Issue 4 of quarterly facilities management update including key sector deal activity and Quoted FM tracker. In Issue 4, alongside our regular features, our experts give an overview of the challenges and opportunities of Healthcare as a vertical sector for FM organisations.

1. FM Insights into
ISSUE 4 • 2012
facilities management
Quarter 3 has seen a welcome recovery in activity with
a significant increase in deal volume in the Facilities
Management sector while our Quoted FM tracker reflects
the on-going pressures at the larger end of the market.
In this issue, as well as our regular review of M&A and
activity in the quoted market, our experts give an overview
of the challenges and opportunities of Healthcare as a
David Ascott
Partner, Corporate Finance vertical sector for Facilities Management organisations.
Grant Thornton UK LLP
Q3 2012 M&A overview
M&A numbers rebound in Q3
Following the admittedly pleasant distractions The total value of deals where a
of the Diamond Jubilee, the Olympics and consideration was disclosed was also sharply
the Paralympics, M&A activity in the FM up, reaching a little over £935 million – its
sector jumped to a two-year high in the third second highest quarterly total in almost five
quarter. Overall just 14 transactions had been years. However, this comes largely as a result
recorded between April and June, one of the
lowest totals in recent years, but a strong
flow of announcements in the following
three months saw this figure rise sharply to
33. Although the YTD figure of 70 deals in
the sector is somewhat behind the totals seen
at the same point in recent years, the current • 2012 M&A overview
momentum suggests that there is every chance
of meeting or exceeding the 2011 full year
• Quoted FM tracker
figure. • Healthcare: a new vertical for
the FM sector?
1 Insights into FM - Issue 4

2. FM
UK Facilities Management transactions 2008-2012 YTD
120
100
Volume Value £m 1400
1200
of one slightly unusual transaction – the
£840 million acquisition of the university
accommodation management services
business UPP Group Holdings Ltd by
1000 Dutch institutional investor PGGM NV.
80
Broadly speaking, the market dynamic
800
60
is still driven by dealflow in the small-
600 cap and lower mid-cap segments. Larger
40 FM players continue to steer clear of big
400
ticket acquisitions in favour of smaller
20 200 deals in niche services areas, with MITIE,
0 0
Capita, PHS Group, Amey and Rentokil
2008 2009 2010 2011 2012 YTD Initial all active during the quarter.
Source: Zephyr
Broad spread of activity
Compared with many recent quarters,
the flow of M&A activity in Q3 was
spread relatively broadly across the FM
sector as operators seek to diversify in
UK Facilities Management transactions 2008-2012 by quarter** order to cope with the way procurement
45 1000
patterns have shifted towards bundled
Volume Value £m
900
contracts. In many cases this involves
40
800
hard FM specialists looking for soft FM
35
700
capabilities and vice versa. Ultimately,
30
600
of course, this process will lead to
25
500
the FM sector being dominated by
20 companies with very similar capabilities,
400
15
300
differentiated only by scale, though a
10 200
certain number of niche specialists will
5 100
surely remain.
0 0
Nevertheless, the utilities sub-sector
2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 remains one of the standout areas in
Source: Zephyr terms of M&A activity thanks to the
**see back page for Grant Thornton subsector split between hard and soft FM
multiple drivers of rising energy costs and
fragmentation within the industry. This
year has already seen 13 transactions in
that space, compared with just three in
the whole of 2011 and two in 2010. The
2 Insights into FM - Issue 4

