Buyers finding fresh opportunity in others’ losses

Operations that prove to be a drag on one business are increasingly finding new life as profitable add-ons or first enterprises. While they may not have performed for their original owners, under new management they may demonstrate turnaround potential depending on the situation.

With overall improving market conditions and merger and acquisition activity in 2014 expected to continue, building on the progress made in 2013, the new year is proving to be a popular time for buyers to seriously weigh up taking over underperforming divisions, realising their potential, often at a reduced price.

Last October, waste and recycling firm Biffa took just this approach when it agreed to purchase most of Shanks’ loss-making UK Solid Waste business for £9.5 million, as part of Shanks’ strategy to exit the division entirely.

Waste processor UK Solid Waste had been a financial drain on Shanks, and a slight diversion away from its core strength - sustainable waste management. But for Biffa, the add-on promised to power up its recycling and waste-to-energy facilities and lead to growth for its energy and processing operations. Ian Wakelin, CEO of Biffa, outlined some more benefits at the time: “This acquisition will enable us to leverage our national infrastructure, grow our market share and enhance our leading industrial and commercial services. It is a progressive move for Biffa in line with industry trends towards consolidation to match waste volume levels.”

Insurer Markerstudy has benefited from a similar situation after finding the positive in a loss-making division of business processing outsourcer Capita. Capita decided to offload the heavy weight of its loss-making retail insurance businesses - Lancaster, Sureterm and BDML – with the intention of selling them on to a company “where insurance was understood”. Due to the poor performance of the businesses, Capita expects to record a combined operating loss of £15 million for 2013.

A sale was agreed to Markerstudy in mid-November. Specialising in personal lines of insurance, Makerstudy is confident that it will turn the underperforming businesses around. Makerstudy director Russell Bence said the acquisition will add “some new product lines and capabilities to our existing retail capability”. It goes to show that it is wise to stick to what you know in business.

Buyers are also benefiting from business disposals by location, with sellers having determined that weak-performing parts in certain areas are often better off in the hands of someone more local. “Some businesses are looking at where they may be sub-scale in a particular region,” Mark Whelan of Ernst & Young commented. He added that firms are “seeing if the business would be more valuable to another operator that can realise some synergy benefits from merging the two operations in that region.”

In both case examples above all parties stand to benefit from their respective losses and gains. The seller has spun off its weaker aspects, gained a cash boost and a drop in operational costs, leaving it to turn its attention to achieving its new, or original, goals.

Meanwhile the buyer has taken on a somewhat battle-scarred business but done so with the potential to turn it around. Post-transaction, a business plan and strategy for how to merge the newly acquired business and fix any problems will ensure the new owner stands to make a success of it, bringing it to profitability and with new competitive advantages.

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