Business Reporter

YOUR AWARD-WINNING SUPPLEMENT

METALS, MINING & MINERALS SPECIAL FOCUS ON MINES AND MONEY

MERGERS & ACQUISITIONS SPOTLIGHT ON BUYING AND SELLING

December 2014 | business-reporter.co.uk

Queen of the mega deals EXCLUSIVE INTERVIEW

Financier Amanda Staveley on tough negotiating, advising Middle East investors… and being kind to people

DISTRIBUTED WITHIN THE SUNDAY TELEGRAPH, PRODUCED AND PUBLISHED BY LYONSDOWN WHICH TAKES SOLE RESPONSIBILITY FOR THE CONTENTS

Business Reporter · December 2014

2

Metals, mining & minerals

Opening shots René Carayol

S

ITTING in a luxury hotel in Johannesburg, I was watching the final race of the Formula 1 season in Abu Dhabi on TV when suddenly the power went out. It wasn’t long before the hotel’s generator kicked in and the TV came back on. But there are many others across South Africa who do not have the benefit of a hotel generator during increasingly frequent power cuts.

It is hard to accept that Africa’s most advanced and sophisticated economy can still be brought to its knees by its ageing and archaic energy infrastructure. As both investments and expectations of Africa continue to grow, it is their political institutions and national infrastructures that lag dangerously behind.

While many would have us believe this is Africa’s decade, we have experienced many false dawns and radical and structural change can no longer be avoided. Although Africa is home to a wealth of natural resources, it is also home to most of the world’s poorest countries.

The African Development Bank states that the continent holds about 30 per cent of the world’s known minerals, and 50 per cent of its uncultivated arable land.

Recent discoveries of metals, minerals, oil and gas across the continent have attracted

IndustryVIEW

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

THE ESSENTIALS

Publisher Bradley Scheffer | Editor Daniel Evans | Production Editor Dan Geary

Commodity markets should be regulated to help Africa share its wealth more fairly foreign investment from just about everywhere, with the Chinese seemingly right at the forefront of everything.

Recent history has seen the double-edged sword these exciting new developments bring, as friction and conflict tend to be just around the corner once a rich seam is discovered.

Governments rightly seek more revenues and economic benefits from these new and huge sources of income. But many foreign companies looking to operate in these sectors are becoming circumspect and cautious due to the high-risk environment.

The level of risk seems to increase despite maturing governments; expropriation, volatile currencies, not to mention political violence.

Things are never quite stable enough to deliver the sustained growth the continent needs and deserves. If this was not enough,

Global conference sees mining in a good light

M

ore than 2,500 delegates from the global mining investment community met at Europe’s largest mining investment and capitalraising forum last week in London.

The UK’s top financial institutions and their international counterparts converged on Islington to meet teams from mining companies representing projects from across nearly every continent, with 75 nations represented.

The 12th annual Mines and Money London conference and exhibition brought together the world’s leaders of the mining investment space for a week of debate around the industry’s outlook: how to identify the next big investment opportunities and where finance will come from to fund and find new mines.

“Mines and Money London is the mining industry’s most important event in Europe,” said Aspermont Events CEO Ruth Carter. “This year again was the setting for numerous mining deals and

high-level discussion that will influence the future narrative of the industry.

It’s also an invaluable networking event.”

Over the course of the week, attendees were treated to a programme that included keynotes from Evy Hambro and Catherine Raw of asset manager Blackrock, Mark Bristow from South African gold miner Randgold Resources, Tom Albanese from Vedanta (formerly CEO of Rio Tinto) and renowned mining mogul Robert Friedland, CEO of Ivanhoe Mines.

From the financiers of the mines and the companies that operate them to international policy makers and

companies that help facilitate mining deals, attendees represented a crosssection of the industry.

Established predominantly over the years as a marketplace for the junior and exploration mining space, this year saw an increase in participation from miners at the big end of town, with teams from Rio Tinto, Anglo American, Newmont and Antofagasta all present.

While it may have been a difficult year for some of those financially invested in the mining space, there was no shortage of optimism on the exhibition floor.

For every conversation that asked where things had gone awry, there were another

bureaucracy and corruption just add to the dilemma of investing in Africa.

Despite all this and the ongoing infrastructure failings, investment and the growth of the middle class will continue – but it is high time to think about bringing effective regulators into play.

Less-than-transparent pricing mechanisms and poorly governed market platforms have always been vulnerable to manipulation by the powerful. Entrepreneurial national leaders, major producers, the big trading houses and, of course, financial institutions are all attracted to the Klondike-like rush.

We have seen what proactive local regulators can achieve in terms of global banking. The recent fearsome set of fines coupled with the naming and shaming of the miscreants has made all banks not just think again, but radically alter their behaviour.

It is high time commodity markets were regulated by national and international authorities. There are many issues around transparency, and some of the current players have become comfortable in a world of little scrutiny. As ever, the losers tend to be those innocent and poor nationals of commodityrich countries.

It is morally unacceptable to be aiding and abetting the few to make billions while the majority suffer. National regulators are a good place to start, and South Africa is leading the way, despite missing the last few laps of Lewis Hamilton’s win in Abu Dhabi. Inequality eventually brings everyone down.

five that asserted that now was precisely the time to seek out well-positioned stocks with the view that when the market spikes upwards, significant gains can be made.

And while the fortunes of mining firms may fluctuate as demand and pricing for commodities does, key factors investors outlined as being most attractive were strong management teams, a robust business plan, a focus on profit margin – via cost control and a focus on efficiency – as well a propensity for delivering shareholder return.

As the leading global portfolio of mining investment events, the Mines and Money series also has a firm foothold outside of Europe, with events in Asia, Africa and Australia. The series next sets up shop in Hong Kong in March, then there are events in Melbourne and Mauritius later in the year, with signs already indicating that the positive mood in London will be replicated throughout 2015.

For miners looking to raise capital from Asian investors, or investors seeking to evaluate hundreds of mining companies from across Asia and Australia in just a few days, Mines and Money Hong Kong will deliver the right audience and programme to serve both purposes.

Exhibitions space and delegate passes can be secured for the event by contacting the Mines and Money team www.minesandmoney.com/contact

Business Reporter · December 2014

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

M M MIN ET 2- IN I A 7, E N LS 16 R G , -17 AL & S

Client manager Alexis Trinh alexis@lyonsdown.co.uk | Project managers Clare Naude, Mark Ragan | info@lyonsdown.co.uk

Metals, mining & minerals

3

Government concern over waning mineral resources RESOURCES NEEDED to sustain population growth and world development are decreasing and strategies have to be put in place to make sure minerals are conserved for the future.

Sir Mark Walport, government chief scientific adviser speaking at the CBI Living with Minerals 5 conference, says: “We have a global population of seven billion people and it looks set to increase to nine by 2050. We have an ageing, urbanising population that will increase the demand for mineral resources.”

He suggests strategies should look at ways to expand the life of minerals, such as recycling and

moving to a circular economy. In a circular economy resources are used as long as possible for maximum value. Products and materials are regenerated at the end of each service life.

Walport explains that the government has a role to play, and must work with industry and academia to undertake research that can feed through into business. He says: “We have to conserve our mineral resources and recycling will become more economical.

All of this is interrelated – there are more people, more resource extraction and more of a challenge in terms of a supply.”

According to Walport, minerals are not evenly distributed throughout the world, leading to potential issues of resource nationalisation. For example, he explains that there are limited sources for phosphorus, which is crucial in the production of agricultural fertiliser, but much of the phosphate rock it comes from Morocco. He says: “We have to be smarter about how we recycle phosphorus.”

Many minerals needed for high-tech equipment are sourced from few countries, such as China, Brazil and Russia. He says: “We have to be more effective in the way we manage those materials.”

Better comms within extractive supply chain will reap rewards, claims expert

By Joanne Frearson THERE NEEDS to be better engagement between producers of metals and minerals and product manufacturers for supply to be able to meet demands, claims an industry expert.

According to Dr Bernie Rickinson, CEO at The Institute of Materials, Minerals and Mining, producers of metals and minerals need to understand how they are used by product designers and architects so as to comprehend what the demand is for such types of resources.

He believes that established manufacturing practices need to change as companies look at ways to produce goods more cheaply. This may mean they have to be less reliant on using metals and minerals to manufacture certain products.

Rickinson says: “There needs to be more engagement with the people who make the decisions about how the materials are going to be used. People cannot stand back and say the world is never going to change and that they will provide materials the same way as they have always done.

Material producers need to appreciate the needs of the other community.

“For example, aerospace is driving towards lower fuel costs and more passenger miles. Metals a re bei ng displaced by composites. If you look at what the skin of an aircraft is made out of, it is predominately aluminium alloys, but the new Dreamliner aircraft is built from a carbonfibre composite.

“If that as a technology starts to become proven, effectively you have a significant increase of manufacturing in aluminium which is going to see direct competition in composites.”

He is also seeing this in the car industry. He says: “Steel will always have a place in chassis, but if you look at the way the new Land Rover is now built, it is made out of aluminium. Audi has done the same, using aluminium to build its cars rather than cast iron.

“In the field of displacement, you have growing competition between metals and between other materials and metals. This is driving performance for the

Dr Rickinson (left) believes the extractive industry must listen more to the changing needs of manufacturers

benefit of the end-user. No metal or material can be regarded as sacrosanct, insofar as it will always be used in a particular application. If CEOs are not thinking about the way in which the world is developing they are going to wake up one morning and find they have lost a market.”

Rickinson believes producers must keep in mind that demand for metals and minerals can swing backwards and forwards.

It is driven by the economy.

He says: “The people who make the decisions on how to use the materials in the market are shaping t he ma rket for years to come. Also coming over

special W Chuka UmunnaInvideo an interview filmed at The Daily Telegraph studios, A Shadow Business Secretary T Chuka Umunna discusses how the future is bright C for the UK’s SMEs. http://bit.ly/brsmallbiz H

the horizon is the technologist, who is disrupting the way we do things and coming up with new ways of building products. These collisions are always going to be happening – no one is ever going to stop them. It is a never-ending competition. There will always be something that is pressing.

The smart money is looking at how businesses and markets are going to be displaced.

“This could either be through designer choice, environmental issue, strategic or political events that are going to impact on the way in which my market moves, or I am going to see a threat coming from another material.”

Although the methods of extraction of metals and minerals may become more efficient and economically viable, unless producers communicate more with manufacturers, it will be harder to know – and react to – what future demand will be for their materials.

Business Reporter · December 2014

IndustryVIEW

4

Metals, mining & minerals

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Find us online: business-reporter.co.uk | Join us on LinkedIn: Business Reporter UK

| Follow us on Twitter: @biznessreporter

Going below sea level

“Why would we want to stress our planet and feed the world from the 30 per cent we can inhabit and ignore the other 70 per cent? That makes no sense whatsoever” – Mike Johnston, CEO, Nautilus Minerals “We have taken machinery used daily in land mining and married it with our know-how in subsea robotics” – Mike Jones, managing director, SMD

Spotlight on two pioneering companies working in the waters off Papau New Guinea in search of precious metals

I

n the territorial waters of Papua New Guinea (PNG), at a prospect known as Solwara 1, Nautilus Minerals has been granted the first lease to mine the deep sea for metals. With scarcity in resources around the world and countries needing more and more metals to sustain everyday life, mining the ocean floor is being looked at as a way to meet this demand. Nautilus holds approximately 450,000 km2 of highly prospective exploration acreage in the western Pacific; in PNG, the Solomon Islands, Fiji, Vanuatu and Tonga, as well as in international waters in the eastern Pacific.