3. FM
UK Facilities Management transactions Q3 2012 by subsector
9% 11%
Other Hard FM
Catering
third quarter alone witnessed six deals in
the area, including the acquisition of the
cable installation business Nationwide
Distribution Services Ltd by Amey.
7% What’s more, within the utilities area
Hygiene
19%
there is growing interest around the civils
Security segment as FM businesses increasingly
Other Soft FM look to resource up in areas where the
17% government expects to tackle the problem
Maintenance/Fit-out
of underinvestment – for instance the
19% M&E national grid and the motorway network.
7%
Utilities
By acquisition type, the Q3 stats show
13%
a familiar pattern, with acquisitions by
domestic entities continuing to dominate
Source: Zephyr (21 deals versus 11 the previous quarter).
But deals by both international and
private equity acquirers also rose to
relatively high levels. For PE buyers in
particular, this quarterly activity (half a
UK Facilities Management transactions by subsector 2011-2012 dozen deals) may be modest compared
by quarter with some periods in the past, but it is
notable given the challenges they face in
100%
Other Hard FM raising the leverage they would like and
90%
Utilities in competing against cash-rich strategic
80%
M&E buyers. However, ECI’s acquisition of
70%
60% Maintenance/Fit-out Rhubarb Food Design Ltd is a prime
50% Other Soft FM
example of where private equity buyers
40% Security
will continue to be a feature in the
30% market, namely acquiring niche, high-
Hygiene
20% margin businesses in areas like catering,
Cleaning
10% which are dominated by low-margin,
Catering
0% scale-based companies.
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3
Source: Zephyr
3 Insights into FM - Issue 4

4. FM
UK Facilities Management transactions 2009-2012 by acquiror type
100%
90%
Looking ahead: distress deals and
a shift to the private sector
Taking a step back from the latest
quarterly figures and casting a glance at
80%
the market ahead, it is likely that distress
70%
deals will figure prominently in future
60%
quarters. Inevitably, given the tough
50%
trading conditions, recent examples, such
40%
as the acquisition out of administration
30%
of Rotary Ltd by Lorne Stewart Plc and
20%
the issues surrounding Mouchel, will
10%
become more common.
0%
2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 Another growing market driver will
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
be the push by many FM businesses
UK PE International into the private sector as a result of
Source: Zephyr the pressure on the public purse. And
one area that is attracting particular
attention is the private rental sector:
there are a large number of private and
institutional landlords with portfolios
of rental properties, and these landlords
will be looking to procure services
centrally. As a result there is likely to
be consolidation among providers of
services to that niche and the private
rental sector. In fact this is already
happening in areas like student
accommodation.
4 Insights into FM - Issue 4

5. FM
Quoted FM tracker
A good number of the FM businesses
on the quoted tracker continue to
perform well versus the FTSE All Share
and the FTSE Support Services indices.
Q2 snapshot. Then, if the two smallest
groups on the list were excluded, the
sample group would comfortably
outperform the FTSE 100 in all but the
“Certainly we are still seeing continuing
pressures on FM company margins. Over
the last quarter there have been various
Among them Compass Group, MITIE, 1-year snapshots. Now, the average announcements by local authorities
Berensden and Interserve stand out as performance has slipped back a little. pointing to further cutbacks in their
the strongest performers in share-price According to Grant Thornton’s spending. In particular this seems to be
terms. Martin Gardner, it is difficult to pin-point aimed at the property elements of their
any one reason behind this and it is more portfolios. And this kind of announcement
However, the overall performance of the likely to be a reflection of the overall only adds to the overall pressure on
sample has declined slightly against the challenges facing the sector: operators in the FM space.”
Quoted FM tracker at 30 September 2012
Share price change to 30 September 2012
Market cap Sales EBITDA EBIT 3 months 6 months 1 year 2 years
Name £m £m £m £m % % % %
Compass Group PLC 12,682 15,833 1,339 1,073 2.2 4.3 31.2 28.8
G4S PLC 3,748 7,522 625.0 390.0 (4.8) (2.5) (0.5) 4.4
Serco Group PLC 2,891 4,646 349.5 264.0 8.2 6.9 13.6 (5.7)
Balfour Beatty PLC 2,090 9,494 306.0 170.0 1.9 6.4 18.8 13.5
Rentokil Initial PLC 1,475 2,544 431.3 179.6 10.5 (4.7) 13.5 (21.1)
Carillion PLC 1,166 4,153 201.1 138.8 (1.9) (9.2) (19.0) (13.6)
Mitie Group PLC 1,058.5 2,003 132.6 102.7 12.0 4.2 24.5 52.4
Berendsen PLC 938.1 992.0 306.2 112.7 9.1 4.5 26.7 35.9
Kier Group PLC 513.4 2,123 77.6 59.7 2.9 14.2 2.4 9.3
Interserve PLC 462.5 1,848 60.3 25.2 16.9 25.2 21.1 81.2
Mears Group PLC 249.9 589.0 37.5 25.8 7.2 10.8 2.0 (5.4)
London Security PLC 220.1 96.3 24.5 20.7 (1.0) (3.0) 2.6 99.4
May Gurney Integrated Services PLC 88.8 695.3 46.9 26.3 (45.7) (53.8) (54.5) (33.8)
Johnson Service Group PLC 83.8 233.5 39.3 15.9 23.6 7.4 8.3 40.9
Interior Services Group PLC 43.9 1,196 14.5 10.4 (3.0) (2.6) (23.8) (25.1)
Green Compliance PLC 2.7 21.2 1.8 -1.4 (56.5) (65.1) (87.6) (92.5)
FTSE All Share 3.7 (0.1) 13.0 4.6
FTSE Support Services 9.0 3.7 27.9 24.0
Source: Factset; Datastream. Market data as at 28 September 2012; Financial data as at last announced financial close.
5 Insights into FM - Issue 4

