Flotation hopes sunk for many as crunch bites

Jun 25 2008 by Peter McCusker, The Journal

Problems in the credit markets and dramatic share price falls have forced some of the region’s up-and-coming companies to rethink flotation plans. Peter McCusker reports.

THIS time last year, with shares soaring to new highs, many senior company executives were eagerly consulting advisers about taking their companies public.

Royal Bank of Scotland was bedding in its takeover of Dutch bank ABN Amro and a host of similar super-leveraged deals were being mooted in the markets.

But as high summer arrived, the raging bull was felled by the Northern Rock matador and the blood has flowed ever since.

The value of the FTSE has fallen by around 15% since last August – and if the oils stocks are factored out – then the fall is far more dramatic.

Some of those worst-hit are the banks – RBS has seen its share price half to around 220p, wiping billions off its value and forcing it to seek a successful £12bn rights issue.

With banks now tightening credit conditions and rewriting business models in a rush to build up capital reserves, a new mood has taken hold in the Square Mile and its effects are being felt in the North East.

Mick Thompson, senior partner at KPMG in Newcastle, said: “There are a number of examples at the moment of private entre- preneurs looking for funding.

“They are setting out good business cases for growth, but are struggling to get the funds in the right form.

“There is nervousness in the banks and equity markets. I am aware of four to five companies which have failed to get the funds to list on AIM in 2008. Their thoughts of flotation are being put back.”

Ray Hope, managing director of Advanced Electronics Ltd which is based in Cramlington and has a US branch, said an Alternative Investment Market (AIM) listing, which had been pursued in detail by the company in 2007, was now off the agenda.

“A listing on AIM was most attractive, but when the stock market started to wobble, we were advised against it.

“A manufacturing company with a branch in America was viewed as having a high level of risk. It’s now a non-starter.”

Mr Hope says the cash-rich company is still in a position to raise debt finance from the banks.

But he added: “In the current economic climate, company valuations are all over the place.”

His views are supported by one of the region’s leading financiers.

The senior North East banker, who chose to remain unnamed, said: “We are still seeing a lot of deal activity here in the North East.

“There appear to be two markets in operation. At the national level the super-leveraged deals are just not getting done now.

“But at a regional level there is still an appetite to provide funds. I think one of the problems some companies may be finding is their ability to secure a decent valuation.

“There is a bit more realism in the market and valuations no longer reflect the historic performance of the company but will take a more pragmatic view of future activity.

“Some companies have seen significant falls in their share prices and we may well see more companies going from public to private.”

Mr Thompson added: “I would like to see a greater autonomy in the regions from some of the banks.

“The credit processes are getting much more complicated, so much so that it is getting harder for local bankers to do what they would like to do.”

Mr Thompson said the bottleneck in the dealmaking process had even led to a few redundancies at KPMG.

He said around five jobs in transactions services had been shed across the North – at the firm’s branches in Manchester, Leeds and Newcastle.

Graham Clark, finance director at rapidly-growing recycling company Alternative Waste Solutions (AWS), of Wallsend, says it has had to reconsider its flotation plans due to the extreme caution being shown by banks.

He says the company has had great support from private equity – earlier this year it received an investment of £1.5m – and there is still an appetite among private equity to make funds available for further growth.

But he continued: “In the last nine months the trading approach of the banks has changed.

“The financial institutions have all had a shock and are being far more cautious.

“This has slowed the market down and is completely out of character with what we had witnessed previously.

“But at some point the banks are going to have to lend again.

“It just requires the banks’ senior mangers to say the word go.”

AWS, which recycles plastic bottles, is currently in the process of expanding its Lincolnshire plant.

Mr Clark added: “The earliest we had hoped to take the company to AIM was in late 2009, but the way things are going that does not look achievable.

“We are still pressing ahead with our expansion plans. This is a highly successful business and private equity firms are very interested in what we do.

“There are bankers who recognise the growth opportunities with the business, but their hands are being tied by others.”

Chris Stott, KPMG’s head of transaction services in Newcastle, says we are in a new a new era of realism which may be around for some time.

He summarised the position in the following way. “While it is common knowledge that the credit crunch has resulted in a slowdown in AIM flotations, these, and indeed other deals, are still getting done.

“The successful floats have two things in common; firstly there has been a flight to quality in the current market such that only businesses with defensible earnings, cash generation and good housekeeping are being considered.

“Secondly, these successful floats are taking longer to complete, as the stakeholders in the deal are taking no chances, increasing their levels of diligence and assessing all the possible scenarios.”

He believes the flotation process is now becoming more prolonged and is being accompanied by some in-house root and branch reform.

“These factors mean many management teams contemplating a float are taking time out now to get their house in order.

“Take the annual budget process; many are taking the opportunity to push out their budgets for three years and consider ‘what if’ scenarios to aid their strategic thinking around the direction of the business and improve visual articulation of future plans to stakeholders,” he concluded.

A listing on AIM was most attractive, but when the stock market started to wobble, we were advised against it