PE Bain Capital and Thomas H Lee’s recent bid for ClearChannel underlined that the advertising and marketing services sector is not immune from the onward private equity march. Justine Jones comments.
Private equity deals currently dominate the business headlines for good and bad reasons. "Asset strippers", "raiders" and "locusts" are just a few of the less flattering terms that have been applied to private equity firms. At the same time, the British Venture Capital Association argues that private equity backed companies outperform other UK businesses and that private equity investment has been shown to contribute significantly to companies' growth. Against this background, can the private equity model work for companies in the marketing services sector whose businesses are particularly dependent on the intellectual capital of their people?
There has been increasing attention paid by private equity investors in the marketing services sector and we are seeing large, mid market and start up deals being completed. As the industry increasingly looks to the internet to drive innovation and expansion – with, for example, the worldwide market for mobile marketing and advertising predicted to grow from £1.5 billion in 2007 to around £9.5 billion by 2011 -private equity interest is likely to increase as the industry looks to expand into untapped areas of the market.
Just as the size and type of marketing service firm varies there is a wide range of private equity firms offering different types and styles of investment aimed at meeting the different needs of, and opportunities presented by, potential investee firms.
Recent transactions which demonstrate the diversity of the sector have included:
- the sale of Dutch conglomerate VNU Group (now renamed the Nielsen Company) to a consortium of private equity investors for USD 9.71 billion;
- the £20 million management buyout of Bounty funded by ECI Partners;
- the £55 million management buyout of MORI by a syndicate of private equity investors headed by ISIS Equity Partners;
- the acquisition by The Carlyle Group of advertising visual effects company The Mill, for an undisclosed sum; and
- the double buyout by Iceni Capital of stakeholder consultancies Trident Communications and The Limehouse Group.
Specialist businesses sought after
Specialist businesses and those offering high quality services are particularly sought after by private equity investors. In addition, secondary buyouts are becoming more common, with private equity houses acquiring from each other to take firms to the next phase of development.
There are a number of reasons why we are seeing more private equity investment in the sector and why businesses are viewing private equity firms as attractive partners. One of the key propositions of private equity investment is that management are owners of the business and this fits well within the marketing services sector as the need to incentivise, motivate and retain good people is critical. As well as bringing cash to the table, private equity firms will provide support, contacts, strategic direction and business growth experience to stimulate business development, yet allowing the management team to retain a degree of autonomy and freedom.
Fragmentation creates consolidation opportunities
Getting together with a private equity partner may also provide owners of businesses with an opportunity to partially cash out whilst at the same time remaining involved with the business to take it to the next phase of its growth. From the private equity point of view, the fragmentation of the marketing services sector offers an opportunity for consolidation. In addition, relatively small companies in the sector are able, due to their niche expertise, to service blue chip clients and generate high revenues due to the quality of their service delivery.
The recent exit of Durrants demonstrates how a business has grown since private equity involvement. In April 2006, it was announced that August Equity, the former Kleinwort Capital mid-market buy-out firm, had agreed the £82m (€118m) sale of Discovery Group, which trades as Durrants Media Monitoring, to Exponent Private Equity. August Equity backed Durrants' chief executive in a £14 million management buy-in at the company in 2000. Since the acquisition, it was reported that Durrants had increased revenue from £7 million a year to more than £20 million and profit from about £1 million to about £7 million. Kleinwort Capital also helped the company raise £2.5 million to fund the development of a digital technology platform.
"Iceni genuinely understands our business"
Increasingly private equity firms are recognising that particularly in smaller service businesses, management teams are looking for more than capital from their investment partners and offer hands on support and experience in addition to funding. Peter Agertoft, CEO of the combined Trident Communications and Limehouse Group says "we have found Iceni Capital's involvement in our business incredibly positive and are already benefiting from their operational experience. In Iceni Capital we have found a partner who genuinely understands our business and backs our growth strategy".
So what are the predictions for the next 12 months? Private equity investment looks set to grow with relatively cheap debt available to fund the acquisition and development of target companies. This presents good opportunities for companies in the sector to acquire both funding and the benefit of experienced investors to help develop their business. We are also likely to see companies already in private equity ownership consolidating their position in the market by making their own strategic acquisitions.