Conditions right for MBOs

Management buy-outs may be relatively rare in Western Australia but they are certainly not unheard of. And the practice is on the rise as a result of favourable financial conditions, according to analysts.

Low interest rates and the emergence of private equity into mainstream investment practice in Australia have provided the perfect backdrop for an upward trend in MBOs during the past five years, with WA’s booming economy attracting the focus of both local and overseas investors.

But with the current drama surrounding the proposed Alinta MBO, recent local MBO action reflects much smaller deals executed in a far less public fashion.

Well-known WA brands such as Dome Coffees, Kailis and France Foods, Worldwide Online Printing and major financial services player Hartleys have all been subject to MBOs within the past five years, and with different motivating factors.

For Hartleys, an MBO rescued the fledgling broking firm after successive years of multi-million dollar losses and legal battles against disgruntled clients.

For other companies, including Nomad Building Solutions, ComputerCorp and Dome Coffees, an MBO signalled a handover of ownership by the founder to a management team well-positioned to take the company forward into its next growth phase.

Managing director of independent advisory and private equity firm Platanus Management, Marshall Allen, believes there are several drivers contributing to the upward trend in MBOs, among them the increase in private equity investors with ample cash reserves.

“The biggest problem in WA was that there was no local private equity. There were a few [private equity firms], but true institutional private equity just didn’t exist 10 years ago,” Mr Allen told WA Business News.

“Ten years ago the bottleneck was the money; very few people had the money to invest. Now everyone’s got money to invest, [they’re asking] ‘where do I find the deals?’”

Mr Allen, who was involved in the Nomad MBO in 2005 while director of ANZ Capital, also pointed to the changing demographic of business ownership as another reason behind the increasing frequency of MBOs.

This is especially the case in WA, where MBOs are predominantly a method of ownership handover, commonly occurring in family businesses.

“You have all the baby boomers that founded companies in the 1970s and 1980s are looking to retire…That was the example of Nomad in that it was family company, there was another generation in there but they really didn’t want to carry on with the business,” Mr Allen said.

Jenny Seabrook, director of Gresham Advisory Partners, who was an adviser in the Hartleys transaction, agreed that MBOs through the presence of private equity were on the rise.

Ms Seabrook believes that one of the reasons MBOs aren’t a common transaction in WA is that most private equity vehicles that back MBOs have been unable to secure transactions of size in WA.

“There are large WA companies that do really well, but the majority of companies operating in WA are either privately owned [are private already] and run, or small, or in the resources sector which is very volatile and doesn’t have a constant revenue or income stream,” she said.

There is no doubt that the Alinta transaction will be watched closely, and to some extent create precedents for MBOs of a similar size, particularly in relation to corporate governance and conflict of interest issues.

As it stands, the Alinta proposal has already struck itself apart from the traditional MBO mould in a number of areas, not the least being the involvement of the chairman in the MBO team

“I wouldn’t be surprised if ASIC came out with guidelines in the next six months. There will be a lot of ASIC focus on not just Alinta but also Qantas, about how boards should handle situations like this,” Mr Allen said.