Nautilus Minerals has been given a mining licence by the PNG government for its Solwara 1 site, and production will begin in 2018.

Advances in technology and the development of a legislative framework by the International Seabed Authority have made what was once thought of as impossible a reality.

Mike Johnston, CEO at Nautilus Minerals, says: “Technology offshore has exploded within the oil and gas industry.

The oil and gas industry is spending $300-400billion dollars a year on offshore petroleum technology.

We are using Nautilus’s Mike Johnston (l) those lessons. and SMD’s Mike Jones (r)

“We have had all of this potential. The technological improvements we have seen over the last 40 or 50 years have allowed us to keep going into deeper and deeper water.”

Soil Machine Dynamics (SMD), which has been developing technologies for the subsea oil and gas sector since the 1980s, will be providing the vehicles which will be used for the mine. Mike Jones, Managing Director at SMD, says: “We have worked closely with Nautilus to develop three vehicles which will be remotely operated to extract and collect minerals from the mine. There are significant challenges to create a mining system that will reliably operate over a mile deep on a sea-floor terrain of peaks and valleys.

We have taken machinery which is used daily in land mining and tunnelling and married it with our know-how in subsea robotics. The individual machines weigh about the same as 20 London buses. Each is designed to carry out the specific tasks to build the mine site roads and benches; extract the ore through cutting; and then deliver it to a huge subsea pump which brings it to the surface. The operation of the machines is directed from a control centre on the vessel. Here pilots and co-pilots monitor and control each vehicle using the sonar and camera images which are relayed from each vehicle via an umbilical.”

Resources being mined on land are becoming scarcer. The demand for copper is doubling every 15 to 20 years, as countries like China and India

industrialise. Preliminary discoveries have shown that resources on the seafloor are enormous. Johnston says: “Why would we want to continue to stress our planet and try to feed the world from the 30 per cent of the planet we can inhabit and ignore the other 70 per cent? That makes absolutely no sense whatsoever.

“Looking at the ocean, there are very large deposits of sea-floor massive sulphides (SMSs), copper, nickel, cobalt and polymetallic nodules. And they are very high-grade compared with landbased deposits. On land the copper grade is now on average 0.6 per cent.

“SMS deposits have copper grades alone of nearly 8 per cent, plus they contain around 5-6 grams of gold, which is a higher grade than most gold mines on land. Then if you look at the nodules, the deposits have grades of over 1 per cent copper and more than 1 per cent nickel, 26 per cent manganese, and nearly 0.3 per cent cobalt. There is more copper on the sea floor than all the reserves on land.”

As this is the first planned commercial deep-sea mining, Nautilus has been receiving interest from governments, authorities and other companies to see how it can be done environmentally safely and economically. Johnston says: “The trick is to do it right, which is what we are trying to do. We have been watched very closely and most people you talk to will tell you we are doing it right.”

Johnston explains the carbon footprint of deep-sea mining is smaller than on land. He says: “We are going to great lengths to make it, environmentally, one of the smallest footprints of any operation anywhere in the world.

“There is only so much recycling we can do, and there is only so much we can do on land. If mines get bigger, the footprints are getting even more enormous, the strip ratios are getting higher and higher. With seafloor mining the footprints are very small and it is highly scalable. Once you do the first one and get the learnings, the next one will be even better and then you will be able to do debt finance and people will want to be able to provide that finance.”

Countries in the western Pacific want to learn more about the project as a way of helping to sustain their development.

“We are talking to a lot of governments in the western Pacific – smaller nations which are interested in it because they do not have any other opportunities,” Johnston says. “They only have a bit of fishing and that is about that.

“Some of these countries do not even have a tourism industry as they are too remote. Exporting resources on the seafloor is something they are interested in doing, so long as it is done right. A lot of them are watching and speaking to the PNG government to try to learn about it.

“The PNG government is a very supportive partner for us, and over the last six months they have worked really hard to get these final deals secured, bring us into production and make it happen.”

In partnership with SMD, Nautilus Minerals is pioneering the development of undersea mining. Governments, authorities and companies are already looking to it for guidance on how deep-sea extraction can be achieved safely and economically. investor@nautilusminerals.com info@smd.co.uk

Business Reporter · December 2014

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Like us: www.facebook.com/biznessreporter | Contact us at info@lyonsdown.co.uk | Lyonsdown is a member of the PPA

Metals, mining & minerals

5

Study: diversity in mining improves performance WOMEN IN the mining sector are good for business. Studies have shown women onboards improve the financial, environmental, social and governance performance of companies.

However, change has been slow to happen in the mining sector. A report co-authored by PWC and Women in Mining show there has been only a 2 per cent increase of female representation on boards in the past year.

Amanda van Dyke, chairman of Women in Mining, says: “The issue is a business issue.

The reality is diverse boards perform better on almost all metrics. The volume of evidence that supports diverse boards is overwhelming.

“The question is, how do you get more women onto mining boards? The main issue in the mining industry is cultural – if you have not been onto a mine site managing the men breaking the rocks, then you can’t do the job.

This idea that only operational mining experience can lend to board-level governance in the mining industry is false and completely unhelpful.

Northern exposure

“Our recommendation is that senior management and boards have to take it upon themselves the need to understand and accept the business case and decide to make a difference. There are a million more ways to get women more involved in the industry, but it requires a cultural change.

“The first thing to do is make it a priority to change company culture to make it more inclusive. There are mentoring programmes, recruitment programmes. There are a lot of ways to change things.”

With demand for food production expected to rocket in the coming decades, one UK firm is poised to reap the benefits Joanne Frearson IN THE NORTH of England lies the world’s largest and highest grade polyhalite deposit, a form of potash. The mineral is used in fertiliser, and it is becoming increasingly in demand as the world’s population grows and food scarcity becomes a real concern.

Sirius Minerals is planning to mine this area, and once the site is developed it will have a significant impact on the UK economy.

Chris Fraser, managing director and chief executive of Sirius Minerals, speaking from China while on a trip, tells me that once the York Potash project is in full swing exports will be worth about £1.2billion annually. The vast majority of what will be mined from York Potash will be exported to countries in Europe, North and South America, Africa, and South- East Asia.

He says the York Potash project has “the potential to reduce the trade deficit by about 4 per cent. “Regionally, we have the potential to increase the North Yorkshire economy by 10 per cent,” he tells me. “The project is significant regionally and nationally in terms of economic benefits.

“The target is to get production commenced in the second half of 2018 and then ramp up to production over the few years following that.

We estimate we will be at full production at 2024 and first-phase production by 2020, so it is an expansion up from the initial to the second phase where we get to the really big numbers.”

The project will create 4,200 jobs during construction and production. There are also benefits to mining polyhalite as opposed to other traditional types of potash.

“Traditional potash is just made up of potassium chloride which some plants do not tolerate,” Fraser explains. “If you do not have a lot of water it can cause a lot of salinity issues and cause burning for plants.”

In comparison, polyhalite is made up of a number of macro-nutrients required for plant growth, which include potassium, magnesium, sulphur and calcium.

The process of getting polyhalite out of the ground is also extremely efficient. In a traditional potash mine more rocks must be extracted to produce potassium chloride than is needed to extract polyhalite. “It is a very cost-effective,” says Fraser. “We will have a very low operating cost.

“We are putting infrastructure in the mine to enable us to mine 13 million tonnes per annum, so we want to get the payback and efficiency out of that. We want to get up that production level as quickly as we can.

“The fundamental drivers of long-term demand remain and continue to get stronger with global growth in potash, your still need a new potash mine being developed every year

and it is just not happening. That is a big positive that you need to look to.”

By 2050 it is expected a growing population will lead to a 70 per cent increase in demand for food production.

York Potash, which has a claim to the world’s largest and highest-grade polyhalite deposit, should be well placed to cater for this demand.

Fraser has been gaining the support of the North Yorkshire community, which is anticipating the economic benefits the project will bring.

He says: “We have an incredibly high level of engagement with the community and we have really built the project off the back of that.

We have engaged very openly and transparently with the community to demystify the subject of mining – a lot of people in the United Kingdom, for example, can only think of the 1980s coal pits when someone mentions mining.

“Our project is very different in its nature, and getting that engagement from the community will hopefully be a foundation for our success going forward.

“The UK has got some really interesting geology, but the biggest challenge of mining here is probably the fact that we are on a denselypopulatedisland.Findinglocations where you can get the balance right and get all the benefits of mining while minimising impact is a really important step for any mining project in the UK.”

York Potash CEO Chris Fraser envisages a big future for the UK potash industry

Business Reporter · December 2014

Metals, mining & minerals

Why gold is a safe haven INDUSTRY VIEW

The gold price may be off its highs, but it doesn’t change the reasons why an increasing number of high-net worth individuals include precious metals in their portfolios and pensions.

A recent Barclays Wealth study found those with more than $1.5million hold an average of 9.6 per cent of their total net worth in tangible assets. In the UEA, Saudi Arabia and China that figure is between 17 per cent and 18 per cent.

It’s no secret the Chinese government has been buying huge stocks of gold and encouraging its citizens to do the same.

Gold has long been seen as a store of wealth, a protection against inflation, diversifying and spreading risk. In November, former Federal Bank chief Alan Greenspan said: “Gold is a good place to put money these days, given its value as a currency outside of the policies conducted by governments.”

It’s gold’s low correlation to financial systems which meant that, as shares plummeted in 2007-08, gold rose rapidly.

It’s a safe haven. It’s also a long-term buy. While you can speculate and purchase a gold-exchange traded fund, or shares in a gold mine, these are pieces of paper with associated third-party risks. With physical metals you have control over your asset.

Storage has historically been one of the downsides, but companies such as GoldMoney exist to enable you to trade precious metals easily and securely online, and store your holding in one of our partner vaults worldwide. +(44)1534 633900 www. goldmoney.com

OCEANS

Find us online: business-reporter.co.uk | Join us on LinkedIn: Business Reporter UK

| Follow us on Twitter: @biznessreporter

SP RE EC PO IA RT L

6

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Companies who venture into the deep should bear in mind that undersea mining is a risky business. Joanne Frearson reports

T

HE DEEP sea is one of the few areas on earth which is relatively untouched. It is the home of unique marine life and ecological forms, some of which few have ever seen – but also vast quantities of untapped precious minerals and metals.

Exploring this new frontier has both high rewards and high risks. Mining the ocean floor could help supply the world with much needed resources, but marine life and ecological systems need to be protected.

With the International Seabed Authority (ISA), set up by the United Nation Convention of the Law of the Sea (UNCLOS), issuing the first licences to start mining the ocean floor, discussions between interested parties are underway to make sure the right procedures are put in place to do this properly.

The United Nations Environment Programme (UNEP) will be the facilitator to promote how the scientific community, governments, regulators and companies can build a framework that supports the global environment and will be sustainable to development.

Achim Steiner, executive director of the UNEP and undersecretary-general of the United Nations, who is based in Nairobi, tells me it is important to take a cautionary approach.

Steiner is an expert in this area. He was nominated both by former secretary-general, Kofi Annan, and current secretary-general, Ban KiMoon, to head up the UNEP due to his in-depth environmental experience. In 2009 he was made an Officer of the Order of Saint-Charles by Prince Albert of Monaco for his environmental work.