6. FM On the other hand, whereas domestic
markets are proving to be difficult,
some of the businesses on the tracker
continue to see strong gains from
Finally, it is worth noting that the
third quarter is traditionally a quieter
period for many of the larger FM
businesses as they are approaching their
contracts abroad. Groups like G4S, financial year-end. Also, for those that
which has clearly had a difficult year provide services to the public sector,
in 2012, stand to benefit in 2013 and this time of year is typically when FM
beyond from contracts relating to PPP- firms are preparing their pitches for
or PFI-type projects to build schools April appointments. News of contract Martin Gardner
and hospitals in emerging markets like awards and annual trading statements Partner
Egypt. should start to drip through early in the Grant Thornton UK LLP
Overall at home the dominant theme new year. E martin.n.gardner@uk.gt.com
within the market remains the need
for FM businesses to diversify, as is
shown by MITIE’s first foray into the
domiciliary healthcare space via the
acquisition of Enara early in the fourth
quarter. The other continuing theme is
the growth in the size of outsourcing
contracts in the private sector.
Following on from the £775 million
contract secured by MITIE in Q2 to
deliver FM services to Lloyds TSB,
anecdotal reports suggest that there
are even larger potential private sector
contracts waiting in the wings, and this
continues to fuel the drive to construct
integrated and bundled services.
6 Insights into FM - Issue 4

7. FM
Healthcare: a new vertical for
the FM sector?
Clearly one of the key challenges for
UK FM businesses today stems from the
changes being implemented by local
and national government in order to
sector is ongoing regulatory change.
Driven partly by a need to generate
increased efficiencies in the NHS and
partly by a policy shift from secondary
begin with, this niche offers the advantage
of not requiring significant investment in
physical assets – namely property. It also
offers some FM businesses the chance of
achieve major cost savings. to primary care provision, the door is leveraging existing contracts, say in social
increasingly being opened to a wider housing, by offering bundled services to
However, as is so often the case, where range of service providers. local authority clients.
there is change there are opportunities, This new dynamic, outlined in 2012’s Groups like MITIE are also well-
and the healthcare market may well be Health and Social Care Act, effectively positioned to introduce the latest
a prime example of this. It is an area to paves the way for any business to pitch technology and draw on their large
which some UK FM businesses have for healthcare contracts as long as they logistics infrastructures. Especially at
already gained exposure: Serco, Mears meet the selection criteria outlined by the lower end of the acuity scale, a large
and Capita all have a track record in the the sector regulator, Monitor. The latter, part of the value that can be created is
sector. MITIE also recently entered the too, is seeing a change in its role. It will in the efficiency of logistics. Arguably,
space in a significant way via its £111.7 become less paternalistic with regards FM businesses would also be more adept
million acquisition of Enara, one of the to those in the space and this means that at planning ahead: whereas the NHS
UK’s largest providers of domiciliary care healthcare providers, be they public or has historically been reactive, the more
services, from private equity owners. But private, will be allowed to fail as long as commercial operators in the private sector
what is driving the flow of opportunities key services are maintained. would typically be better set up to create
for FM operators and what risks might be So far, as is evidenced by the MITIE/ meaningful forecasts relating to the UK’s
entailed? Enara deal, the most obvious areas of changing demographics and therefore
Although the well-known issue of an opportunity for FM providers are in would be better placed to respond to a
ageing demographic certainly has a lot niches such as domiciliary care, an area market that is shifting from a supply-
to do with it, the most important factor that has been attracting the attentions of driven to a demand-driven model.
behind the opening up of the healthcare a range of investors for some time. To
7 Insights into FM - Issue 4

