Support Limited (MHL), a specialist consultancy focused on health and safety systems for major corporate clients.

Martineau Johnson advised private equity backers Advantage Technology Fund, which invested in the MBO of MHL back in 2001, and a Martineau Johnson team led by Mr McGiveron recently advised both that fund and the other shareholders in the multi million trade sale of MHL to Bibby Line Group Limited.

“The MHL story was more typical of the past but current market conditions have caused both MBO teams and their private equity backers to reconsider this approach.

“The result is that we are looking at two to three years as the average time before a subsequent buyout or trade sale happens.

The quick fire exit is not completely new. It’s several years now since the budget airline Go! was sold by 3i just 11 months after the venture capital giant backed a management buyout from British Airways.

The sale, to rival Easyjet, netted a return of around 14 times for the investors in a deal which must have surprised BA shareholders as much as it delighted 3i.

However, the norm in those days was for longer periods before exits happened and it is this which has changed according to Mr McGiveron.

“Private equity backers and MBO teams are focusing more on aiming for profitable growth in the early stages and investors are sometimes willing to back riskier deals in the interest of achieving higher returns,” he said.

Naturally, good exit options at such an early stage are really only available to MBOs which perform well in trading terms.

Mr McGiveron said: “Where you have a business that started out as an MBO and it is exceeding its budgets and the plans that were put forward to investors, the value is there and this is where the momentum for an early and perhaps an opportunistic exit is greatest.

“MBO teams and investors might be two years down the track of a five year plan and find that the value of the business has risen significantly where they are trading well.

“Economic conditions have been generally positive and a well managed and focused MBO team can exploit this through profitable trading.

“For shareholders, including management, a tricky question arises where a business storms ahead in the first two years or so of a five year strategy.

“Does the MBO team carry on the good work, or do its members take the view that the deal market could weaken leading to falls in exit deal prices.

“If this were to happen, the MBO may have to press on with the last two or three years with no return as the gains from further growth in trading are offset by a weakening market.”

Mr McGiveron is urging businesses to start planning exits earlier than they do now.

“MBO teams need to plan an exit route in outline when the MBO itself is being discussed. It should be an important consideration even at that stage.

“They should also be flexible about revising the plan as necessary and they should stay constantly aware of market conditions and of the impact they have” he said.

For further information please contact Adam McGiveron on adam.mcgiveron@martjohn.com