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Executive Report: “Perfect strategic fit” A day after announcing its proposed acquisition of Hewden’s tool hire operations, Speedy Chief Executive Steve Corcoran tells Robert Aplin about the £115m cash deal. The only surprise about Speedy’s announcement on Thursday 14 June that it proposed to acquire Hewden’s tool hire division was that it had taken so long. The process appears to have been caterpillar-like as a result of the vendors’ need to constantly refer to Hewden’s parent company, Finning International in Vancouver, Canada, which is eight hours behind our time zone. In our Tool Hire Top Ten 2007, published in January, Speedy was clearly the No.1 player in the UK and Hewden was at No.4, having slipped just behind Wolseley following its acquisition of Brandon last year. In the Tool Hire Top Ten analysis, we anticipated that Finning would seek to dispose of its tool hire operations and, in our April issue, we discussed a number of possible buyers, concluding that Speedy would have to be interested. By last month’s issue, we concluded that the crescendo of rumours that Speedy would emerge as the purchaser was too loud to be construed as anything other than that a deal was imminent. The bare facts of this deal are that Speedy will pay £115m in cash to acquire on a debt free, cash free basis (conditional on no referral by the Office of Fair Trading (OFT) to the Competition Commission), 188 Hewden tool hire outlets. For the year ended 31 December 2006, Hewden’s tool hire operation reported un-audited turnover of £89.8m, with un-audited gross assets of £63.2m. Focusing on the depot numbers, they will increase Speedy’s total geographic coverage from 361 to over 540, of which 402 will be tool hire. Speedy is also taking on 1,200 Hewden staff, making an enlarged group total of over 5,000 personnel. Speedy is also not taking over any properties, allowing Finning to sell them separately. For its part, Hewden retains all its plant hire, accommodation hire and site services operations. Speedy is funding the acquisition through new debt facilities of £325m and a two phased placing of an additional 9.5% share capital to raise £54.5m, providing it with funds for future investment. Speaking exclusively with Speedy Chief Executive Steve Corcoran the day after the announcement, he told me that the deal had been a ‘slow burner’ for 18 months and that negotiations only gathered pace since February. “This acquisition is the perfect strategic fit for Speedy. Hewden is the closest fit to us; our customers, in the main, are serving the heavier end of building and construction; our outlets are based on industrial estates, rather than operating as retail outlets and there is a tremendous commonality of suppliers.” “Substantial expectation of business” In terms of national agreements with contractors, Speedy has far more than Hewden, although it does have 14 with what Steve describes as “real value.” The enlarged group now has 100,000 customers, many of which are complementary. “This significantly increases our cross selling opportunities as 40,000 dealt with Hewden, circa 40% of which are mutual customers, leaving approximately 24,000 which dealt solely with Hewden, which also has a particular strength in the industrial and local authority markets. We have a substantial expectation of business from these customers.” Undoubtedly the question on most people’s lips regarding this deal is the duplication in the depot network. This, to me at least, always seemed to be the drawback. However, Steve Corcoran is adamant that this is not a major issue. “On completion, we will make an immediate cut of 23 outlets. In the main, these will be in smaller economic areas where it does not make sense commercially to operate from two locations. “On average, Hewden turns over £500,000/year from each depot, whereas a Speedy outlet has an average annual turnover of £800,000. Staff affected by the closures will transfer to other outlets in these towns. This cut will result in operational efficiencies, not necessarily manpower losses, and will improve margins throughout the entire network.” Following this action, Speedy will review the entire depot network performance before any more closures are considered. Speedy also expects to re-brand all the depots, and vehicles, in its colours by the end of December this year. Traditionally, Hewden has been stronger than Speedy in Scotland, with Speedy stronger the further south you progressed. So what are the areas of overlap where both companies are only relatively strong and further cuts may be expected? Having undertaken a simple Post Code analysis of the current Speedy and Hewden tool hire locations on EHN’s circulation, we would not be surprised if the future of another 25 or so outlets (making a total of about 50 outlets) was in question. Of the 188 sites acquired, eleven are shared locations where Speedy has a one year lease to operate from, whilst Hewden continues to run its retained business. Moving on from this, Steve Corcoran confirms that “we are also developing a strategic cross hire alliance with Hewden in which it would become Speedy’s plant provider and we become Hewden’s tools provider. Under this alliance, we would be obliged to use each other wherever possible.” However, Speedy has not bought any significant Caterpillar kit as part of the deal, nor is it committed to do so. In fact, there will still be a degree of competitive overlap after the deal is completed as, for example, Speedy, which operates JCB mini excavators, will compete directly in the compact plant hire market. “Speedy now has 95% coverage throughout the UK. This means that we can serve 95% of the population within one hour’s travelling time. The remaining 5% is too sparse to serve effectively.” Surprisingly, perhaps, Steve Corcoran is still not satisfied with the depot penetration, stating, “we still do not have total coverage in London, Manchester and other major conurbations and will continue to look to acquire other good quality hire businesses.” Apart from what he believes is a minimal risk of an OFT referral, Steve Corcoran’s bigger concern is the on-going deterioration in Hewden’s trading performance in this current period to 31 July, when the deal is due to be completed. “When hire companies cut out capital investment, it drives down revenue quickly. Hewden was under-investing and cutting back. Revenue has reduced from £89.8m to a current annual run rate of £80m-£85m. At this level, it would be broadly breakeven. “We
have
insisted
that
Hewden
maintains
its
investment
in
line
with
the
investment
plan
on
which
we
valued
the
company.
If
Hewden
injects
capital
(within
limits)
ahead
of
this
before
the
end
of
July,
then
we
would
be
prepared
to
pay
for
this
in
addition
to
the
agreed
£115m.
On
completion,
we
will
Overall, this deal obviously strengthens Speedy's position as the UK's largest hire company with revenues well in excess of £400m. For the purists, it also ensures that tool hire regains its premier position within the company, representing over 60% of its turnover. Steve Corcoran describes it as “a transformational acquisition, consistent with our strategy of growing both organically and through acquisition. As well as a strategic fit, it is an excellent cultural fit, as it brings a great number of knowledgeable and highly experienced people with complementary skills, operating a similar business model to our own in a closely related area of the market. All in all, the deal provides us with a larger and stronger operating platform to take advantage of opportunities in the UK hire market.” • Executive Hire News › Archives › July 2007 › Executive Report › "Perfect strategic fit"
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