15 July 2010
by Graeme Davies
The growing fallout from the new government’s swingeing cost cutting programme continues to reverberate around the FM and wider support services sector. The hoped for wall of outsourcing contracts has yet to materialise but in the short term the government is hacking costs off left, right and centre, leaving some companies in potentially grave trouble. But one interesting knock on effect of the uncertainty riddling the sector is an upsurge in acquisition and consolidation activity which is likely to continue for some time.
As is often the case when a market is in a state of flux, the stronger participants begin looking to pick off their weaker rivals, taking advantage of companies who may be exiting the sector or who have overstretched themselves. This can have the effect of building up market share and diversifying the acquirer’s own business streams and also covering up any short term cracks that may appear in their existing business by effectively ‘buying’ growth at a time when organic growth would be difficult to achieve.
One such recent deal saw Johnson Service Group snap up a series of Private Finance Initiative (PFI) assets from the administrators of Jarvis Group, which recently fell from its perch. For the princely sum of £3m in cash, Johnson Service has picked up eight PFI contracts and their associated Special Purpose Companies which provide FM services to schools, hospitals and local authorities. The acquisitions should be earnings enhancing almost immediately and generated £10.5m of revenues last year. Overall the contracts will increase Johnson Service’s group revenues by 35 per cent over a full financial year, not bad business for £3m. Johnson itself is currently undergoing some restructuring to improve the performance of its workwear and laundry businesses and this opportunistic acquisition will speed up that process.
Elsewhere we have also recently seen Spice offload its loss making gas business, which repairs boilers, in an attempt to clean up its structure, and it has now attracted an improved offer from buyout group Cinven. And late last month, US outfit URS Corporation agreed a deal to buy support services and infrastructure consultancy Scott Wilson for $242m (£160m) to expand its presence into the UK market.
This flurry of activity is unlikely to be the end of what is likely to end up being widespread consolidation in the sector. For example, social housing repair specialist Connaught, which recently issued a withering profits warning, is now being touted as a possible target in the sector. Connaught said a total of 31 of its contracts had already been affected by government cost cutting, sending its shares crashing. But its lowly valuation has prompted activist investor Breedon Partners to build up a 13 per cent stake in quick time. Breedon has also recently emerged as a shareholder at Connaught’s rival Mears Group, prompting gossip that it could be planning to encourage the two to join forces. And the uncomfortable market conditions are likely to continue for some time with ministers believed to be calling in the major suppliers of services to the government to demand they prepare for slimmer margins and a reduced number of new contracts coming through. Already all IT contracts worth more than £1m have been put up for renegotiation and this week education secretary
Michael Gove announced major cutbacks to the Building Schools for the Future programme, scrapping plans to rebuild up to 700 schools. And this, if we are to believe the bitter taste of the medicine we are being spoon fed by the government on an almost daily basis, is only the thin end of the wedge.
Graeme Davies writes for Investors Chronicle
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