Steiner says: “We are in many respects moving into a territory that is unknown. We must first access both the risks and opportunities.

It is important to put in place the right mechanisms and asses the risks in a scientific and methodologically rigorous way, so that we are not simply extracting minerals without at least being able to understand the magnitude of risk.”

Nautilus Minerals is the first company to be granted a licence to mine the deep sea in Papau New Guinea (PNG) at Solwara 1. Steiner says: “Nautilus Minerals is in a sense a pioneer company

that will play an exemplary role, both in terms of potential for extraction and also working with the scientific communities, national authorities and international organisations.

“The licence for Solwara 1 in PNG is an interesting example. It is almost like a laboratory at the moment, for the world to understand how extracting these deposits with high copper and gold rates can be done in a way that is compatible with management of the marine ecosystem.”

The experience that will emerge from PNG should be rapidly translated into lessons that can be used to inform the broader deep-sea mining economy. Steiner believes a multi-stakeholder approach is necessary in putting together the appropriate processes in place to deep-sea mine.

He says: “A multi-stakeholder process is a critical foundation upon which to build the framework – combining the best in what science can provide us, the best of what technology may offer us and the best of what responsible governance measures can be put in place to ensure that this is an opportunity that is truly beneficial to us.

“We have time to develop a more deliberate and risk-managed approach that is informed not only by economics, but also by ecology and the environmental aspects, to ensure that wherever deep-sea mining may occur in the future it is done so with a relatively low risk profile and high potential in terms of benefit.”

For companies that are planning to mine the sea floor, Steiner explains the most important thing they can do is to be transparent. He says: “This will protect the company from being viewed as not

practising due diligence, and secondly, it becomes an asset not only to its shareholders but to governments and nations trying to understand how deep-sea mining will evolve in the coming years and decades.”

It is also about making sure the appropriate regulatory framework is put in place. Steiner says: “When you move beyond areas of national jurisdiction there is a very patchy set of government framework. In areas beyond national jurisdiction,

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

EXPLORED

Metals, mining & minerals

Like us: www.facebook.com/biznessreporter | Contact us at info@lyonsdown.co.uk | Lyonsdown is a member of the PPA

we do not have an adequate legislative and government framework in place to assure both commercial operators and the international community that we are ready to manage this deepsea mining potential in an adequate way.”

Regulation and laws that currently exist to govern the sea are held under UNCLOS, which defines the rights and responsibilities of nations with respect to their use of the world’s ocean, while the ISA controls all mineral related activities in the areas beyond the limits of national jurisdiction.

PRODUCTION SUPPORT VESSEL (PSV)

B

RIVER AND LIFTING SYSTEMS (RALS)

1,600 METRES

ut then there are also the Regional Fisheries Management Organisations, the International Maritime Organisation, and single-sector regulatory instruments that have been developed around the world.

Steiner believes all of these organisations and authorities, as well as the UNEP, need to play a significant role in addressing the issues of being able to mine the ocean floor safely while protecting the marine and ecological environment.

There are areas where marine habitats and life could be polluted and impacted if deep-sea mining takes place.

At the United Nations Rio+20 Summit on sustainable development, member states requested UNCLOS consider a new agreement for the conservation and sustainable use of marine biodiversity beyond national jurisdiction.

Within national jurisdiction areas, Steiner would also like to see a coherent global framework put in place. At the moment it is up to a country’s government as to how they will legislate deep-sea mining in terms of its natural jurisdiction.

Steiner says: “We have a keen interest through the UN to work with member states to ensure that the national legislation and governance framework for deep-sea mining is rapidly involved, and hopefully in a coherent, internally agreed set of standards.

“The decision whether to mine or not to mine must not only be informed by that local presence of a mineral, it must take account of a bigger picture of what the implications of that mining activity would be.”

However, Steiner does not think there is going to be a stampede of companies mining the deep sea any time soon. The first mine will not commence production until 2018, and only if it proves successful will more interest develop.

Mining the ocean is a high-risk business, and companies who are venturing into the deep will be moving into unchartered territory. If time is taken to understand the risks and consequences to the marine habitat and ecological environment, and achieved safely, the ocean floor could open up incaculably valuable mineral resources for the world’s future.

SUBSEA SLURRY LIFT PUMP (SSLP)

SEA-FLOOR PRODUCTION TOOLS (SPTs)

Nautilus Minerals is the first company to pursue ocean-floor mining, at its site near Papua New Guinea

Business Reporter · December 2014

Graphic courtesy of Nautilus Minerals

7

Holding a critical position in the industry INDUSTRY VIEW Antimony, anti-monus – never alone. If you are lucky it comes with gold, so says Tri-Star. Processing and being integrated is the key to Tri-Star’s strategy.

The company is nearing completion on permits and funding for its 20,000-tpa antimony roaster in Oman, a JV with its Oman Sovereign and Gulf-based construction partners.

Antimony has been high on the critical metals list for the West for some time, and is an essential chemical and plastics additive fire retardant and catalyst, a market dominated by China for decades. Scarcer than rare earths and with a large and diverse global consumer base, this metal has a quiet yet critical position in industry.

Tri-Star, with its modern high-standard facility, aims to provide a clean and sustainable source of antimony products for global consumers nervous of dwindling Chinese raw materials at a time of growing Chinese domestic demand and stockpiling.

The technology of rotary tube roasting has also taken the company into the direction of treating refractory gold ores.

Some 30-50 per cent of the world’s gold in the ground is in a sulphide crystal lattice, trapped and often unresponsive to normal leaching technologies. In some countries, the problem is more acute. Some 70 per cent of Kazakhstan’s gold reserves in the ground are refractory, and the country has called for the need to solve this problem.

Dealing with antimony and other sulphide concentrates has long been an important education in being able to treat cleanly other high-value sulphide concentrates. +44 (0) 1303 213 180 www.tri-starresources.com

Business Reporter · December 2014

IndustryVIEW

8

Mergers & acquisitions

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Find us online: business-reporter.co.uk | Join us on LinkedIn: Business Reporter UK

| Follow us on Twitter: @biznessreporter

Arming against cyber-attack: The new threat to M&A

E

mbarking on an M&A transaction has always been risk-prone for financial and operational reasons: will the two entities be a good fit; can integration be achieved; will anyone make money as a result of all the hard work?

Over recent years, however, a new and serious threat to M&A has emerged, one that’s continually changing and becoming ever more sophisticated.

That’s the threat of cyber-attack. How to manage it, along with cyber-security, is an issue concerning dealmakers and business leaders globally.

In terms of likely targets for information that can be misused, every individual, company, even entire governments are in the frame. Personal banking, company strategy and national secrets all have their value to different agents. Therefore, cyber-security has become a universal issue, and one that inescapably impacts M&A. During the due diligence phase of a transaction, companies need to let down their defences so effective fact-finding can take place. Buyers interested in an asset must be able to scrutinise each facet of the business for sale and that means disclosing information and making it available for review. However, this opening in the usual fortifications creates an intrinsic vulnerability for the sell-side organisation. That vulnerability needs

M

erger and acquisition activity is increasing across national and continental borders.

Current statistics indicate that North American companies make the most outbound acquisitions, and European companies lead inbound deal activity, but not by much. In fact, all continents are experiencing heightened levels of deal values and volumes by acquirers and targets.

A sustained focus on cross-border and cross-cultural integration is now the norm for leading acquirers.

It is well known how dependent M&A success is upon integration success.

This is challenging between two organisations within the same country.

However, when M&A is cross-border the challenge is much greater: companies can be in multiple countries, separated by inconvenient time zones, under separate legal jurisdictions with no double tax treaties and radically difficult compliance standards, primary language variations and contrasting cultural norms. The exercise in mitigating risks through careful integration grows exponentially more complex.

In light of the changing landscape of activity, it is no longer sufficient to merely understand and practice (western) textbook integration methodologies.

Successful cross-border

to be managed to protect everything from strategic information to product roadmaps, from sales figures to personal contracts.

This means stringent measures have to be applied to protect data to minimise risks throughout this period of relative openness.

In the early stages of due diligence, sell-side teams often need to redact sensitive documents to keep certain information from parties invited into the review process, let alone defending it from those who should be actively excluded.

As a provider of virtual data rooms for due diligence projects, Merrill DataSite is alive to the risks of cyber-attack and works to respond to market conditions, but more importantly it actively stays ahead of the issue. Over time, a number of multi-layer data security methodologies have been developed, leading to one of the most secure online repositories available. As an example, Merrill DataSite will not allow users to download any information (unless they are specifically enabled to do so) – rather, all documents are streamed as secure images through a proprietary viewer. Additionally, Merrill has recently completed a significant investment in a European data centre – this was in response to concerns from clients around the hosting of data in the United States.

The information entrusted to Merrill DataSite is encrypted in transmission (256-bit – the same standard employed for internet banking) and also “at rest” on the server to ensure it’s close to impossible to decrypt in the unlikely event of malicious physical intrusion to the data centre.

In addition, during a deal, and even once a deal has closed, they offer reports that show who has looked at exactly what information in the virtual data room and when. This also acts as proof of disclosure should any disputes arise after the deal is done.

Undoubtedly, some of the dangers of cyber-attack are perceived as well as real. However, it’s a concern now and a trend set to continue for M&A, which means business leaders need every tool in their armoury to fight it.

Mike Hinchliffe (right) is director at Merrill DataSite Michael.Hinchliffe@ merrillcorp.com www.datasite. com

Local knowledge is key to crossborder integration success integration requires extensive experience of living and breathing M&A integration in both the acquirer and target countries.

Naturally, the starting point is local language and culture; a fluent speaker is essential to engage adequately with the target company’s staff directly, not just through its management team. The staff will be more than usually concerned with trying to understand and second-guess the implications of the foreign takeover, so the cultural integration and internal communications will be critical.

The subtlety to be able to determine if an employee question is sincere or sarcastic makes all the difference to setting the tone in your first town hall meeting. A local will always be more successful than a foreign manager or management consultant, who will be interpreted negatively, even before

consideration of effectiveness and cost effciency. Next is awareness of the local legal, tax and regulatory environments within which the day-to-day integration activities frequently become tomorrow’s risks and issues. Global legal and advisory firms write risk logs and mitigations during due diligence, and remain at hand to provide advice when required, but local experience of navigating these rules prevents risks turning into issues. By the time the lawyers are called, the integration plans have usually already been adversely impacted.

None of this local expertise can be traded off against integration experience.

The integration teams in each country will need to work seamlessly together under the same approach and acquirers

will select integration advisers to match the cross-border and cross-cultural challenges ahead. If you’re doing M&A internationally, a global organisation with local integration expertise is the best way to give your cross-border integration the right support.

Andrew Scola is the UK partner at Global PMI Partners andrew.scola@gpmip.com www.gpmip.com

Business Reporter · December 2014

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Like us: www.facebook.com/biznessreporter | Contact us at info@lyonsdown.co.uk | Lyonsdown is a member of the PPA

Mergers & acquisitions

9

By Tim Adler

T

A 8- CQ ME 15 U RG , 1 IS E 8- IT R 19 IO S NS &

HE GLOBAL mergers and acquisitions market will be worth $3.5trillion (£2.2trillion) this year, accord i ng to C a s s Business School.

Leading global sectors so far in 2014 have been telecoms (the average deal over the past year has been worth $1billion), health care ($426million) and real estate ($421million). The total value of technology deals alone has been worth $225billion.

