| Sale of private, independent companies to continue |
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| The pressure on independent firms will continue to increase, writes Martin A. Rafferty, driven by pressures from larger national competitors as well as new international entrants to the market. This will result in the re-organisation and sale of a large number of family owned businesses he adds. |
In the late 1960s there was in excess of 100 companies listed on the Irish Stock Exchange. Despite the expansion of the Irish economy over the intervening period, and in particular the dramatic growth in the Irish economy during the last 15 years, the number of companies listed on the Irish Stock Exchange has continued to decline. Today, there are less than 50 companies listed on the Stock Exchange (excluding the exploration stocks).
While there has been a sharp decline in the number of listed companies, an explosion in the growth of profitable and dynamic private and family owned companies has occurred. Companies such as SELC (Belmullet), Oran Precast (Galway), and Shaws of Laois are just some examples of this phenomenon. Of late there has been a substantial increase in the numbers of large family controlled companies seeking guidance on a range of transactions most notably around matters relating to succession, mergers, acquisition and disposals.
Why this growth?
Research has established that whilst 90 per cent of Irish businesses are family owned, 70 per cent fail to make the transition to the second generation and only 13 per cent to the third generation. I believe that the level of M&A activity for family and privately controlled companies will continue to be an increasingly fertile hunting ground for advisory work due to the following factors:
• Many of these companies are controlled by people in their sixties and seventies and there is an absence of identifiable family members and/or management to take control;
• Consolidation within industry sectors e.g. regional media and waste management sectors.
• Increasing ability and desire of many private and family controlled companies to undertake sizeable acquisitions.
To highlight some of the issues facing a family owned company and how they can be addressed its best to look an a sample case such as the recent high profile sale of Telford Group to Grafton Group Plc in October 2003. The building materials and construction sector is one area which has seen much activity of late and this in my view is a sector likely to consolidate further similar to the consolidation that has already taken place in the UK.
Telford Group - A family run business for the 21st century
Telford’s a builders merchant from Co. Laois, is a local example of a family run business who have successfully used corporate finances services to help transform its ownership structures to help meet its longer term business objectives. Telford’s a leading independent builders merchant was controlled by the fourth generation of family owners with outlets in the midlands employing 100 people. As the business expanded rapidly during the 1990s, the owners realised the management and ownership structures in place were not necessarily those that would ensure company growth and prosperity into the future. Management therefore decided to implement a family constitution to provide moral and business guidelines to operate the business, changed its auditors to a leading international firm whilst also bringing in a respected business leader to act as a Non-Executive Director. The Non-executive Director’s role was to enhance the board’s ability to develop and implement a strategic plan for the company and adhere to best corporate governance practices.
The Telford’s also made another enlightened move by appropriating share options to two leading non-family members in the business with these options becoming exercisable on exiting the company.
Preparing Telford’s for sale
In preparation for the disposal of the business, Telford’s along with their corporate finance advisers undertook a strategic review of operations and made a number of recommendations including a review of operations. Some of the changes that resulted from this strategic review are listed below:
• Relocation of Athy outlet - it was apparent that the Athy outlet was no longer sufficiently large enough to cater for the growing business demand for building materials in the Athy area. To ensure that prospective acquirers, if required, would have an immediate solution available, agreement in principal was reached with a third party for the purchase of property to facilitate the re-location of the business;
• Property confirmation of title and issues pertaining to the ownership of various properties occupied by the company had to be resolved;
• Shareholdings confirmation and agreement to the size of shareholdings by family and management.
Prior to the beginning of the sales process an information memorandum was prepared and sent to a select group of prospective acquirers. There was intense competition between parties to secure ownership of the company, which culminated in its acquisition by Grafton Group in October 2003 for an undisclosed amount.
Conclusion
Since the completion of the Telford transaction, the landscape of the Irish builders merchanting sector has completely changed. This year alone the Heiton Group Plc announced the acquisition of Paddy Power (Waterford) on July 30th UPM-Kymmene announced the sale of Brooks Group to Wolseley PLC for €183m and in August Grafton Group announced a €336 million offer for the Heiton Group Plc.
These transactions highlight a wider trend beginning to affect family run businesses across all industry sectors in Ireland. The pressure on independents, especially in volume and rebate driven sectors will continue to increase, driven by pressures from larger national competitors as well as new international entrants to the market. This increased level of competition will by implication result in the re-organisation and sale of a large number of family owned businesses over the coming years.
Ultimately, the number of family owned companies requiring corporate finance services from providers in the Irish market has increased substantially of late and will continue to do so. |
Martin A. Rafferty is associate director at AIB Corporate Finance.
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| Article appeared in the September 2004 issue.
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