The positive state of the Western Australian economy has been highlighted by a flurry of private business sales in the past month valued at more than $100 million.
The positive state of the Western Australian economy has been highlighted by a flurry of private business sales in the past month valued at more than $100 million.
The biggest transactions were the $34 million sale of mining software company Surpac Minex Group and this week’s $30 million sale of swimming pool equipment manufacturer Monarch Pool Systems.
The boom time sales have delivered big returns to vendors such as John French, the owner of Willeton-based Monarch, a national market leader in the development and sale of swimming pool chlorinators.
Mergers & Acquisitions partner Jeff Roberts, who specialises in selling large private businesses, described the current period as a “purple patch”.
“Prices have certainly been climbing for good quality private businesses,” Mr Roberts said.
“We’ve been saying to vendors, if you are thinking of selling, sell now.”
He said the market was in a virtuous circle, since the economic boom had boosted the earnings of many businesses yet purchasers were confident they could continue to generate strong profits.
Mr Roberts’ positive view was echoed by business broking firm Goodwin Mitchell O’Hehir principal Graham O’Hehir.
“I’d say it’s the best it’s ever been for businesses that are netting seven-figure profits,” Mr O’Hehir said.
He said purchasers were very positive about WA’s prospects and had been able to gain backing from banks, but the buoyant conditions were restricted to medium-sized and larger firms.
Small businesses generating profits of less than $150,000 were struggling to attract buyers, since many potential purchasers were able to obtain a secure salaried job offering an equivalent income.
Despite this, Goodwin had settled 16 business sales in June alone.
“That’s the biggest month we’ve ever had in our 20-year history,” Mr O’Hehir said. Most of the big recent transactions listed in the table involved Australian Stock Exchange-listed companies seeking to diversify or expand their operations. As listed companies, the purchasers have the ability to raise extra capital to finance their acquisitions.
They are also able to offer shares as part of the consideration. The strong rise in share values in recent years, underpinned by the commodity boom and strong economic activity, has made this an increasingly attractive proposition.
One of the most acquisitive companies over the past year has been Welshpool-based engineering contractor RCR Tomlinson, whose chief executive John Linden described current trading conditions as being the strongest of any time in the company’s 15-year history.
Its latest WA purchase was Geraldton site maintenance firm JG Engineering, which has been owned by Greg Anderson since 1998.
The $4.8 million purchase price comprised $1.8 million in cash and $3 million in RCR shares. In line with normal practice, the shares will be escrowed, meaning Mr Anderson cannot sell them for six months.
VDM Group is another listed engineering company looking to expand through acquisitions.
It has paid $4.7 million in cash for a 75 per cent interest in Bassendean company Cape Crushing and Earthmoving Contractors, with the balance retained by company founder and managing director Mike Heddon. The transaction showed two common features in business purchases.
The purchase was conditional on VDM raising $5 million in new equity capital and the vendor, Mr Heddon, signed a three-year employment contract so his value to the business was not immediately lost.
Kwinana-based Tox Free Solutions has acquired two specialist industrial waste companies in the past month for a total of up to $9.9 million.
Its purchase of Specialised Tank Cleaning Services illustrates the way in which total payments are often linked to the performance of the business being acquired.
Tox Free will pay $4.4 million initially and up to a further $3.1 million if Specialised achieves agreed pre-tax profit targets over the next two years. Similarly, the price that Perth company Neptune Marine Services pays for Allied Diving Services will be tied to the latter firm’s profit before interest and tax.
Neptune has agreed to pay $2.1 million initially, consisting of cash and Neptune shares, with the final price to be adjusted depending on Allied’s EBIT over the next two years.
Sydney debt collection firm Credit Corp has not disclosed details of its acquisition of local competitor Pioneer Credit Management Services.
However, the consideration will be 80 per cent cash and 20 per cent shares, with the total linked to “a number of performance metrics” over the next three years.
It added that Pioneer was expected to contribute $1 million in EBIT in the 2007 financial year.
Some acquisitions are paid for largely, and in some cases entirely, by the issue of shares, which may reflect the limited cash available to the purchaser.
It may also reflect the outlook of the vendors, who may become substantial shareholders in the merged business.
An example was Victorian company Concept Hire’s $10.5 million purchase of Balcatta-based Blackadder Scaffolding in 1996.
The payment comprised $10 million in Concept shares and just $500,000 cash.
The three founders will continue in their current positions and have voluntarily agreed to retain their Concept shares for between one and three years. Blackadder has about 200 employees, most of whom work in its labour hire business. Optima Corporation’s $4.5 million purchase of motor scooter wholesaler Vmoto Motorcycles was a pure scrip transaction, with the consideration being 60 million Optima shares at 7.5 cents per share.
This immediately made the three vendors significant shareholders in Optima, with one, Patrick Davin, since joining the board of Optima.
While most of the recent trans-actions have involved listed Australian companies, there were two exceptions, both involving software companies.
Mr Roberts said one of the factors driving demand for private businesses was the emergence of cashed-up private equity funds.
A prime example was AMP Capital Investors, which acquired an interest in three WA businesses last year.