The M& A market peaked in 2007 at $4.3trillion worth of deals. However, after the recession hit, deal volumes fell to $2-3trillion between 2008 and 2013. Scott Moeller (below), director of the M&A Research Centre at Cass Business School, says: “The market is coming back from a trough. Finally, this year it looks as if we are going to break out of that $2-3trillion trough. The third quarter is the busiest three months for deals, peaking at the year end.”

During the recession, companies observed how others got into trouble because they did not have enough cash. Being conservative about mergers and acquisitions became the norm. But those purse strings are now being gradually loosened.

“The market is right, the equity market is riding high and prices look good,” says Roger Mills, emeritus professor at Henley Business School.

Experts say there are several factors as to why the M&A market bounced back. Some companies are under regulatory pressure to restructure, especially in the financial sector. “One company’s divestiture is another company’s acquisition opportunity,” says Moeller.

Activist shareholder funds in America have shaken up complacent management – such as eBay spinning off PayPal – and sovereign funds have come out of the Middle East. Professor Mills says: “The trouble is that as these companies become bigger monsters it’s difficult to create organic grow th for shareholders. An individual arm may be doing really well but that’s not going to be reflected in the share price so an M&A becomes attractive. If you’re

eBay span off its subsidiary PayPal last year in an attempt to increase agility

M&A markets to hit £2.2tn jackpot by 2014 chief executive and you want to keep your job, there’s nothing better than going on the acquisition trail. It used to be that the only compa ny t hat made money out of a n acquisition was the company being bought because their share price went up. The acquirer was punished in the market.

But it seems now that both parties are benefiting.”

Moeller says: “There’s clearly a lot of cross-border international activity taking place and the market does reward the bold rather than trying to grow organically,

so you’re seeing a broadening of the market in that way. But until we see deals in the industrial sector coming through, we haven’t truly got ourselves out of the trough.”

In fact Professor Mills believes the total volume of M&A activity has been underreported.

Technology companies are acquiring majority stakes in companies through incubator funds that fly under the radar.

The accepted norm is that two thirds of mergers fail. The combined value of the synergies – the incremental value – does not pay off compared with the acquisition price.

But Moeller says the percentage of failed deals

is going down. Today only about half of mergers fail compared with 60-70 per cent in the past.

“There’s been a lot more focus on what happens after the deal closes. Keeping a marriage going is a lot of hard work,” says Moeller. “However if you do succeed, then the sky’s the limit in terms of what you can achieve.”

So, will this buoyant M&A market continue?

Professor Mills thinks not. “What’s going to happen is that the stock market froth will disappear. At the end of next year I would be monitoring things more closely. We’re at the end of a finite run.”

Cash is king when it comes to acquisition deals, say banks BT IS BEING urged to pay cash to acquire O2, the mobile company it once owned, rather than hand over a rump of shares to Telefonica, its Spanish rival.

Near-zero interest rates combined with an upturn in the global economy have increased global M&A deal volumes to the highest levels since 2007, according to Dealogic.

“The big theme is the return of confidence… that’s the key ingredient of what’s been missing. CEOs and boards have become open-minded in terms of doing M&A deals,” says Hernan Cristerna, co-head of global M&A at JPMorgan.

In terms of deal volume, the larger proportion has been from big transactions in the $10billion to $25billion segment – the bread-andbutter M&A market has been down.

“Inhibitors have been shocks in Russia and the Middle East,” says Matthew Ponsonby, head of M&A EMEA at Barclays Bank. Low interest rates have meant cash has been the starting point of most transactions.

However, most big companies want to maintain their investment-grade status, so they turn to using stock if it starts to impinge on their credit rating.

Michael Findlay, co-head of

corporate broking Bank of America, says: “From a seller’s point of view, if you’re on the receiving end of an offer, cash has a lot of value whereas hundreds of thousands of shares will be difficult to move around. Cash is a nice way for you to exit the business.”

Cristerna says the market usually punishes acquirers when they buy another company. “The buyer’s share price historically is been close to neutral, with some bias to a wait-and-see reaction,” she says. “What’s been different this year is the average reaction to a buyer’s share price has been up by 3 to 4 per cent.”

O2’s return to the BT fold could be made more likely with a cash payment

Another key trend has been European companies seeking growth in other territories. European companies want exposure to regions where there is greater confidence about short-term economic recovery. “The toughest thing to achieve is organic growth ,” says Findlay. “One way to move your business forward is through acquisitions as people take advantage of the current beneficent financing conditions.”

Cristerna expects global M&A deal volumes to continue to grow next year, albeit more slowly. He predicts a 10-15 per cent growth rate rather than the 30 per cent seen this year.

Business Reporter · December 2014

10

Mergers & acquisitions

EXCLUSIVE Tim Adler

F

INDING Amanda Staveley’s office on Park Lane proves as elusive as discovering what the financier actually does for a living. It turns out that the entrance is round the back.

Similarly, putting your finger on how Staveley justifies her multi-million-pound fees is just as confusing. She inhabits a rarefied world where people pocket millions of pounds for apparently just making introductions. She hit the headlines back in 2008, as the golden girl who kept Barclays out of government hands by negotiating a £3.5billion lifeline from the Middle East. For that deal she pocketed £30million.

The reality, she tells me, involves a lot of hard negotiating and, crucially, investing her own cash alongside that of her clients.

Staveley, 41, has become a tabloid newspaper favourite: a glamourous former model and girlfriend of Prince Andrew, whose mother was a champion showjumper. Her career seems to have been an effortless canter, from running a restaurant to opening a technology conference centre, before brokering the acquisition of

Amanda Staveley’s top tips for buyers and sellers Who are you selling to? Consider very carefully the type of buyer. Do you want investment or strategic help for your business to grow? What financial terms and long-term goals do you want to achieve?

Is the buyer acquiring the business for strategic accretive reasons or because he wants to make a return?

Valuation is critical. Ask others for independent advice as to how they would value the business you’re looking at.

Often owners are protective and value businesses higher than you might.

Integrating management. Do you need to bolster the incumbent management team to integrate it with your current structure? Existing managers need to have financial incentives to grow the business in the new merged company.

Cash is always king. What room is there for companies to grow? Don’t leave it too late before selling your business. Too often owners run out of road when they decided to sell their business – your buyer needs room for the business to grow.

Listen to what people are saying.

The ability to listen to the other side is the most important quality to bring to the negotiating table. If you’re negotiating for somebody else, listen to what your client wants out of the negotiation.

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Find us online: business-reporter.co.uk | Join us on LinkedIn: Business Reporter UK

Manchester City Football Club by Sheikh Mansour bin-Zayed bin Sultan Al Nahyan, now deputy prime minister of the UAE. Her fee was reportedly £10million. In March, she advised A l Habtoor Group on t he acquisition the Intercontinental Budapest hotel. She is currently advising Middle East investors on a £1billion bid for three top London hotels: Claridges, The Connaught and The Berkeley.

Staveley makes her entrance grandly late, having kept me waiting for 45 minutes. I should be irritated. But what nobody prepares you for is how disarmingly funny she is. At one point during our conversation I think both of us were on the verge of helpless giggles.

Staveley occupies a unique position as the only western woman advising Middle East governments on business. So, what has she learned sitting alongside these powerful men at the negotiating table?

“The more successful the person is, the less ego they have. I’ve found that the senior principals don’t have egos. The ego problem increases the further down the line you get – and especially with advisers such as accountants and lawyers,” she says in her warm Yorkshire accent.

The most important ability to bring to the negotiating table is the ability to listen, she says.

Staveley and her company PCP Capital Partners like to do their own drafting when it comes to heads of agreement. She tries to keep the accountants and lawyers out until as late as possible. She plans the deal on paper almost like a flow chart figuring out various scenarios.

“The more that you can agree up front the easier it will be before you bring in professional advisers,” she says.

What advice does she have for any businessman looking to sell their company? You need to make sure that your buyer isn’t just acquiring your company as a quick turnaround to sell on, she says. “From day one we set out a plan that everyone understands what they need from each other.” The seller should think about his exit strategy much earlier than they do. Companies often leave it too late to put themselves up for sale where all the growth has been extracted, so there’s no future left for the buyer.

And young entrepreneurs need to make sure they’re not being bought to keep their disruptive business out of the market. She has seen bigger companies buy smaller ones just to keep their disruptive technology on the shelf.

When it comes to acquiring a company, buyers need to ask if the acquisition fits with their strategic direction. A key issue is always going to be whether the company is worth what the seller wants – sellers often putting too high a value on their business. And does the company have stable revenue and stable profits?

The most important factor, however, is the management team. “We won’t buy a business that doesn’t have exceptional management.

It’s absolutely critical that you provide incentive plans for management teams once the deal goes through.”

Staveley is feted as the woman who has the ear of vastly wealthy Gulf State investors. Three quarters of her

| Follow us on Twitter: @biznessreporter

The big interview Amanda Staveley

I don’t like how I used to be. These days I’m nervous about debt, which I used to litter around like confetti

Business Reporter · December 2014

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Like us: www.facebook.com/biznessreporter | Contact us at info@lyonsdown.co.uk | Lyonsdown is a member of the PPA

investors are based in the Gulf. Increasingly, however, her client base include Americans and the French.

Americans, of course, have a different attitude when it comes to business. They like everythinng locked down in watertight contracts. Arabs, by contrast, still do things on what they call a “handshake habibi [friend]” basis – their word is their bond, anathema to American corporate lawyers. But Staveley says her Arab investors are just as assiduous when it comes to due diligence as their western counterparts. “A lot of people think that Arab companies aren’t fastidious about doing due diligence, but that’s just rubbish,” she says.

Concepts of time are different, though.

Negotiations with Gulf States can take much longer than western businessmen are used to.

“I’ve seen chief executives of big companies kept waiting for days to meet the right person.

Timelines can be slightly different… your investor may want to build a personal relationship. Plus, the Gulf States are hugely hospitable.”

She talks about how she risked offending her hosts when she nearly severed her right hand walking through a plate glass window – using your left hand to eat and drink is deeply offensive to Arabs. Staveley gamely struggled on. The biggest difference, she maintains, is that deals may have to be structured using Islamic finance – Muslim investors are forbidden to either pay or receive interest.

She looks skittish for a moment when I suggest that it’s difficult for most people to understand what anybody does to justify these multi-million pound fees. “I like building deals and building value for clients. The reason why we get paid a lot is that is that I get good results for my clients, and sometimes the deal may not come off, which means that I’ve spent all this time for nothing.

I’m a good negotiator, a good strategist and a hard worker… I’m a perfectionist, you see.”

She reveals that, unlike most intermediaries, she invests her own cash alongside her investors.

“You’ve got to be prepared to put skin in the game.

It’s easier to persuade investors when you yourself are in the deal.”

Staveley hasn’t always been in the winner’s enclosure. She lost everything when the company she sold her tech conference centre to collapsed, and found herself sleeping rough. “That was the worst moment. I’ve faced near bankruptcy, and I’ve also seen extreme wealth,” she says, gesturing to her exquisitely tasteful apartment with its marble floors and Persian rugs. Photographs of Staveley greeting Arab potentates are everywhere.

“I don’t much like how I used to be – the younger Amanda Staveley,” she says ruefully. “These days I’m nervous about debt, which I used to litter around like confetti. Everybody has peaks and troughs. Do what you love and you will be successful. You can hit rock bottom again anytime… so what I say is, be kind to people.”