8. FM There are certainly opportunities for
FM operators to move into the healthcare
vertical, either by acquisition, as MITIE
has done, or by joint venture, but of
“There is a lot of organisational
change taking place, which means it
can be unclear where the best future
course there are also risks. In part these opportunities lie. Local intelligence
risks are financial; they are to do with the is key: commissioners in different
difficulties in getting to grips with the parts of the country are taking very
right pricing models in a rapidly changing different approaches. Quality local
Bill Upton
landscape, or with the financial risks relationships are needed which of
Head of Healthcare
attached to technology investment in a course are time consuming and
Advisory
sector which sees rapid take-up of new expensive to build from scratch.”
Grant Thornton UK LLP
technologies. Another important area of E bill.upton@uk.gt.com
risk is reputational: as high-profile cases Certainly, although opportunities in
such as Southern Cross have shown, the the domiciliary care space may play to the
failure of a business to provide acceptable core strengths of FM businesses, pushing
levels of care can have far-reaching further into classical healthcare territory
consequences for a company’s brand. is a much more complex undertaking.
In both cases, not having a background Nevertheless, if FM providers do begin
of clinical expertise would put FM to prove that they have a sustainable
companies at a disadvantage. advantage and can translate it into
But perhaps the more important risk positive impact on their bottom line the Neil Rutledge
is driven by the sheer complexity in the provision of healthcare services could Partner, Governance &
healthcare market, with its wide range of change radically. Infrastructure Advisory
approaches to procuring NHS contracts,
Services
and the current uncertainty in the space
Grant Thornton UK LLP
only accentuates this. Although the
E neil.m.rutledge@uk.gt.com
passing of the 2012 Health and Social
Care Act addressed some regulatory
concerns, there remains significant
uncertainty as to how the NHS itself will
evolve structurally. The re-allocation of
staff between Clinical Commissioning
Groups, Commissioning Support Units
and the Local Area Teams (of the NHS
Commissioning Board) is still very much
a work in progress and this obviously Mark Naughton
makes it difficult to predict exactly where Head of Healthcare,
the most interesting opportunities might Corporate Finance
arise. As Grant Thornton’s Bill Upton Grant Thornton UK LLP
explains: E mark.c.naughton@uk.gt.com
8 Insights into FM - Issue 4

9. FM Contacts
For any further information, please contact:
David Ascott Pete Dawson Martin Gardner
T 020 7728 2315 T 020 7728 3197 T 020 7728 2847
E david.p.ascott@uk.gt.com E peter.dawson@uk.gt.com E martin.n.gardner@uk.gt.com
Grant Thornton Facilities Management - subsector map
Hard FM Soft FM
Fabric maintenance Security
Fit-out Cleaning
Mechanical & engineering Catering
Fire Protection Washroom hygiene
Grounds Maintenance Textile / Laundry
Utility Maintenance Pest Control
Reprographics Space planning
Relocation & Storage
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