Sports Direct House of Fraser deal could influence Edinburgh markets
When Sports Direct signed a deal to buy parts of House of Fraser, or Israeli-owned Leonardo Hotels purchased the Scottish Portland Hotels group, it was because they spotted an opportunity.
It could have been an opportunity that other buyers saw and dismissed, or one that did not appeal after investigating a list of criteria.
But for Sports Direct and Leonardo, the motivators for purchase were met and a range of rewards and benefits were deemed advantageous. The time was right – and a deal was struck.
“The same is true of all corporate deals, whatever the size,” says Julian Voge, a partner in leading Scottish law firm Brodies and a highly experienced corporate and commercial lawyer. “First an opportunity arises, then the deal is assessed according to various criteria – and then the buyer will decide to purchase or to let it go.
“Our role at Brodies is to assist the buyer by drawing on our experience of many different corporate deals over the decades – because we have access to considerable resource and expertise in our organisation.”
There are three main types of purchaser, a trade buyer, private equity or a management team.
Voge, who has been a partner at Brodies for more than 30 years, says: “With a trade buyer it is usually someone in the same type of business, so it could be a hotel group buying more hotels or a restaurant owner buying more restaurants.
“Another type of buyer is private equity. These are funds of money, created perhaps by pension funds or individual investors. They look to take a stake, or acquire all of the shares, in companies. This purchaser
is usually looking for a short-term gain, so a company is identified as a good buy because it has the clear potential to be improved and it is then sold later for a profit. It is a way to grow an investment fund.”
A buyer could also be a management team in an existing company. Voge says: “It might be that the owner of a company has decided to retire, or to sell for another reason, and offers the opportunity for a management buy-out. This requires access to debt funding, most likely through a bank. The purchaser already knows the company it is buying into.”
With company acquisitions there are generally two types of deals: A buyer can purchase shares in the target company – called a share deal – or the target company can sell its business to the buyer, which is known as an asset deal.
The share deal is a transaction between shareholders and buyer and the outcome is the buyer acquires the target just as it is – with all of its assets and all of its liabilities.
In an asset deal, the buyer picks the assets it wants to buy and, by doing that, does not take on any liabilities. The exception to that is the liabilities relating to employees, who work in “the undertaking” that is being bought and sold. This happens by law because of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) that protect employees when a business changes owner.
A seller gives warranties to a buyer in both types of transaction, to give the buyer comfort that the assumptions it makes about what it is buying are correct.
In a share deal, the warranties are more extensive because they have to cover both assets and liabilities. In an asset deal, they cover the assets and employees. There is less concern about liabilities.
A variation on an asset deal is a “pre-pack sale”, which is an arrangement under which the sale of all, or part of, a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment.
Behind all company acquisitions there will be a range of motivators for an acquisition.
Voge underlines: “There is no one-size-fits-all approach to buying a company, and deciding whether it’s the right time to buy will be different for every purchase, but there are a set of motivators that can be identified as the reasons for seeking a purchase.
“So, when a client tells me he has seen an opportunity to buy a company, I always ask: ‘Why this business and what are the most important things about this business for you as a buyer?’ The answers vary in every case.”
Motivating factors might include the attraction of a new workforce, or groups of employees with new skills.
Voge says: “Sometimes a client will have identified another business in their field that has a strong workforce or, perhaps, renowned experts among the staff. This can make a company purchase very attractive because the sale will bring with it an expertise that they currently lack.”
The desire for a new product, such as the purchase of a new hotel in a key market place for a hotels group, is also a strong motivator for acquisition, as is acquiring a company in a new location.
For example, a company that already has operations in England might buy in Scotland to expand their business.
Voge says: “The business already knows how to operate successfully in one location and recognises an opportunity to do the same in a new location, thus hopefully growing their business.”
If the organic growth of a company has slowed, a target might be to purchase a similar business and gain access to a new stream of customers, clients or contacts. An example of this might be an accountancy firm that buys another and gains the benefit of the staff and their client lists.
“It is really a “bolt-on,” Voge explains: “The aim of a bolt-on purchase would be to add business opportunities but without vastly increasing overheads.”
The acquisition of FreeAgent by Royal Bank of Scotland might be seen as this type of deal.
Many buyers will also be looking for an “undervalued” business to buy. These are often the target purchases of a private equity. Voge says: “A business might be deemed to be in an unfashionable sector, or a company may be having a tough time modernising, or the owner wants to retire. The buyer will spot this as an opportunity for a cheaper purchase.
“They will have assessed the purchase and will be sure that with expert advice and a systematic approach to improvements, they can turn a profit relatively quickly. In many cases, these purchases are sold on for an early profit.”
Having worked with many clients, Voge reports that no two cases are the same and most of them are “interesting and fascinating”.
He adds: “Assisting a buyer with a company purchase is different each time; I enjoy the process of discovering the motivators and criteria for an acquisition, as well as partnering with the buyer to ensure it is ultimately a good buy and that the purchase turns out to be exactly what they hoped it would be.”
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