Portrait of Amanda Staveley in her Park Lane office in London by Andras Rac

W A T C H

Video special Amanda Staveley talk to Tim Adler about how to succeed in the world of M&A http://business-reporter.co.uk

Mergers & acquisitions

11

When fear drives M&A activity, defensive mindsets rarely achieve the desired outcomes René Carayol

A

S GLOBAL markets bounced back towards the end of 2013, confidence surged around mergers and acquisitions (M&A), really hitting a peak in the first half of 2014. There was some $1.7trillion worth of M&A activity announced. This is the highest half-yearly total since the crash of 2007.

The greatest activity was in the highly regulated environments of healthcare and telecoms, accounting for $319billion and $261billion respectively. The lack of similar action in the fiercely regulated world of financial services has been striking.

Two proposed mammoth transactions in the telecoms sector were the mergers of Time Warner and Comcast, at some $70billion, and DirecTV with AT&T at $67billion.

Similarly, in the world of pharmaceuticals, the aborted approach for AstraZeneca by Pfizer was set at $90billion and the hostile bid by Valeant Pharmaceuticals of Canada for Allergen of the UK was $62.4billion, causing the M&A bar to be significantly raised.

Unsurprisingly, the world of financial services has not been seen as anywhere near as attractive given the fearsome tenacity of the European and US regulators. This has led to the perception that many of the banks now appear to be running their businesses to meet the burdensome requirements of the regulators, rather than for customers or shareholders. Therefore, it is still viewed as too volatile to risk getting further entangled in the web of interventionist regulation.

The pharma market has started to be dragged down by a slowdown in profits.

Some CEOs are left hoping to improve their bottom line by consolidating with a rival, primarily for synergistic savings. Some also want to rejuvenate their failing efforts at R&D – just being bigger has yet to deliver more innovation. When fear drives M&A

activity, defensive mind-sets rarely achieve the desired outcomes.

Telecoms, on the other hand, feels much more confident and aggressive, perhaps harking back to the big globalisation deals of the early part of the century. Then the likes of Vodafone and AT&T used their muscle aggressively to achieve huge economies of scale with the added desire to dictate pricing. This delivered the obvious cost savings that result when bringing two very similarly structured, but geographically spread giant organisations together.

Recent M&A activity in the technology marketplace, which is far less regulated, has also seen fear as the driver. Facebook has utilised its high-priced stock to acquire increasingly popular and fast-growing rivals, such as WhatsApp and Instagram, at hugely inflated prices.

This sort of activity is less about growth, and more about ultra-highly rated businesses beginning to stall. We have even seen the rise (and fall) of the very provocative tax inversion strategy which was behind Pfizer’s failed bid for AstraZeneca, wanting to be domiciled in the UK to benefit from a 21 per cent tax rate as opposed to the 33 per cent corporation tax in America.

M&A very rarely learns from history and CEOs are always keen to be in control of a much bigger empire. The scramble of the early months of 2014 has been tempered by the slowing down of global markets leading to a fall in confidence. The optimism at the outset of big deals soon diminishes as the management of the organisation gets increasingly sucked into the painstaking and increasingly complex world of integration. One could infer that old-world consolidation hopes that will just about equal 1.5, whereas the new world of tech and telecoms still dreams of one plus one equalling three.

Optimism can be a force multiplier in M&A, but only when the motivation is both positive and growth oriented.

Business Reporter · December 2014

IndustryVIEW

12

Mergers & acquisitions

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Find us online: business-reporter.co.uk | Join us on LinkedIn: Business Reporter UK

| Follow us on Twitter: @biznessreporter

Carving out non-core assets: Redefining the measures of success

B

reaking up is hard to do. Divorces can be painful, time-consuming and expensive. The same goes for selling and acquiring non-core assets that have been part of a corporate family.

Carve-out transactions (i.e. selling part of a larger parent company) are becoming increasingly popular. If managed well, the deal will appeal to both trade and financial bidders, can facilitate a change in corporate strategy and provide a financial injection for future growth. This may explain why the growth of these transactions has continued since the M&A peak in 2007, bucking the general deal trend. But if managed badly, a transaction can be derailed permanently (or significantly delayed) and value can be left on the table for both parties.

Most people think of deal completion as the key measure of success. A vendor is happy if they achieve their target sales price, while a purchaser is happy if the acquired business runs smoothly following completion. It’s a traditional view that is both short-term and overly simplistic.

Vendor perspective Headline price is undoubtedly important, but deal value should be viewed more broadly.

To maximise value the vendor needs to prepare the business well in advance of sale. Applying a private equity lens and having a more commercial mindset unshackled from the parent can uncover cost saving and revenue creation opportunities. These might include optimising the organisation, improving working capital and creating a simpler right-sized IT environment for the standalone business.

Critically though, the business plan needs to be believable, underpinned by robust plans.

A carve-out also provides an opportunity for the retained business to take a good look at itself. At the very least, vendors should mitigate any adverse impacts from the disposal, such as worsening supplier terms and stranded central resources that have historically supported the divested business but will remain with the vendor. This can trigger more widespread changes to the retained organisation structure and operating model.

Beyond the headline price there is also always a significant cost to execute the separation. This shouldn’t be underestimated and the liability for each party should be well defined.

Purchaser perspective From the buyer’s point of view the hard work starts once the deal is

done. Achievement of a business plan that reflects the revenue and/or cost upsides built into deal valuation is key. Translating the financial targets into executable plans and driving change through the business requires considerable management focus. The medium/longer-term change should be balanced with the need to stabilise the newly acquired business and transition away from the vendor. This is not a simple task and can stretch resources to breaking point.

The right management team needs to be in place, but if changes are required they should happen as soon as possible, as everybody needs to be on board, fully committed and able to play their part. Successful purchasers strike the right balance between challenging/supporting the management team and letting them get on with running the business they know best.

In conclusion, vendors and purchasers need to recalibrate their success measures for carve-out transactions, adopting a broader view of deal value and understanding the key drivers of value that can be controlled.

Alan Dale (left) is head of business consulting at Grant Thornton +44 (0)20 7865 2777 alan.dale@uk.gt.com

Proper advice and planning will maximise value on the sale of your business

I

have always found it strange that so many people who have had the courage and expertise to start and build successful businesses have a complete blind spot when it comes to planning their exit.

Few give it any meaningful thought until being forced to do so, either by an out-of-the-blue approach from a potential suitor, or because the main shareholders suddenly decide they want to retire. As a result, many business owners fail to achieve the value that they could have had they been better prepared.

For someone who has been helping people to buy and sell companies for more than a quarter of a century, I find that really disappointing.

After all, it’s a tough enough process even in the best-ordered circles. Many compare the stress involved in selling a company to that of getting divorced or moving. And there’s never any guarantee

of success at the end of it. More than three-quarters of SME sale negotiations never make it to completion.

Even so, there are things that the owners of small and medium-sized companies can do to give themselves a fighting chance of achieving their full financial ambitions when the time comes to sell.

For a start, they should prepare as far ahead as possible. The old adage that “by failing to plan you are planning to fail” is never truer than when applied to selling a business. So think ahead about how the process is going to work and what needs to be put in place to achieve it.

Next, they should choose their advisers carefully. Even if they have excellent relationships with their bankers and accountants, they won’t necessarily be the best people to drive the end-to-end process. Best to go with a corporate finance specialist who has a strong track record of dealing with similar disposals and a team of seniors that isn’t going to be chopped and changed. There will need to be regular

face-to-face contact with them throughout the process, so geographic location is also an important factor.

Allow time for “grooming” – getting the business and the management structure in the best possible shape before offering it for sale. This can often take a year or two, which is why forward planning is vital.

Get the timing right. Too often companies look to sell when they have peaked or their future is uncertain.

Time the exit for when growth prospects are good.

Don’t get too involved. Be there in the background, but leave the negotiations to the experts. I’ve seen too many deals

scuppered by careless talk from business owners wanting to be at the centre of the action. Selling a company is one of the most important transactions people will ever undertake and a once-in-a-lifetime opportunity to secure their own and their family’s future. If they get it right, their years of hard work can be turned into something of considerable financial value. If they get it wrong, there’s rarely a second chance. So surely it’s worth more support than is often currently the case.

Nik Askaroff (left) is CEO, EMC Corporate Finance 01273 945984 www.emcltd.co.uk

Business Reporter · December 2014

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Mergers & acquisitions

Like us: www.facebook.com/biznessreporter | Contact us at info@lyonsdown.co.uk | Lyonsdown is a member of the PPA

TONY WALFORD

PARTNER, GREEN SQUARE

Green Square is media, marketing and tech M&A consultancy that specialises in deals in the £5million to £30million range Seller: It’s key that sellers sell on the way up when there’s still room for growth and not when the business has already peaked.

It’s tempting to keep riding the wave but marketing, media and technology move really fast. You’ve got to realise when your offer is hot and in vogue, otherwise you’re yesterday’s news. If a buyer thinks that a business has finished growing then they’re going to pay a lower multiple.

The optimum window for selling a company is between year three and year eight. Growth is most buoyant then.

And you must be in a position to sell quickly. If you run your business as if you’re going to sell it tomorrow, then your business is in good shape. We often work with vendors anything between 12-14 months before we take them to market.

Buyer: Media and marketing companies are about their staff and they tend to spend a lot of time together, even socially. You must make sure your cultures are aligned.

It’s really important that key employees are incentivised once the deal goes through either through shares or equity. The fear that an acquirer has is that people who are not incentivised will walk away.

DAVID BROOKS

PARTNER, WYVERN PARTNERS

Wyvern Partners is a corporate finance boutique that works on around 15-20 deals each year in the £20million to £200million range. Recent deals include Del Monte and Golden Wonder.

IndustryVIEW

Seller: Vendors shouldn’t be frightened about telling the press they’re for sale

Viewpoint: What’s the best advice for sellers and buyers contemplating M&A? – they’re paranoid about news leaking that they’ve put a For Sale sign up but maintaining your profile in the trade press is something you need to be aware of.

The more offline, unofficial conversations you can have with existing management the better.

BRUCE EMBLEY

M&A PARTNER, FRESHFIELDS BRUCKHAUS DERINGER

Freshfields is an M&A law firm whose recent deals include Travelodge and P&O Cruises.

Most owners have a pretty good idea of how much their business is worth. The challenge for advisers is to rein in people’s expectations when it comes to valuations.

One of our jobs is to bring a dose of realism.

Sellers need to sketch out the growth potential of the business. If you were three years younger, where would this business go next? To have a vision for the standalone business, as opposed to the merged one, is really important.

Buyer: I want to know early on where the bodies are buried. Most information memorandums paint a rosy picture but they don’t tell you where the problems are. If a business has been up for sale before, why didn’t it work out last time?

The key thing will be chemistry – will the merged businesses be a good fit? Will synergies pay off? And what happens if the owner cashes out? Does he take your customers with him?

Just do your homework. The more spadework you can do early on the better.

Seller: The vendor needs to make sure there’s as much certainty in the transaction as possible and that the sale is going to go through. For a start, he wants to make sure the buyer has money and that they won’t have any problems closing the deal.

The seller also wants a fixed price for his company – not something that can be renegotiated further down the line.

