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Spring/Summer 2012

Spring/Summer 2012 Newsletter Volume 2, Issue 2

FRG News 

 

We are delighted to welcome our new Associate, Erik Bindslev, to the team.  Please learn about our new colleague in his message below:

  

       

 

“Joining FRG in early 2012 is a turning point in my career, transitioning from the corporate side of finance to the M&A advisory work.  Prior to becoming a member of the FRG team, I was an analyst for Data2Logistics, a Platinum Equity Group company, offering freight bill audit and transportation consulting for Fortune 1000 companies. During this time I was given the opportunity to work on multiple M&A transactions focusing on valuation analysis and due diligence. These experiences sparked a passion and commitment to myself to enter the world of investment banking.

 

In 2008 I graduated from University of Central Florida with a Bachelor of Science degree in Finance and shortly after earned an MBA with concentrations in Finance and Marketing from Rollins College.  After graduating, I worked as a financial analyst for industrial distributor, HD Supply, where I handled corporate reporting and managed the compensation analysis for two lines of business. I am extremely excited to be joining Falls River Group and look forward to helping close more transactions and grow the firm’s pipeline all while gaining insight and skills from the experienced team here at FRG. “

 

Erik Bindslev, Associate

 

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Chinese Food Company Eats English Breakfast

 

WSJ reports that Bright Food Group Company of China agreed to acquire a majority stake in UK based cereal maker Weetabix in a deal that shifts an iconic British  breakfast brand to a state-owned Chinese business and underscores the eagerness of Chinese companies to extend their influence world-wide.

 

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New China Desk

 

Clearwater Corporate Finance, our IMAP partner in the UK, has opened a China Desk with a newly established team dedicated solely to UK-Chinese M&A.  Congratulations to our partner firm!

 

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A View on

Growing Markets

 

Jim O’Neill, Chairman of Goldman Sachs, recently hosted the GSAM Growth Markets Summit and blogged some of his insights:

 

“A number of s0-called emerging economies are now so big, it is ridiculous to think of them as traditional emerging markets.  Currently this applies to Brazil, Russia, India and China along with Indonesia, Korea, Mexico and Turkey.  In the next ten years their combined GDP will contribute more than two times that of Europe and the US put together.  GSAM calls these Growth Markets.

 

China, at the core of them, alone will contribute more than the US and Europe together (assuming 8 percent real GDP growth). The four BRIC’s collectively last year nearly created the equivalent of a whole new Italy in one year.  Italy is the eighth largest economy in the world, and for the BRIC countries to be creating the economic equivalent of another one at that speed is remarkable, and demonstrates the speed at which the world is changing.” 

 

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Labor Shortage for Chinese Manufacturers

 

South China Morning Post reported that nearly 90% of 105 manufacturers surveyed by the National Bureau of Statistics had difficulties recruiting workers last month.  More than 70% said they increased wages to attract workers, and 65% said the lack of manpower had affected business.  Labor shortages have plagued most of the nation’s manufacturing centers, including the Pearl River Delta, for several years as many migrant workers find better paid work with improved conditions closer to home.

 

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CIC Fund to help China invest in Europe

 

China Investment Corporation (CIC), the sovereign wealth fund, is establishing a small fund to help Chinese companies invest in European groups in partnership with the Belgian Federal Holding Co and A Capital, a private equity group, the FT reported on May 3rd. 

 

The move comes as China is encouraging its companies to expand internationally.  The Chairman of A Capital, Andre Loesekurg-Petri, is quoted as saying that “Cross border investment used to be from Europe to China.  This is more in the direction of China to Europe”.

 

The fund’s target size is reported to be EU 250m, which could grow as investors join, and will be managed by A Capital.

 

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IMAP Annual Report 2011

 

Our latest IMAP Report is now ready to be viewed on the home page of www.imap.com

 

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China:  Are you a Buyer or a Seller or Both?

First, our good Friends and Partners at IMAP China just closed a significant transaction with JM Smucker (the Ohio Jelly/ Food people) and Guilin Seamild Biologic Technology Development Co. Congrats!

