Australia and the United Kingdom may have raised interest rates last week, but that does not necessarily imply a return to widespread investor confidence for a return to the boom times.
Following a study by Grant Thornton Corporate Finance, the financial and business advisor, the recovery in corporate finance activity is still at least six months away according to mid-market venture capitalists and brokers surveyed by Grant Thornton Corporate Finance.
Business services, healthcare, financial services, retail and leisure, were identified as the only sectors worth investing in over the next six months, however, according to 60% of respondents, only certain sub-sectors and niche operators within this group were tipped to experience some renewed buoyancy. The remaining 40% of respondents showed mixed levels of confidence in all other sectors and surprisingly overlooked food and media, two sectors which, given recent market and legislative developments, could provide interesting deal opportunities.
“The first signs of greater business and commercial optimism that we are currently witnessing are still well short of infecting entire sectors. As a result, the vast majority of deal opportunities are concentrated around high-quality businesses that operate within niche sectors that can offer a point of differentiation. Such businesses are either in need of consolidation, or have been able to weather the economic slowdown better than others”, says Mat Bhagrath, partner at Grant Thornton Corporate Finance.
From the survey’s results, sub-sectors within the business services sector were regarded as head and shoulders above the rest. Here, business process outsourcing and facilities management were highlighted as investment hotspots rather than logistics and human capital management. Within the healthcare sector the manufacturing of medical devices, care homes and private hospitals were deemed much more appealing than dental practices, opticians and the pharmaceutical industry. In financial services, respondents favoured fund management and the IFA market, whereas in retail the non-food sector proved almost twice as popular as food retailers. Within leisure, bar and restaurant businesses appear to be the preferred option for investors, with fitness centres and the travel and tourism industry reeling behind.
“One surprising aspect from the survey’s results is the small level of interest expressed by respondents in relation to the food & beverages and media sectors. In terms of the media sector, the advent of the Communications Act (which came into force in July 2003) which removed most rules relating to cross-media ownership is likely to provide some renewed impetus in terms of deal activity. Likewise, a better than average performance by media companies on the stock market over recent months might also help fund future takeovers. Within the food sector, pricing pressure and the desire to control the supply chain by the larger retailers, coupled with the cost burden of implementing new legislative measures will drive consolidation amongst struggling smaller producers. Deal activity is also likely to develop around growing and attractive niches within the sector such as convenience food producers and the relatively small and fragmented organic producers and distributors”, continues Bhagrath.
“More deals are certainly being done now than at the beginning of the year, leading many to jump the gun and call for the end to a difficult period for corporate finance activity. Whilst improving, deal activity is still patchy and largely confined to niche businesses. We don’t expect the nature of these transactions to change much this side of Christmas but to hopefully to start gathering some momentum into 2004, when, if aided by a growing economy, corporate finance activity levels could be set to regain some lost ground”, concludes Bhagrath.
