Are we in a seller's or a buyer's market - City Comment
Thu, 5 Jun 2014 | By Kevin Barrow, Andrew Saul and Matthew Bodfield, recruitment sector team at law firm Osborne Clarke
It's no great secret that investors seem to be interested in recruitment companies again. Fund managers holding shares in quoted recruiters seem keen on the stock – even after significant plc share price rises over the last year, many may be expecting a further re-rating when perm starts to take hold in the current cycle.
In May Osborne Clarke advised on Staffline's £16m placing of new shares in connection with its recent acquisition of Avanta. There are also rumoured plans to float two or three recruiters on AIM, and we expect a number of recruiters to consider an IPO (initial public offering) whilst the current listing window remains open. Linked to this, a number of smaller and mid-sized quoted companies are likely to use stock to make strategic acquisitions as part of growing their critical mass, perhaps at deal values of £3-15m.
Alongside this, many private equity (PE) investors are keen on the sector, especially areas like legal, oil & gas, finance and education. We have been involved in investments in all these areas in the last six months and US PE companies (who have started looking beyond the US for deals recently) have invested in this cycle in NES, Swift and AMS.
So this all seems good news for owners of recruitment companies.
However, there is a painful truth: for those who are too small (ie. less than £4-8m EBITDA [earmings before interest, tax, depreciation and amortisation]) to contemplate an IPO, there seem to be more sellers than buyers in the market. Prospective sellers need to remember that many PE investors will not want more than one or two recruitment companies in their portfolio at a time and so perhaps when owners come to sell there will not be that many prospective buyers out there.
This is especially true if the PE investors choose to ‘fill their boots’ now while valuations are below peak and while there are still (hopefully!) a few more years of growth in the current cycle – PE investors do not want to buy at the top of the market. The same timing issue probably affects the plans of US and other trade buyers, and linked to this the US dollar is (for the moment) relatively weak against the pound, which may dampen US enthusiasm for UK recruiters.
Of course there are many unique and, in their own ways, outstanding recruitment companies who will rightly be confident that they will be able to float or find a buyer come what may, and many will have good reason for delaying their sale/investment/IPO plans, perhaps waiting for recent international investments to boost operating profit, or for second-tier management to step up and be credible (to investors) as successors to the founders. A ‘best in class’ platform is a recipe for success, notwithstanding market conditions.
We predict that quite a few growth companies will be looking for exit in the same window (2015-17), and investors/buyers may be spoiled for choice.