Buyer: As a buyer you need to make sure you understand what you’re buying and that involves due diligence. What you don’t want is surprises you haven’t priced into the deal. You also want to agree consideration terms – flexibility in how much you’re paying – so you can lower the price if there are unwelcome surprises.

You also need to make sure there’s some sort of contractual recourse if your assumptions aren’t correct either, and that’s about customers staying with you or not having any hidden problems.

You also want to ensure that your vendor isn’t going to set up business against you or poach your staff.

JOHN LUNN

EXECUTIVE DIRECTOR, MOORHOUSE

Moorhouse is a business transformation consultancy helping companies achieve strategic goals. Clients include British Airways, the NHS and Heathrow Airport.

Seller: The vendor needs to be clear about what value the sale will create. CEOs are under pressure to grow and increase shareholder value but the real question is what’s the value you’re trying to achieve?

The vendor also needs to be clear about what they’re offering and who they want to be bought by. The failure rate of acquisitions is very high. So the vendor needs to know what the approach will be that realises the value.

Buyer: Thinking about the deal before it happens is the main point. The reason why you’re buying a company often gets lost in the excitement of doing the deal.

The buyer needs to go into standard due diligence: why is it buying the business, how is it going to execute the transaction?

And there are softer elements, such as how you bring the people along in terms of communicating what the strategy is.

Often too much focus is on getting the deal done rather than what happens when the dust has settled. But that’s really only the start of it. What are the objectives that the integration is going to achieve? You need to communicate those to the market.

Communication is key.

13

IT compatibility: the elephant in the room ROYAL BANK of Scotland’s recent £56million fine in the wake of its merger with NatWest shows what happens when not enough thought is put into merging IT systems.

Customers found themselves locked out of their accounts.

IT experts agree that you need to think about merging systems much earlier when first thinking about an acquisition. Too often, IT mergers are rushed through without enough thought.

Steffen Wendsche, managing director of technology consulting/IT strategy at Accenture, says: “I would advocate involving IT as early as possible in any divestiture or acquisition.

People don’t think about IT when it comes to mergers.

The chief technology officer needs to be at the table right from the start.”

Jean-Marc Jefferson (below), operations director at NSC Global, an IT service provider whose clients include Atos and BT, says merging IT systems provides an opportunity to transform a business – especially as most businesses are going digital first. He says: “It’s a chance to create a more coherent and holistic IT system across both companies.”

The need for a holistic approach to M&A has never been more important

F

or the first time since 2007, the total value of M&A transactions exceeded $3trillion globally in 2014.

What has changed over the recent past to stimulate this activity? Low interest rates, a world economy that is sluggish in aggregate but presenting hot-spot opportunities in certain geographies and industries, and debt markets that are today reasonably benign.

After many years of conservatism and balance sheet reinforcement, boards are now more comfortable with the risks involved in domestic and cross-border M&A. A greater sense of urgency has also been injected into corporates’ strategic thinking by institutions and activists that are keen to see balance sheets deployed more effciently and effectively.

Traditional risk mitigation around transactions (financial, legal, tax, operational and commercial due diligence, stakeholder communications and post-merger

integration planning) remain vitally important. With tensions between international M&A structures and national interest being played out at the highest levels of government, there is a now a pressing need for such traditional areas to be supplemented with considerations of local, national and trans-national political risk, such as sudden and politically driven changes in tax policy and interpretation. Witness Abbvie’s proposed offer for Shire, a highly satisfactory deal for the target’s shareholders, scuppered by US government action on inversion deals, which cost Abbvie $1.6billion in break fees.

While academic studies have consistently demonstrated that underestimation of post-merger risk has destroyed value, today, intangible, traditionally “softer” risks (public policy, political headwinds and tax) pose a significant impediment to both transaction completion and

long-term value creation. The need for a holistic approach to M&A planning that includes consideration of reputation and communication challenges, as well as public affairs insight on government policy, has never been more important for companies both large and small.

Edward Bridges is a senior managing director at FTI Consulting LLP 020 3727 1000 Edward.bridges@ fticonsulting.com

Business Reporter · December 2014

IndustryVIEW

14

Mergers & acquisitions

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Find us online: business-reporter.co.uk | Join us on LinkedIn: Business Reporter UK

D

ue diligence processes are typically attuned to the commercial, legal and financial aspects of a potential acquisition. Forensic, historical focused assessments of past performance and positioning are used to evaluate upside opportunity and downside risk. The current management team is assessed to determine whether it can be brought onside to work with the investment agenda. But too little attention is paid to a critical aspect of due diligence that can blindside the investor: the risk inherent in the target’s operating model.

Operational due diligence: Upside, downside, onside, blindside… assumptions. That leaves operational improvement as the principal route for value enhancement.

Operational due diligence (ODD) Improved company operating performance is central to driving returns.

The opportunities to extract value from pure financial re-engineering or acquisitive roll-ups are few and far between. Companies, and their acquirers, are more attuned to the importance of free cash flow as the primary arbiter of financial health, and financial reengineering cannot alter that. Roll-ups involve high transaction costs and require long-term, stable markets which, given the current rate of disruption seen across many industries, represent uneasy

I

| Follow us on Twitter: @biznessreporter

skills required to deliver the post-deal plan.

Through identifying these challenges pre-acquisition, ODD supports both pricing decisions and identifies priority areas for remediation, thus setting a realistic baseline and speeding up the timeframe to value creation.

ODD scope and assessment

Unlocking value creation ODD can unearth risks that could threaten the feasibility of your investment plan.

Risks may arise in scaling the current operating model effectively, in a lack of alignment across the business, or from supply-side constraints in resources or

n the lifecycle of every business venture there comes a time when either you think about selling, or are approached by a potential buyer.

You will have painstakingly developed your business over a number of years, so the burning question at this time will be: What is my business worth? This question is hard to answer but ultimately your business is only worth what someone is willing to pay for it.

So how can you start to ensure a buyer pays the value you want? First, consider what value you actually need. This may be driven by retirement requirements or other investment opportunities.

We work with our clients to help them define this value and then work to prioritise the value-drivers within their business to ensure their aspirations are exceeded.

A key value-driver is the presentation of your financial accounts. Ensuring you show a financially strong position is important, but so is stability and maintainability. Be careful if you have only one client or one product or service line as this may be open to competitive erosion. Diversification of your client base or expansion of your product or service lines can help show financial stability. This is also a time to critically analyse your cost base. Be careful not to cut costs too far, but consider that for every £1 of overspend your business’s value could be reduced by £5.

Interestingly, if you have the ability to file full audited accounts that show a strong financial position, then this can also start to attract suitors, as many keep an eye on Companies House information.

Another major value-driver is the level of management succession within your business.

When a strong business leader leaves a company

The startpoint for ODD has to be the current business strategy, along with any key strategic shifts envisaged to drive the post-acquisition plan for value enhancement. Those strategic shifts should then be examined through both an external and internal orientation.

The external orientation should consider customers, the proposition to attract them and the channels required to capture the addressable market. For example, can the plan be achieved

through serving the same customers, or is there a need to break into new markets and segments? Is the current proposition extensible to attract and serve the new customer base, or are enhancements required? Is the current channel mix appropriate, or will you need to build and operate additional channels to market?

The shifts identified in external orientation give clues as to where internal operations will be impacted, and hence where potential risks reside.

Underpinning the risk assessment are the core competencies that the target operates today. Are these competencies well-articulated and do they drive value creation now and in future? Does the business align behind these competencies in terms of organisation design, in-house skills development, ways of working and IT systems? If new competencies are required, can these be grown organically or must they be acquired?

The answers to these key questions should be the focus of ODD, and room created in acquisition pricing and posttransaction planning to deal with the responses. Otherwise, you risk being caught down the blindside.

Neil McClumpha is a partner at The Berkeley Partnership, a management consultancy who provide a range of business services including ODD www.berkeleypartnership.com/ODD

Ensure your diamond shines: How to make your business more valuable it can often be difficult for second-tier management to truly take the reins. Delegate to and empower your management team and identify any gaps that will help them succeed you. In essence, it is about making yourself dispensable to prove to an acquirer that you are not important for the smooth running of the business.

Next, ask yourself if your business can innovate and manage change? All acquisitions bring with them a degree of uncertainty. The ease with which your business can be integrated into another company’s culture and infrastructure is important.

Technology is a key part of this integration. If your business is reliant on bespoke technology, you may want to invest in ensuring it can work alongside

other industry technology, or can be adapted to work with other more standard systems. It’s not to say that potential suitors would look to change everything about an acquired business, as the most successful acquirers take on the best of both businesses to help drive the new business forward.

Ultimately value is important, but so will be the way in which the sale is structured to ensure that either your retirement is secured or you can cash in your diamond so that you can to start the next exciting business venture.

Debbie Clarke is head of corporate finance at Chantrey Vellacott DFK LLP www.cvcapital.co.uk

Business Reporter · December 2014

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Mergers & acquisitions

Like us: www.facebook.com/biznessreporter | Contact us at info@lyonsdown.co.uk | Lyonsdown is a member of the PPA

Inspector Dogberry Global M&A volume has totalled

by Morgan

$3.2trillion so far this year – the highest

Stanely and JPMorgan,

since 2007 ($4.08trillion) and 27 per cent higher than 2013, according to Dealogic.

Healthcare has been the most targeted

with $704.4billion and $674.3billion respectively.

However, global M&A volume stuttered in

sector and has reached the highest volume

October at $227.1billion – the lowest October

on record at $437.4billion. Telecoms and real

monthly volume since 2011 ($191.3billion) – and

estate have been the second and third-highest

the third-lowest monthly volume so far this

sectors respectively at $363.4billion and

year. Only January ($191.7billion) and March

$328.7billion.

($219.1billion) saw lower transaction volume.

The biggest announced deal of the

America was the only region to record

year so far has been Comcast’s bid

an increase in October monthly volume at

for Time Warner Cable ($69.8billion),

$114.6billion – up 7 per cent year-on-year.

expected to close on January 23.

Goldman Sachs has led the pack of M&A advisers with $935.3billion

Here’s something Dogberry

InvestorIntel

selling his business hires an the valuation, surely the seller will go with the rosiest price.

“There’s an obvious potential conflict,” agrees Fiona Hotston Moore, partner with the corporate finance team at Ensors. “A seller is more likely to take on a Big Four accounting firm to come up with a bigger valuation.” So what’s a dog to do? “Sellers need to appreciate it may

not be the highest valuation that’s most accurate. Look at the past experience

Europe, Middle East and Africa volume was

of advisers, and,

down by 26 per cent to $61.4billion and

most crucially, personal

Asia Pacific fared even worse, down 37

worth of transactions, followed

including Chile, Belgium and Brazil.

There is also an entry on why M&A confidence rose in 2014.

doesn’t understand: if a seller accountancy firm to prepare

chemistry,” she tells me.

per cent at $51billion.

Twitter: @dogberryTweets

By Matt Smith, web editor

NYT DealBook http://dealbook.nytimes.com The New York Times DealBook blog features the latest news and in-depth analysis on mergers and acquisitions and venture capital.

The site posts its own morning briefing on a daily basis to keep you ahead of the most recent stories at the start of the day.

PwC M&A Blog www.pwcblogs.be/transactions With expert analysis on all areas of the sector, PricewaterhouseCoopers’ M&A blog is worth a visit.

Recent posts have an international focus, covering deals in countries

http://investorintel.com News and analysis site InvestorIntel is split into categories including Gold, Base & Previous Metals and Rare Earths & Technology Metals.

