RSS feedsYou know that feeling when you're walking down a busy street and it seems like everyone is going in the opposite direction? And then when you turn around, it still seems like everyone is walking against you? That's pretty much what it must feel like at Aim-listed Acertec plc.
In 1999, the company, then known as Hall Engineering, was unloved and lowly-rated by the stock market which was in thrall to the dotcom boom. So, amid a torrent of internet IPOs, Hall Engineering took itself private with backing from venture capital group Candover.
Then last year, as the private equity boom looked like it could threaten almost any quoted company and the Aim market suffered a few knocks from a number of sub-prime listings, Acertec put itself on the junior market to give its backers a graceful exit.
David Roache, who became finance director of the group just as it was taken private eight years ago, says that refloating on Aim wasn't his preferred choice. “I hear the criticism of Aim being a very lightly regulated market,” he says. “It doesn't feel lightly regulated when you're in it.”
Acertec is a £325m-turnover business that has two main operations: Stadco makes car bodies and subassemblies for customers such as BMW, Jaguar, Aston Martin, Land Rover and, formerly, MG Rover; BRC makes steel rebar and mesh, used to reinforce concrete in the construction industry. Its recent results showed a turnaround from pre-tax losses of £2.3m to a profit of £2.2m.
Though the company is clearly big enough for the main London market, Roache explains that Aim was chosen because it offers a quicker flotation process: the company's numbers are ratified by its own nominated adviser, or nomad, whereas a full market listing would require sign-off by the UK Listing Authority. Also, Aim companies were granted a two-year exemption from having to implement international financial reporting standards, which meant there was one less major task to do prior to floating.
Whether the choice of Aim will prove to be the right decision over the medium term is another question, Roache suggests: “You're always told that you are better off as a smallish stock on the main market simply because you get on the [FTSE] index and everyone has to buy the index: therefore, you get a little bit of lift in the share price. Don't know. It's an interesting debate. We're happy where we are,” he says.
Private affair
So while Aim was chosen over the main market “as an expedient”, the truth is
that Roache would have preferred not to go to market at all. Rather, he would
have liked to stay in the private equity realm. But Candover had been backing
the group for six years and, as Roache admits, Acertec had been “an adequate
investment but no better than that.” He insists that the backers had been “very
supportive through some fairly thinnish times, supported a couple of decent
acquisitions”, but that the time had come for them to get out – and other
avenues weren't viable. A secondary buyout would have been Roache's preferred
option, “but the arithmetic didn't work,” he says. “No private equity player is
going to take a business off another private equity player at a value that would
match what you can get on a float.”
A shame, really, because, as Roache sees it, the focus of a private equity buyer is always on the value that will be generated at exit – which sounds a bit intimidating, but, in reality, meant that such a backer “is not going to jeopardise the business in taking too short a term view,” he says. “That compares with having 300 shareholders all looking over your shoulder wanting to know what the results are.” But, he adds, the difference between private equity and the stock market is “different shades of grey – not between black and white”.
One advantage of being back in the public arena, though, is that there isn't anything like the debt burden that gets lumped into a buyout deal: “Although by today's standards we were not highly geared, we had sufficient gearing in there to make it tolerably uncomfortable,” he says.
Roache had been a little concerned about how the City would react to Acertec's return to the market. It might have looked as though the management team and the private equity backers had taken the business off the market, run with it for a while and then tried to offload it again. In fact, the reaction was quite favourable: “People were genuinely interested in investing in a business that actually makes stuff,” he says. “This is a real business, not a sort of virtual business. It made stuff; it made money making stuff, and therefore was going to pay a reasonable yield. We were pleasantly surprised that there were investors out there for whom this was quite an attractive package. On Aim, you're not knee-deep in companies that can tick those boxes.”
One of the tricks that Roache admits he hasn't yet mastered is the art of being unremittingly upbeat about your own stock. “Selling a business on the public market can be a bit like selling second-hand cars,” he says. “I think you are expected to polish the goods and flog them fairly enthusiastically and we, by nature, are a very conservative management team. What I would euphemistically describe as ‘market puffery' doesn't come as second nature to us. We tell it like it is. And I think we got credit for selling a very honest story.” One broker – Acertec's own, in fact – said that the company had yet to learn how to be bullish.
It also went against his nature to have to do seemingly endless presentations to potential investors. “Unless you are a natural salesman, selling your own company to a bunch of rather cynical professional investors is quite hard work,” Roache admits. “To sound enthusiastic and positive about a company solidly in the steel engineering sector is hard work and you need a bit of oomph from the broker to make that thing work.”