Second, I just returned from the IMAP meeting in Beijing, sponsored in part by the Ministry of Finance (MOFCOM). Many of you have been to Beijing and have seen the fabulous progress China has made to become the 2nd largest economy in the world. Many of you also know that China has several trillion of US dollars in its reserves.

Today MOFCOM has been very clear to China’s lower middle market companies ($200 mm to $ 3 bn in revenues) that these companies need to make investments in the US. Prior to the IMAP meeting, MOFCOM suggested over 156 Companies that they felt could and should be making minority, majority, and joint venture investments in the US. InterChina, our IMAP Partner, spent, over a 90 day period, thousands of man hours meeting and qualifying each of these companies, narrowing it to a list of 40. Criteria were a) cash to invest; b) strength of commitment to an M&A Process; c) willingness to engage appropriate expertise to help and; d) “fit” with the idea, provided by other IMAP Partner eg. Falls River Group LLC.

Falls River Group LLC had 4 of the 40 “bilateral” meetings arranged with these highly qualified candidates, as well as 2 other significant meetings with prospects for other FRG Mandates. Each meeting was attended by C level executives, an InterChina partner who coordinated the discussion, and when necessary served as an interpreter. Because of all the time spent by InterChina in advance, this “speed dating” format really worked. As a result, FRG may soon have: 1) a prestigious buyer for an energy property; 2) a joint venture partner for a pump company; 3) a buyside agreement to buy a CRO; and 4) a buyside agreement to buy a larger lighting manufacturer.

Most importantly, it is clear that China is seeking to use its economic might and power to build a greater US – China link. China recognizes that acquiring major US companies is not worth the political firestorm (a la CNOOC’s attempt to acquire Chevron) and that the most responsible efforts will build bridges with the primary drivers of US business, the $20 mm in revenue to $2 bn US companies. Many of my IMAP partners remarked how considerably China has changed in its view to outbound M&A in the last 10 years. There are many, many hurdles to bridge but the Great Wall of China is an antiquity; a nice place to visit, it is no longer the State of Mind.

Kerry C. Dustin, CEO

Europe is an Opportunity

The European Debt Crisis has created an opportunity for larger US based Private Equity Groups and middle market companies to buy good companies/assets in Europe at very favorable prices.  Europe is where the US was at the start of the US bank crisis in 2008.  Its banks are not lending; they are shedding assets, scrambling to control government debt exposures in the weaker countries, and in general starving the EU PEG community of lending/refinancing for investments made over the last 5 plus years.  Every week, FRG becomes aware of great opportunities caused by the EU recession.  For example, a consolidation opportunity globally in the coated fabrics industry, opportunity in aerospace consolidation, and opportunities in agriculture and construction and heavy equipment distribution.

Last week, one of the best US Private Equity investors, Christopher Flowers, announced that he has moved to London from the USA to focus on the “shift of investment opportunities” to the EU.  While Flowers’ focus is on very large deals, principally in distressed finance, his view does coincide with our FRG/IMAP view, based on our deep knowledge of the EU M&A markets.  This unusual opportunity will not fit many US based PEG’s whose charter restricts them to only US investments.  And the largest PEG’s, such as KKR, Carlyle, etc., have been in Europe for a long time.  So, this opportunity is really for US PEG’s, probably those with over $1 bn under management, who have the charter to permit such investment and the willingness to talk to FRG/IMAP about how to access these opportunities.  And they will need to do so as US markets keep heating up.

Currently, good U.S. PEG acquisition opportunities are commonly in the range of 6 to 10 x EBITDA pricing with many at the 8 to 8.5 multiple level.  PEG’s call us every day begging for deal flow and complaining about the dearth of quality companies.  Some of the EU opportunities we are currently seeing are between the 5 to 6 x EBITDA level.

Kerry C. Dustin, CEO

 

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SWOT Analysis  and the Sale of Your Business in 2012

 

People approach us here at FRG all the time asking how they will know when it is time to sell their business?  Many of their concerns are focused on the obvious: timing of the sale to maximize the value; fear over the expiration of the Bush Tax cuts ending; fear of uncertainty in the future due to increasing government regulations and a lack of leadership from most elected officials; deficits out of control, both domestically and internationally, just to name a few.

 

One question we ask in response to their concerns is, “Have you done a SWOT analysis for your business”?