The latter brings you almost daily articles, including thoughts on the changing demands for different metals in the technology industry and beyond.

Minerals Make Life http://mineralsmakelife.org/blog What makes minerals so important to technology? How much do manufacturers depend on it? And how does mining in the US support national security? Find the answers to these questions and more on the Mineral Make Life blog, which focuses on mining across the pond.

Deals we’d rather forget years later when AOL reported a $98.7billion loss – the largest in US corporate history at the time. The companies demerged in 2009.

AOL/Time Warner, 2000 “The biggest mistake in corporate history,” is how Time Warner chief executive Je Bewkes described AOL’s $164billion acquisition of Time Warner. Buoyed by the dotcom boom, the bubble burst two

BMW/Rover, 1994 BMW forked out £800million for Rover, but it soon became apparent that its sales forecasts were wide off the mark. The German car giant eventually sold Rover for a mere £10.

IndustryVIEW

M&A deals can go terribly wrong as well. Here are four M&A deals that have Dogberry covering his eyes with his paws…

Royal Bank of Scotland/ ABN-Amro, 2007 RBS’s takeover of ABN-Amro is probably the worst financial merger in recent times. RBS led a consortium that bought ABN-Amro for an eye-watering $98.5billion in 2007.

The deal went pear-shaped the next year when the bank recorded the biggest corporate loss in UK history.

The government bailed out RBS with £45.5billion of taxpayer cash.

News Corp/MySpace, 2005 Remember MySpace, the music social networking site? No, Dogberry doesn’t either. Rupert Murdoch decided to muscle in on this internet thingummy, however, by stumping up $580 million for MySpace. But users and advertisers quickly left for upcoming rivals such as Facebook and Twitter. Murdoch sold the fading social network for a reported $35million six years later.

The Book of Jargon (FREE – Android/iOS) Developed by law fi rm Latham & Watkins, this app serves as a comprehensive glossary for international mergers and acquisitions terms.

Metal Calculator Free (FREE – Android) Use this app to process some of the most common metals calculations, including one that works out the mass of metal using its dimensions.

The four pillars: Planning an exit strategy

T

hinking about the shape your business should be in ought to be at the forefront of your mind before going to market. It’s a good way to think about your business full stop.

Vendors need to consider their exit strategies earlier. People often contemplate exit strategy in terms of just selling their business. Many owners only begin to plan selling six to nine months ahead of a possible exit. That’s not the way to optimise – you should be thinking at least two years ahead.

Many businesses also have a right time to sell, but the owner hangs on too long. They run out of road in terms of where the business is going. And any buyer will be much more interested as to where a business is heading – not where it’s been.

Also, by hanging on too long, you damage the sale prospects of the company you have spent so long building up.

There are four pillars when it comes to exit strategy: • Strategy • Operational excellence • Management • Finance and risk These are things that all

businesses should be thinking about, but exit strategy brings them into sharp focus.

Strategy Do you have a clear vision as to how you are building value in your business? That articulation of a value growth story is critical. Do you have a robust plan to deliver that value growth?

A lot of businesses think about where their business is today, not where it could be tomorrow as a higher-value business. For example, a manufacturer should think about moving into becoming a highervalue solutions business. Any potential buyer will be thinking this way. Why aren’t you?

And who are your buyers? Is there something you should be doing in your business that would make it even more suited to that optimum buyer pool?

Operational excellence Are you doing benchmarking about how you are performing compared to your peers? Are there operational savings that your buyer can see but you cannot? As a seller you have just left that money on the table, which is not a sensible thing to do.

Private equity houses have been good at

15

stripping out those unnecessary operational costs. What savings could you be making yourself?

Management You need to think about your replacement as chief executive. It’s quite possible that your buyer will want you to stay involved.

However, is the business too focused around you? What are you doing to tie in the rest of your team to shore up strategic execution if you do leave?

Finance and risk How accurate are your financial forecasts?

Can you improve the quality of that information? And how vulnerable is your business to unexpected and unwelcome threats and change?

Finally, remember that as a seller, you need to think about what you’re going to do if you do step down. There will be a non-compete clause stopping you from going into direct competition.

Stephen Baker (left) is a corporate finance partner at Grant Thornton +44 (0)20 7728 3100 stephen.baker@uk.gt.com

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

INSIDE TRACK

M et m als, in m er in als in sp g a ec nd ial

IndustryVIEW

16 · Business Reporter · December 2014

Atlantic Coal breathing new life into an old mining area

De-risking is key to success in Zimbabwe mining project

D

e-risking a mining project is essential if you want to raise finance and investor interest in it, according to George Roach, CEO of Premier African Minerals.

Premier African Minerals RHA Tungsten mine project in Zimbabwe has undergone this de-risking process. The RHA project was a recommissioned old mine that produces the highly marketable iron-rich wolframite (inset) mineral, and has undergone a de-risking process in order to gain finance.

“As it is an old historical mine it carries significantly lower risk in terms of geological and metallurgical mining,” Roach says. “It is subject to a relatively low capital requirement in the region of $4.5million, and it plans to be in production before the end of the second half of next year.”

Historically when the mine was built it was done so without commissioning initial exploration and metallurgical tests. Since Premier African Minerals has taken over the mine, it has undertaken extensive exploration and metallurgical analysis as well as a pilot plant test.

Over many years of not being mined, water had accumulated in the

lower levels. Roach says: “We have de-watered the mine and re-equipped the internal winze.

We have confirmed that a historically reported non-compliant developed ore reserve is intact and channel sampling has been completed.

We await assay results.”

Hydrological and catchment area studies in the area have been undertaken. “A risk may have been water,” explains Roach. “We are comfortable now we can manage the water situation. A risk may have been, what kind of concentrate are you going to produce? We know we can produce a 63 per cent concentrate that is free from deleterious elements.

“I don’t know how much further we can go in terms of de-risking this thing – technically, from a mining perspective and a geological perspective, resource perspective and so on. I think we have gone as far as is reasonable at this stage.”

Although some people are concerned about the political risk in Africa, Roach does not see

A

this to be a problem. The RHA mine is being developed in partnership with the National Indigenisation and Economic Empowerment of Funds, which is part of the government of Zimbabwe. Laws in the country require a business to be owned 51 per cent by indigenised Zimbabweans.

He says: “There are perceptions that people do not particularly want to trust and believe in the government. I do not think one has a right to do that.”

Once the project is up and running it will help the impoverished community in the area and have direct and indirect impacts in the area. Roach says: “There will be employment for up to 150 people.

The direct benefit obviously is of the families employed.

“I have insisted on a principle that employees return to their communities every night. That ensures the benefit of having the money going straight back into the community. It will have a much more significant and wider effect.”

De-risking the RHA project will help the mine prosper and once production starts it will have a tremendous impact for the local Zimbabwean community. www.premierafricanminerals.com

nthracite, constituting just 1 per cent of the world’s coal reserves, is no ordinary coal destined for power stations. It is a premium, high carbon product with fewer impurities than any other coal, and so is a sought after product in the steel and ferrous metals industries, as well as its myriad of other specialised applications.

The anthracite coalfields of north eastern Pennsylvania USA have been worked for more than 200 years, and are known to produce the highest quality anthracite. The underground miners of old left around 50 per cent of the original coal deposits, a valuable resource which Atlantic Coal Plc is currently exploiting at Stockton mine using improved surface mining techniques, a highly experienced Anglo-American management team, and the latest technologies.

There are still hundreds of millions of tons of well proven reserves of high quality anthracite in Pennsylvania, a stable political environment with excellent local infrastructure and which benefits from already established working relationships between the UK and the US. The market situation is bright with expanding worldwide opportunities particularly for export to steel companies. In recent years

the Pennsylvania anthracite industry has suffered from poor investment and a lack of focus as many operators have failed to follow up-to-date mining practice or to explore export opportunities.

Atlantic Coal brings a new energy and commitment to the industry, with expansion at the forefront of its strategy. The company is in a strong position to not only increase its current production profile but also to deliver increased shareholder value by becoming a leading anthracite production company with a portfolio of sites in Pennsylvania.

Anthracite is the cleanest solid fossil fuel known to man, and Atlantic Coal’s mining operations have already reclaimed 600 acres of derelict mine lands in Pennsylvania.

So modern anthracite mining in Pennsylvania is an environmental “win win” situation: producing a high quality low emission product, reclaiming the legacy of 200 years of unregulated mining and also reinvigorating local communities with good quality jobs.

Barney Corrigan is Project development director at Atlantic Coal Plc 0191 386 6392 bc@atlanticcoal.com

Business Reporter · December 2014 · 17

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

IndustryVIEW

Eurasia offers a great deal when it comes to gold

M

ining firm GoldBridges will be able to withstand a prolonged period of weak gold prices by focusing on brownfield development opportunities, streamlining production and increasing the grade of what is being mined.

A competent person’s report (CPR) has shown GoldBridges’ Sekisovskoye mine underground development project in Kazakhstan has a net present value (NPV) at current gold prices in excess of $250million and should deliver annual gold production output at 100,000 to 120,000 ounces.

Aidar Assaubayev, CEO at GoldBridges, says: “We have had our own internal technical work verified by independent consultants to international best practice standards. The report highlights the net present value will be in excess of $250million at the current gold price.”

GoldBridges is expanding the mine which is already in production, and by doing this the company is keeping its operating costs and capex relatively low.

Assaubayev says: “The best way to achieve low capex is to focus on brownfield expansions rather than building a new mine from scratch. That is exactly what we are doing at our mine in Kazakhstan. The mine is already reliable and has profitable gold production. We are simply expanding on this.

I

Raising the grade: How a Kazakhstan mine is leading the field “We are very positive about the development work ahead of us. We understand the geology well and have a strong technical team on site.”

By moving Sekisovskoye to an underground mine from an open pit we will be increasing the grade of the ore that we mine. Louise Wrathall, investor relations for GoldBridges, says: “When we go to an underground operation, the material that we mine will be of a much higher grade because it will not be as diluted. The grade we are going to send to the mill will be around four grams per tonne of gold.”

Presently, the grade of the open pit mine is around 1.4 to 1.5 grams per tonne of gold because it is diluted with the rest of the material that we bulk mine. She says: “The key to knowing if you

have a good project has always got to start with the geological understanding of the gold that is in the ground, and also the structure of the gold resources within the ground and how you might be able to mine that.”

From understanding the geology in the area, GoldBridges knows the exploration potential of the adjacent site Karasuyskoye.

Ashar Qureshi, director at GoldBridges, says: “We have spent $27million on this geological data for this area. We have a road map which tells us exactly what to hit, and when and how to hit it. In terms of technical work it is really about confirmation and updating

and not about starting from scratch. It is 198 square kilometres.”

As Karasuyskoye could use existing resources and infrastructure from the Sekisovskoye facility, it should be cost-effective to produce gold from this area in the future. By expanding on what is already there, GoldBridges is well positioned to withstand prolonged periods of weak gold prices while increasing its production.

020 7932 2455 www.goldbridgesplc.com

nvestors in gold mining should be looking not only at Russia, but the wider Eurasian region for opportunities to increase production and create synergies between companies.

Denis Alexandrov, CEO of Auriant Mining, says: “In Eurasia, the first priority should be Russia, as half of the gold reserves – 420 million ounces out of 860 million – are found in this area.” There has been no geological exploration in Russia since Soviet times and it is possible there could be more potential.