Roache is full of praise for the “oomph” that his stockbrokers, Collins Stewart, gave the shares prior to flotation. And he admits that this part of the process was something of an eye-opener for him: “To the uninitiated you think that, if the business case is good, it will sell itself.” The truth, he found, was that “unless you have a very interesting and sexy story, yours is going to go on the ‘too-difficult-to-get-my-head-around' pile and you may not get institutions buying into it.”
Greasing the wheels
The job of the stockbroker, then, is to ring around and call in all his chips:
“He's calling in all the favours and you get investors coming out of the
woodwork that make you think, 'Why the hell are they buying into this? This is
not in their sweet spot.' But they're doing the broker a favour. Wheels within
wheels.” The end result was that the issue was sufficiently well oversubscribed
to be described as a success. While you only need to sell the shares once over,
it helps the aftermarket if there is excess demand and individual investors'
allocations have to be scaled down in the share placing.
Ironically, given Roache's ambivalence towards the stock market, he and his board colleagues had wanted to float Acertec a year earlier. But suddenly one of its biggest customers went out of business with a bang: Rover. “We knew it was going to happen sooner or later. It was the timing that was going to be uncertain,” he says. “Heading into the IPO process in 2005, it was always a big risk factor.”
The collapse still came as something of a surprise, says Roache, and it took about £20m-£25m of turnover out of the group, overnight. Acertec had to take some big provisions and do some fairly drastic reorganisation, “therefore we were certainly not ready to float.” Roache had expected Rover to go into a slower, more gradual decline, and Acertec had been whittling down its exposure to the car company. “But we didn't anticipate that Rover would go in one big blow.”
Having got the restructuring underway with two plant closures and one downsizing, Acertec could try again with the markets, explaining what the impact had been and what action had been taken. “By and large they took that on board. Had we have floated with Rover still limping on then it would have been a risk that was not in our hands. Investors would have been more nervous of that than just the execution risk of a reorganisation.”
In some respects, it proved to be quite helpful to be able to start the flotation process, suspend it for a while, then carry on again, Roache found. Usually, companies coming to market not only have to sort out all the accounts and legal documentation, the prospectus and so on, but also have to restructure the financing arrangements, adding an extra layer of complexity at a time when the corporate head office is already stretched. In Acertec's case, they managed to sort that out during the period when they were lying low, between their initially planned flotation date and their actual launch date a year later. “I would not recommend aborting an IPO to anyone, but it did help to a degree,” Roache says.
Glue that binds
Oh, by the way, did we mention how big Acertec's head office is? It's got a
headcount of six. Not 60, or even 16. Chief exec John Sword, Roache, a PA whom
they share, plus three accounting staff – and that's it. The two divisions that
make up Acertec are standalone businesses that have nothing to do with each
other. “What we are in the centre is a little bit of glue that keeps them
together, and the public-facing bit for the group. So we deal with treasury,
tax, reporting to the outside world and the strategic direction and development
of the group,” he explains. “We don't run the two businesses on a day-to-day
basis although we keep a very strong hands-on control of them. We prefer to give
the people who run the businesses that responsibility and they make or break on
that basis.”
It's almost as if Acertec's head office is a mini private equity group that owns two industrial investments – though Roache and his chief executive certainly don't stand back and manage the business on the numbers. “We are far more hands-on and involved in the businesses than most private equity owners would be,” he says. “But yes, the analogy is a good one.”
Roache himself is nominally company secretary, but much of the work is outsourced. Even though, he thinks that it will be necessary to recruit a full-time company secretary because of the on-going compliance burden which, he says, has “stepped up several notches” since the days when he was last FD of a quoted company: “I hesitate to say [compliance] is a pain in the neck, but it is a significant burden on a relatively small company.” Roache will also be recruiting more accounting staff – but even then no more than about two or three altogether.
With such a small staff, it's perhaps a wonder they managed to find the time to float at all, even if the businesses are supposed to stand on their own two feet. The flotation process was painful: “You just write off weeks of your life,” he says. “You cannot run the business and float at the same time unless you have lots of resource around you, which we don't. So you do get frustrated that the float is taking all your time and you're not devoting any time to actually stay close to the businesses.
“You get on a big treadmill, effectively, and your only relief is knowing that, at some point, the thing is going to go. That's just what you look forward to and you then collapse in a heap when it does. I think it is a very interesting exercise for any FD to go through. You learn a lot about your own business.”
