© The Financial Times Ltd 2014 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
March 8, 2013 12:01 am
The global economic downturn has not been kind on the UK’s mid-market companies. When the credit crunch began to take hold in 2007, the subsequent flight of investors to safety avoided smaller, and so potentially riskier, companies.
After topping the 12,000-mark in early 2007, the FTSE 250 index lost more than half its value over the next 18 months.
But, for those companies that have survived the downturn, the outlook appears to be getting rosier, with the mid-cap index passing its previous 2007 peak at the end of last year.
At about the same time, Deloitte’s annual survey of UK chief financial officers found that some economic worries were receding. The proportion of finance directors who were fearful of another recession and the break-up of the European single currency had contracted from more than a third in 2011 to about a fifth a year later.
The study also uncovered a fall in credit costs and that finance directors felt credit was at its cheapest level in five years.
“We had to refinance at the end of 2009 and that was much harder – some of the banks were a right nuisance. But things are much better now,” says David Landless, chief financial officer of Bodycote.
Mr Landless says the FTSE 250 engineer’s recent €125m refinancing was “smoother and more straightforward” than previous post-global financial crisis credit negotiations.
Neil Jones, finance director at ITE, the FTSE 250 exhibition group, agrees: “There is now more of a willingness among banks to lend. If you have a good credit rating, are not over geared and the bank knows your business plan, it isn’t too difficult to get funding. That was not always the case.”
A separate Deloitte study found nine out of 10 FTSE 250 groups and other similarly sized private companies planned to sell off parts of their businesses within the next three years. This was not in an attempt to shore up their finances, which had been the case in 2009-2011, but in an effort to refocus their businesses and implement longer-term strategic plans.
“The economy in the UK has not been an overly auspicious background for mid-market companies but the word that you see coming out of the backdrop over the past few months is ‘resilience’,” says Robert Finlay, head of corporate finance and broking at Westhouse Securities.
He adds: “Any real fears of the eurozone collapsing have ebbed away significantly. People have been toughening up their businesses to deal with the continued economic uncertainty. Boards have adjusted to the new norm of difficult trading conditions and refocused their businesses on their core.”
One example is Invensys, the global technology group, which late last year sold off its rail division to Siemens for £1.7bn. In the process, it wiped out most of its pension deficit and honed its focus on its controls and operations management arms.
Other recent disposals by midsized UK groups include the move by FirstGroup, the transport company, to pare down its UK bus business; and Premier Foods’ bank-mandated sell-off of assets, which saw the Branston pickle brand snapped up by a Japanese food company in October.
Meanwhile, Senior, the British maker of engineering components, offloaded a unit that supplies the nuclear and construction industries to focus on the booming market for commercial aircraft parts.
“Much of mid-market companies’ success has been dependent upon the sector in which they operate and where they have concentrated their attentions,” says David Silver, chief executive of investment banking at Robert W. Baird, a US investment bank.
He says: “The ones that have picked their targets sensibly have come out of the downturn well. If their focus is on specialised offerings and they have a focus on high-growth geographical regions, they will have withstood the downturn better.”
As well as freeing itself of non-core assets, Senior has used its cash to buy companies that better tailor it to be a supplier to aircraft makers Boeing and Airbus. Such acquisitions include Weston, a Lancastrian maker of turbine blades for aero-engines, and US component maker Damar.
Mid-market recruiters, such as SThree, Hays, Robert Walters and PageGroup (formerly Michael Page International) are examples of how emerging markets can compensate for stagnant conditions in mature economies.
“It has been difficult for UK-centric companies, those that have not had the ability to export their business abroad and target expanding markets,” says Mr Silver.
Mr Finlay agrees: “Many UK mid-market businesses are looking abroad for growth and doing so quite successfully. They are all looking for growth to come from overseas markets.”
Although emerging markets are the main target for many UK mid-market companies, Europe’s apparent recovery has tempted Filtrona to eye acquisitions over the Channel.
“We are underweight in Europe and would like to make a few acquisitions there,” says Colin Day, the company’s chief executive, who joined the FTSE 250 plastics and fibre supplier in April 2011 from Reckitt Benckiser, the consumer products supplier. “This is the moment to get into Europe.”
Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.