Business

Why investors leave alone first and second-generation family businesses

Investment bankers tend to operate by rules of thumb.  They expect their clients to pay a 30% premium to take control of a company. 

They prefer agreed bids. And they leave alone family businesses run by a first or second generation.

One banker says: “That’s when families and management are tight. Once you get to the third generation we start to pay attention as families lose interest and the quality of their people deteriorates.”

The rules still hold. But the situation is evolving, private equity bidders get ever more determined to get UK deals over the line. They are desperate to make up for a deal famine over the last 18 months, which has badly constrained carry payments to their partners. 

It is scarcely surprising that so many target companies have evolved out of family businesses…but the scale of takeover bids is astonishing

UK businesses are more tempting to private equity buyers than most following a post-Brexit decline in sterling and evidence that the local economy is bouncing back. Buyout firms sense uncertainty about the future from UK management, which makes them more likely to agree deals. 

Despite their recent recovery, UK share prices are on a low multiple compared to other economies, making deals even cheaper. 

One banker said: “Institutions have been selling UK equities for years. The buyers have tended to be overseas investors and tracker funds, and they are more inclined to accept a bid than active UK managers.” 

The number of buyout negotiations carried out in the UK this year totals 366 – the biggest since the 1980s, according to data provider Refinitiv. 

Their interest has spread from the larger end of the market to the smaller, squeezing out trade buyers and family businesses who can offer plenty of synergies but less cash. According to one family business: “We are still working on deals, but it can be hard to compete.”  

It said private equity firms, despite their reputation for cost-cutting, do offer synergy and assistance to portfolio companies: “Which makes them competitive in a good way.”

But low interest rates have increased the amount of debt private equity firms can bring to the table suggesting that they risk overpaying. 

As well as throwing cash at situations, private equity firms are switching staff to the UK and paying top dollar to advisers who can offer less time to their previous clients, as a result. Private equity is particularly keen to pay what it takes to secure an agreement for a deal, rather than embarking on a hostile bid. Once a deal is agreed, other private equity bidders pop up.

After saying farewell to two generations of family management, UK supermarket chain Morrisons is now dealing with potential offers from three private equity firms.

William Morrison started the company in 1898, building it into a local grocery chain from a market stall in Bradford, Yorkshire.

His son Ken served in the Royal Army Ordnance Corps and succeeded his father at 26.  He built a successful chain of superstores in Northern England, then acquired Safeway to repeat the exercise in the South. 

The deal led to digestion problems but Morrison persevered and regained the respect of investors, becoming chairman and life president until 2008. He died in 2017.

But Morrison’s expansion diluted the family’s control of the business. Going into the pandemic, it lost some of its identity and lacked a decent delivery chain. All of which made for classic post-family, post-pandemic, vulnerability.

The writing went on the wall, as shareholders told management a £6.3 billion bid from private equity firm Fortress, backed by the US Koch family, which offered a remarkable bid premium of 40%.

Rival private equity bidders Clayton, Dubilier & Rice and Apollo Global Management are considering their position. 

Earlier this year, the Issa family used debt to buy Asda, from Walmart, whose backers, the Walton family, saw less faith in its growth prospects. The Issa family did their £6.8 million deal with backing of private equity firm TDR.

Clayton Dubilier is buying UDG Healthcare for £3.7 billion, which has built itself out of a pharmacy business started in 1948 by friends and families in Ballina in the west of Ireland.

A break up is developing at Cobham International, once a family business, following its £4 billion takeover by Advent International in 2020. Advent has gone on to target Ultra Electronics, developed out of Edward Rosen’s headphone business in 1925. 

Of course, it is scarcely surprising that so many target companies have evolved out of family businesses. 

But the scale of takeover bids is astonishing, not least because it is largely being driven by the weight of money. In fact, offers are getting so generous that they are even tempting first and second generations to sell.

St Modwen, the property company, founded in 1996 by the late Sir Stanley Clarke and his brother-in-law Jim Leaveley, has agreed a £1.2 billion takeover with Blackstone, which wants its skill in logistics. The bid premium was 25%. Sir Stanley’s son Simon, a non-executive director, has agreed the deal and benefits from the bid, as does Leaveley.

Ultimate Packaging, a UK company run by the Tonge family, has agreed to be taken over by US packaging group ProAmpac, backed by the Pritzker family’s Pritzker Private Capital (PPC). First-generation Nigel Tonge, founder of UP said: “As a family-owned business, it was important for us to select a partner who shared our values, commitment to innovation and partnership with our customers.”

It makes a nice change to see a deal driven by synergy. But PPC happens to be backed by the Pritzker family, which sees a great deal of value in that approach.

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