The four-year restructuring that led to Agrivert’s £120m deal

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Properly preparing a business for acquisition can require a significant overhaul of operations. And increasingly, it's the FD leading the charge. 

Phil Earl joined food waste recycling business Agrivert as group finance director in 2015, just as the business entered a period of organisational change. Group structure was overhauled, £35m of fragmented debt refinanced, £25m of expansion debt obtained and work towards a £120m acquisition began.

Restructuring 15 operating companies

Earl’s immediate task was to restructure the 24-year-old group's debt and structure. “Our group structure is quite complicated. We have about 15 operating companies,” he explained. “That was done for a variety of reasons, but a lot of it was to do with minority shareholdings and how we took on debt.”

The company used the opportunity to exit the private equity house, remove the minority shareholdings and attract a majority shareholder with 55% of the holding company.

That doesn’t mean it was easy. Agrivert is a capital intensive business with long-term revenue streams. This meant it was highly geared with £65m in debt and three years ago the debt was double the equity value.

“It wasn’t an easy debt round. We refinanced historic debt to tidy everything up and to raise £25m to build our final two plants. That was quite high risk. We hadn’t started construction, there were no operating permits and we needed to build quickly,” said Earl

Agrivert used Gravis Capital Partners, a listed infrastructure fund, to provide the debt funding. Earl explained that it’s necessary to speak to a lot of potential partners to develop a deal like this, that it was too risky for traditional banks and advised other FDs to look at specialist lenders.

“Gravis is quite a niche lender. We were nervous about that, but the experience of going with niche rather than a typical lender has been really good. They properly understand what we do. They have been flexible. As ever, as long as your performance is coming through and you’re being open and honest you’re okay,” said Earl.

What happens to your day job?

Earl said it's crucial to have a high-quality finance manager to handle day-to-day operations:

“Like many FDs and CFOs now my role is much broader than just managing the finance function. I’m very lucky to have a really solid finance manager. That’s allowed me to get involved in a whole range of things.

"A lot of time over the last few years has been spent on strategic development of the business. Helping develop our entry into the Asian markets and looking at operational performance. We’ve looked at acquisitions as well.”

He estimates that working on the Severn Trent acquisition has taken up 70% of his time over the last six months.

Negotiating an acquisition

Earl looked at a series of offers to acquire the group. Some of these conversations were short as it was clear they couldn’t achieve the necessary valuation or weren’t the right fit for the group, others proceeded into more detail. One conversation lasted six months but terms couldn’t be agreed.

“Severn Trent came along in January. They have been a client for five years and we know them well. It was a business that we felt would be a good match. We were unsure then whether we would get to a deal proposal that was going to be acceptable to shareholders,” said Earl.

Severn Trent agreed a £120m acquisition of the business last month and Earl and other senior managers are moving on to form a new company.

Earl advises other heads of finance to take the lead role in the acquisition. This allows the chief executive and management team to focus on business performance. If this tails off it can lead to the acquirer getting nervous or discussions around price adjustment.

It was important to establish an advisory team too. It’s possible to use a corporate finance house. Agrivert brought in a experienced individual to provide advice and have some of the difficult conversations that could move things forward.

“Another thing that we absolutely learned is that tax structuring can be a minefield - think about it early. Optimising tax for the deal and future is really important. Never underestimate how complex property matters can be in the deal process. Those two things have slowed down the deal more than anything else,” said Earl.

It’s important to consider incentivisation too. Earl implemented a share scheme for senior employees, which helped provide focus and motivation.

Agrivert has always had a bonus scheme for other staff and this has worked to help them understand how they contribute to the overall growth of the business.

The importance of forecasts

The long-term contracts and large construction projects mean Agrivert looks at a 15 to 20 year time horizon. However, Severn Trent wanted at an even longer forecast period.

“The surprise for us was just how long a forecast they were looking at. We hadn’t discussed that early enough in the process to really understand what was driving value for them. Trying to get that done early would be helpful. Then you know what’s going to be difficult,” he said.

In fact, putting together a long-term forecast is the first thing that Earl advises heads of finance do if they’re thinking about acquisitions.

"If you think there’s going to be a deal, start to put together long-term forecasts. You absolutely need annual budgets, but any deal will focus on a much longer time horizon,” said Earl. “If you start to get in that mindset it’s not going to be difficult when you get asked for a five-year financial plan. I would start to get that into the normal run-of-the mill activity."

About Chris Goodfellow

Chris Goodfellow

Journalist and editor with eight years' experience covering politics and business. His work has been featured in a range of publications including The Guardian, The Financial Times, The Independent, the BBC and Vice magazine.

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