But that does not mean ignoring wider Eurasia, as many countries in this region are on the same geological belt.

Alexandrov explains companies producing gold in these countries could consolidate to achieve better economies of scale.

Alexandrov believes there are consolidation opportunities for Auriant Mining. He says it has the benefit of being publically listed, an internationally recognised board and strong corporate governance procedures.

“There is also absolutely no presence of the government in gold mining,” he says.

“The government welcomes investments in the gold mining industry. They recently introduced new tax legislation which gives you significant tax breaks if you start new deposits.”

Countries that Auriant Mining would look at for consolidation opportunities include Turkey, Armenia, Azerbaijan, Georgia, Scandinavia, Sweden and Finland. He says: “In each of those countries there are companies who are producing 30,000 or 60,000 ounces of gold, which is small in industry standards. “If you can combine two or three companies then you achieve 150,000 to 200,000 ounces production – an intermediate player which can be managed from one place, one board of directors and one management team.”

Royalty agreements can also help companies exchange deposits without using cash.

Auriant Mining recently acquired Kara-Beldyr and will pay Centerra Gold a net smelter royalty of 3.5 per cent on any future mineral production. +7 495 660 2220 www.auriant.com

IndustryVIEW

Business Zone

Fo cu & s on ac m qu e isi rge tio rs ns

18 · Business Reporter · December 2014

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

Understanding pension responsibilities is more crucial than ever

The future

Fresh thinking generating more deals

T

here has been a gradual building of momentum in the mid-cap M&A market over the last 12 to 18 months, with the number of transactions increasing over that period.

The other general trend is that transactions are generally taking longer to complete, and purchasers (and their funders) are more demanding and willing to walk away from a deal even in the later stages if issues arise.

In terms of deal size, our own particular sweet spot remains in the £5m to £20m bracket.

Funding types In the aftermath of the 2008 crash, mainstream lenders have unsurprisingly been less willing to finance deals, and a greater proportion of the M&A activity has involved trade purchasers able to fund transactions from their existing resources or banking facilities.

Private equity (PE) funding was faster than debt funding to make a

comeback, and in our experience there was significant appetite for the “right” deals, with a number of PE houses willing to fund some deals, but little appetite for things which were perceived to be slightly riskier. Fundamentally this attitude is still, quite rightly, more conservative than pre-2008 levels.

Crowd funding It is diffcult to give a view on whether crowdfunding is a fad or is here to stay.

My inclination is that it works best for companies that have a specific brand or concept that the investors would like to be associated with – BrewDog, for example – rather than a nondescript manufacturing or services business. This is because most crowd investors commonly feel the need to have some sort of connection with the company they are investing in rather than seeing it as a pure financial opportunity.

W

Is economic growth driving M&A activity?

My feeling is that the improved confidence coming out of the positive economic growth news is certainly a factor. Equally relevant though is the low interest rate, which means businesses with excess cash are looking to do something with that money.

I think a significant factor in the increased M&A activity is that we have now come out of a period of defensive thinking by many businesses. They have, as a result, looked to refresh their strategies in the knowledge that unless they are moving forward, business will

stagnate, and M&A is an obvious way to look to drive growth.

Simon Thomas is partner and managing director of corporate division at Clarke Willmott LLP 0845 209 1359 Simon.Thomas @clarkewillmott.com

In focus: The personal touch counts when it comes to business divestment Chuka Umunna video special

In an interview filmed at The Telegraph, Shadow Secretary of State Chuka Umunna MP discusses how the future is bright for UK SMEs http://bit.ly/brsmallbiz

Y

ou’ll have read elsewhere that the M&A market is buoyant: we at BCMS recently completed 11 deals in one calendar month, one of the most intensive periods of activity since I co-founded the advisory in 1989. Many M&A commentators talk at a macro-level, overlooking one key market driver. For many business owners, selling is a personal decision, driven by personal factors.

Each week I have the pleasure of speaking to up to 150 business owners at the BCMS seminar programme, where we share our experience of a quarter-century of dealmaking. The entrepreneurial owners I meet are seeking exit for a variety of reasons, including change of lifestyle, other business interests, and retirement. For many, Monday

mornings are not what they used to be, and they find themselves at a crossroads.

Overwhelmingly our clients are ownermanagers, who understand that it takes a specialist deal team of dedicated researchers, analysts and negotiators to secure the best deal and terms for the company they have built from scratch. “We were flat-out running the business, and didn’t have time to do the research and preparation BCMS undertook, which was phenomenal,” said one client, who sold to Countrywide plc in 2014. Phenomenal?

Even after 25 years, I do like that word…

Dave Rebbettes (left) is director of BCMS. For more information, including details of our seminar programme, visit www.bcmscorporate.com

here a defined benefit (DB) scheme exists, potential purchasers need to consider the pension liabilities in the context of the risks being taken. Key issues include the funding level and the volatility surrounding it, trustees’ objectives for the scheme, the impact of the transaction on the perceived strength of the employer, investment strategy, and reliability of data.

Buyers should also consider more general points which may offer opportunities for acquisitions which include a DB scheme. First, the 2014 budget brings new flexibilities for pension savers, and DB scheme members may be more inclined to take advantage of these, presenting opportunities to de-risk for the proactive. Second, the budget changes have hit the individual annuity market hard and, as a result, insurers may price bulk annuity contracts – a key de-risking tool for DB schemes – more competitively going forward.

Finally, the Pensions Regulator has published new guidance which may give employers more flexibility in negotiations with trustees.

The pensions due diligence should not ignore defined contribution (DC) arrangements – after all, they have a cost too – but the risks to the purchaser are substantially less. However, with the introduction of automatic enrolment DC provision becomes more significant. Buyers will want to ensure the new rules have been complied with and understand the impact of future increases in minimum contribution levels.

Nick Griggs (below) is a partner at Barnett Waddingham LLP www.barnettwaddingham. co.uk

Business Reporter · December 2014 · 19

AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH

The debate What is the best way to value a business before sale?

Co-founder and managing partner GP Bullhound

Manish Madhvani

Partner and head of corporate Boodle Hatfield

Nigel Stone

Steve Dally

Brian McCann Partner MC Vanguard

Founder Cavendish Corporate Finance

Deal-making in technology is the 100 per cent focus of GP Bullhound.

We have been fortunate to work with many of the category leaders in Europe such as Spotify, Klarna, Believe Digital, Avito, Fjord and Pozitron.

To drive premium valuations for many of these companies it has been important to identify strategic non-obvious buyers and establish trusted relationships well ahead of the planned exit. In the case of Fjord, a leading digital design agency, the obvious buyers were the marketing communication goliaths who had been courting them.

Many years before the ultimate sale we introduced the team to a number of consultancies and strategic IT services firms. Fjord only executed on the strategic front end of the project with tier one clients, which meant that these parties had much to gain from delivering on the rest of the project. This allowed Accenture, the end acquirer, to value the business in a different way to the more obvious buyers.

The best valuation method will reflect the nature of the business itself. Factors including the age of the business, circumstances of sale and intangible issues will all affect it.

Techniques include: • Asset valuation: net book value adjusted for factors such as bad debts or depreciation. Future earnings are not considered. Good for businesses which are asset rich.

• Price/earnings ratio: often used for businesses with an established, profitable history. Quoted companies typically have a higher P/E ratio as shares can be traded.

• Entry cost valuation: reflects the start-up costs of a similar venture.

• Discounted cashflow: based on assumptions about the long-term cash flow and forecasted dividends, plus a residual value at the end of that period. Often used for established, cash-generating businesses.

• Industry norms: some sectors have developed rules of thumb, often dependent on factors other than profit (such as customer numbers).

Our experience in advising on more than 500 UK and international transactions across the last decade tells us one thing: you should never value a business before entering the sale process. You must let the market decide, and every acquirer values a company differently. As a sell-side adviser, our focus is exclusively on our clients, and we cast the net wide internationally for acquirers, typically profiling between 120 and 250 companies and investors. This creates a competitive environment, and multiple interested parties mean multiple offers. Our track record proves price is not only based on traditional valuations – such as multiples of profit. It is the future potential and the synergistic benefits of acquisition that drive what acquirers will pay. BCMS results show that the typical difference between the lowest and highest offer for our clients’ businesses is 2.5 times. In one recent sale, there was a difference of £17m between offers.

Name your price, and you might leave a lot of cash on the deal table.

We encourage our clients to have a realistic assessment of the true value of their business before we start the sale process. Whenever possible, this value will be something they have been working towards previously as part of their exit plan. The key steps will be specific to each business but usually include reducing dependence on the owners and raising the profile.

For the majority of businesses sold, this indicative valuation will be based on a multiple of maintainable profit – those that are shown in the annual accounts after adjusting for non-recurring items of income or expense.

In certain sectors, more specific valuation methods may apply.

While the indicative valuation provides a useful guide, a key purpose of the sales process is to identify potential purchasers with a strategic reason for buying and to generate competition. Such buyers may pay a higher price.

There are no short-cuts to valuing your business pre-sale, as it is only through a proper sale exercise that the price a willing buyer is prepared to pay can be determined. However, analysis of your own operations, your industry and the macro-factors that affect it, together with regard for precedent transactions and comparable public companies, can give an indication.

You need to consider a potential buyer’s viewpoint, as well as your own strengths and weaknesses and how these affect your business value.

If a business has hard-to-value assets, such as brands or property, users may look at future cash flows in current terms to provide a sanity test. However, prediciting the future, even within margins, is not easy.

Also, understand your potential within your market and compare yourself with your competitors.

This will help you understand how best to enhance the value of your business on exit.

www.bcmscorporate.com

www.mcvanguard.co.uk

www. cavendish.com

www.gpbullhound.com

44 (0)20 7079 8140 nstone@boodlehatfield.com

CEO BCMS

Lord Howard Leigh

Spotlight: Be prepared and choose your partner carefully

O

wners of mid-market companies looking to sell or grow their business have more options than they might think. The market for selling a business has improved considerably over the last two years; valuations have recovered and the availability of both debt and equity capital is as strong as it has been for some time.

Trade buyers remain very important but don’t discount a private equity solution. Private equity can often be just that – a capital injection to fund expansion through investment or M&A – and also a means of introducing valuable new leadership experience.

We advise business owners to be aware of three important areas when contemplating a sale. First, the level of due diligence undertaken by potential buyers and financiers has become

much more detailed. Sellers must be extremely well prepared so that their business is presented in the right way. It is also critical to ensure that past performance supports forecasts and that there are robust, defensible explanations for planned growth.

Second, understand the buyer universe and be targeted. Opting for a scattergun approach simply doesn’t work – it’s better to identify a small number of credible potential buyers then have a detailed dialogue with them. This should always be done in a global context: with the right advice and international access, any high-quality company could attract an overseas buyer, whether from Europe, the US, China or South America. We have linked mid-market UK firms with them all.

Finally, recognise that a transaction process

can be complicated. The whole package of a deal must be right and not just based on the highest valuation. The headline value is clearly key, but it is critical to have the right partner and the right structure.

Selecting the right buyer is fundamental, especially if you’re remaining as a shareholder.

Your choice of investor has the potential to take your business to new heights and create significant value, so choose wisely.

Joel Hope-Bell is co-head of UK M&A at Duff & Phelps www.duffandphelps.com Joel.Hope-Bell @duffandphelps.com