 

SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities or Threats in and to your business.  SWOT analysis is considered a method of categorizing key internal and external factors that are important to achieving both your long range goals for your business and, ultimately, the exit strategy from your business.

 

Strengths: What does the business do?  What is its primary function?  What makes the business special and how does that give it a competitive edge over others who perform the same functions or manufacture the same products?  We live in an age of uncertainty.  Many businesses can thrive for many years protected by their market niche but ultimately, the business will reach a place where change is inevitable as the old way of doing things limits competiveness.  Part of assessing the strength of the business is having a longer range strategic vision that analyzes the next three parts of the SWOT Analysis.

 

Weaknesses: What factors, either under your control or not, could put your business at a disadvantage? This could mean lack of succession planning, competitive threats, need for an infusion of capital to grow your business or keep it competitive, management problems (competition amongst key management or lack of adequate management to sustain growth), losing customers due to a lack or innovation or distribution, lack of a long range vision for your business, “we’ve always done things this way and the business has been food to us”, trusting loyal vendors (accountants, attorneys) who are not geared up to see the risks nor opportunities.

 

Opportunities: What are the external or internal changes that could optimize business performance? These are only limitless if you have the ability to envision them and act on them. Envision means a thorough analysis of your competition, what your market share is and how sustainable that is, what is your acquisition strategy is or how you intend to grow your business, where the new market share will be coming from and how you can be truly opportunistic through innovations, new employees and IT.  Most businesses that have survived the past few years are leaner and are more efficient.  This will translate into a higher valuation if you prepare the business properly for the future.

 

Threats: External and internal threats that could harm your business: These include the potential looming increases in regulations or regulatory agencies such as the EPA, employee dissatisfaction, competition from abroad entering the US markets, credit markets continue to be problematic for small businesses, acquisitions integration problems or not making the right organic growth decisions, increases in interest rates and the cost of capital, missing the wonder-thunder years where the business is rapidly growing and you simply hang on too long.

 

There are many facets to the SWOT analysis, one which FRG would be happy to explore with you.  The primary reason to do this analysis now is to determine if 2012 is the right time for you to sell your business. 

 

Why is it time to get in the queue for 2012? Expiration of the Bush-era tax cuts: In 2001 and 2003, Congress passed tax cuts proposed by President Bush.  The expiration date was 2010.  This was extended by Congress again in 2010. In February 2012, President Obama called for the end of these tax cuts for high-income households, and he increased the ante by calling for capital gains to be taxed at the same rate as ordinary income.  This is an increase over his previous proposal of capital gains increases of 20%. This could be a great time for you to take some chips off the table.

 

Multiple on the sales of businesses are close to pre-recession levels: For lower middle market companies with enterprise values (EV) below $25 million, the data shows sales multiples for the first half of 2011 between 5.2 to 5.5 times EBITDA, which is near pre-recession levels. For companies above $50 million, the multiples are even stronger averaging between 6.8x and 7.5x EBITDA. Of course these multiples vary according to the industry and many other factors.

 

There’s money looking for the right deals: Private equity, corporate buyers and private companies are sitting on records amounts of cash. Many businesses have been waiting until their perception of the multiples they will get improve before they go to “market”.  It is a seller’s market now especially for businesses that have shown sustained growth, good management, increased their market share (or not lost market share) and have made improvements to the business over the past few years.

 

The markets may be flooded soon with people trying to exit in 2012:  The end of tax advantages along with Baby Boomers retiring in droves could spell trouble for anyone thinking of selling their business in the next six months.  The accountants and lawyers will be swamped and if you are not in the queue ASAP, it will be 2013 before your business can realistically be sold.

 

Maegan A. Evans, Ph.D.

Director, Falls River Group

 

Falls River Group, LLC, a Global Merger and Acquisition Advisory Firm based out of Naples, Florida, and a member of IMAP. IMAP features some of the world’s most skilled M&A advisors from across the globe and with a diverse resume of industry expertise. For more than 35 years, IMAP advisors have worked diligently to deliver success for a wide range of clients.through 39 firms located in 30 countries (www.imap.com).  Securities transactions conducted through StillPoint Capital, LLC. Member FINRA/SIPC.

 

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