Times of crisis are also times of opportunity for those who can see beyond the short term and spot longer-term opportunities, says Graeme Davies
Times of crisis are also times of opportunity for those who can see beyond the short term and spot longer-term opportunities and position themselves to take advantage while others are distracted by simply staying afloat in stormy waters.
This is why, at times of extreme economic stress, we often see a spike in mergers and acquisitions. And the FM sector is no stranger to this, hence the planned deal between Mitie and Interserve, which will see the former emerge as a front runner in the UK’s outsourcing sector.
There are many reasons why such a deal makes sense for both parties. Some commentators expressed surprise over the timing of the deal during the coronavirus crisis and also given both groups’ recent track record of financial difficulties. For Mitie, combining with Interserve’s FM arm will give it enhanced scale and a wider spread of business across both public and private sectors, creating what will effectively be the UK’s biggest FM company with combined revenues of about £3.5 billion. Combining areas of overlap such as back-office functions should also create economies of scale.
“Mitie has already benefited from its diverse operations with more public sector work”
Mitie has already benefited from its diverse operations with more public sector work such as deals won at the Nightingale hospitals establish to battle the pandemic peak offsetting weaker private sector demand and its increased scale should enable it to benefit when the economy – and private sector demand – picks up.
For Interserve, which is effectively owned by its lenders after running into serious financial trouble last year, the deal brings a welcome injection of cash and leaves a company more focused on infrastructure and construction. Both these areas could see a significant boost in the years to come as a result of Boris Johnson’s bid to reinvent himself as a Roosevelt character who is going to rebuild the UK economy through a splurge on infrastructure.
So the deal, while coming at a somewhat surprising time, appears to be rooted in solid long-term thinking on Mitie’s part. It could also be the start of a trend of increased mergers and acquisitions activity across the sector as companies look to seize the mantle of depressed valuations and grab more market share before the economy, and valuations, pick up. Some FM companies, such as Rentokil, are already well versed in growth through acquisition to hoover up market share by picking off smaller operators and the current economic environment is likely to prove fertile ground for this sort of activity. Larger deals such as Mitie/Interserve are more rare, but don’t bet against some significant consolidation coming down the line.
Graeme Davies writes for Investors Chronicle