UK services sector provides fertile hunting ground

With deals such as Montagu's acquisition of Biffa earlier this year, private equity buyers have dominated M&A activity among UK business services companies. The sector actually saw an increase in deal flow in the last 12 months, according to recent research.

The UK business services sector – which counts as subsectors industries like logistics, facilities management and outsourcing –  has seen M&A deal volumes hit a five-year high with private equity firms snagging the largest deals in each subsector.

Buyout firms typically like to target business services companies because they tend to be “asset-light, people-strong organisations with good cashflow characteristics, in a sector dominated by mid-sized companies”, Simon Hawes, head of business services at PricewaterhouseCoopers, told PEO.

Biffa: big deal for Montagu

In the twelve months from July 2007 to July 2008, the number of transactions in the sector increased by 8 percent on the prior 12 months, from 480 to 517, according to new research from PwC.

However, in a sign that financing constraints have put a hold on large deals, the combined value of the last 12 month’s deals, at £13.8 billion (€17.4 billion; $25.6 billion), was less that half of half of the previous year’s total of £31.5 billion.

The largest deals in each of the report’s five subsectors were private equity-backed. 

Bain Capital sealed the largest deal in the transport, distribution and logistics sub-sector with its £1.4 billion acquisition of Brake Bros in September last year, while Warburg Pincus completed the next largest: the £565 million buyout of Safety-Kleen Europe.

Montagu Private Equity’s £1.7 billion co-investment with Global Infrastructure Partners in waste management company Biffa was the largest deal in the facilities management sub-sector, while in the “professional advisory” space, 3i’s £229 million buyout of testing company Inspicio topped the list.

In the human capital management sub-sector, the largest deal was executed by Baring Asia Private Equity: a £186 million buyout of Nord Anglia Education. Meanwhile, the largest business process outsourcing deal was Kohlberg Kravis Roberts’ £593 million takeover of software group Northgate Information Solutions.

However Close Brothers’ Peter Alcaraz, who advised on 3i’s take-private of support services company Enterprise in 2007, feels that the landscape is due to change.

“Private equity is running out of steam because of the constraints on finance, while trade buyers are rubbing their hands. We expect to see more corporate activity in the next year or two,” he said.