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Lloyds Bank: Funding consolidation and portfolio restructuring to drive growth

Author : Chris Sood-Nicholls

21 August 2015

What factors within the market are driving this outsourcing activity to FM firms?, asks Chris Sood-Nicholls, MD of head of global services, Industrials & TMT at Lloyds Bank Commercial Banking

While organic growth in the business and support services industry remains resilient, companies are increasingly looking to augment this growth via acquisitions, and the FM sector is no exception. To companies in this space, acquisition activity can prove most attractive when it enables the delivery of new products, skills or geographic coverage to help companies serve more of their clients’ needs.

This trend has been further augmented by the juxtaposition of both buoyant debt and equity capital markets which have provided a cost competitive source of financing for companies to raise new incremental debt capital in order to finance acquisitions. It has also helped to create a fertile market backdrop for vendors who can be confident in securing a fair price for their assets.

Indeed, as shareholders in FM businesses seek to drive value, M&A is increasingly being considered as a route to expansion, to create economies of scale and for companies to better position themselves for larger, bundled service contracts. Certainly the growing trend towards rationalising suppliers in order to have one integrated outsourced FM contract is driving consolidation and portfolio restructuring in the sector.

As FM firms look to move away from single-service contracts to larger, integrated contracts, many will be placed under significant working capital pressure as they mobilise their resources to deliver more complex projects. In order to achieve this, companies will need to dip into sources of debt in order to fund that expansion, presenting both a risk and an opportunity.

To help capitalise on such market opportunities, banks and financial institutions can work with FM companies to establish solutions that can address some of these pressures and deliver incremental benefits for both the service provider and their clients. These include supply chain finance, receivables finance and asset finance alongside other working capital tools that can help them to quickly mobilise their resources while also preserving core debt for more strategic purposes.

Political and market trends driving outsourcing to FM firms
So what factors within the market are driving this outsourcing activity to FM firms? The sense of certainty gained following the UK general election has no doubt enabled companies to plan for the future with confidence. It has also mitigated the risk of larger public sector outsourcing contracts being put on hold, which could have been one of the unintended consequences of a hung parliament.

Additionally, the prevailing political agenda to manage deficits via austerity measures is sharpening the focus on internal efficiencies, presenting an opportunity to outsourced providers both in the UK and in international markets. Organisations within both the private and public sectors are increasingly recognising the benefits of a streamlined, total facilities management contract, rather than working though complex supply chains which engage a multitude of suppliers and duplicate management levels.

While the continued slump in oil prices is driving lower activity across larger industrial groups, these organisations are also now more inclined to focus on cost-cutting and efficiency-driven initiatives, again presenting an opportunity to outsourcing providers.

Although focus remains very much on opportunity, the services market continues to be fragmented and the trend towards a sole supply mechanism is still in the early stages. In 2012, one large UK FTSE 100 organisation streamlined its supply chain by dramatically rationalising its suppliers from over 60 FM providers to 1. The test will be evaluating to what extent efficiency benefits are realised by customers such as this and whether the trend to continue to move towards a fully integrated FM model will prevail in the future. So far, initial evidence suggests that this sort of contract is delivering benefits, particularly for larger clients.

Likewise, a level of discretion will apply to firms when bidding on new contracts, particularly for high profile public services organisations that will be placed under scrutiny. Outsource providers will need to ensure they are comfortable with the risk profile of each contract and consider factors such as the ability to mobilise effectively and deliver the contract, the financial risk associated with setting up the contract, and the reputational risk with large, high-profile contracts for organisations that touch people’s lives on an everyday basis.

Another recent development for the sector is the change in wage legislation in the UK: In the budget in July the Chancellor George Osborne introduced a National Living wage (NLW), which will raise the minimum wage progressively from £6.50 per hour to £9 per hour in 2020. Some FM companies will be able to pass these increases on directly to clients depending on the nature of the underlying contract, while others may have to renegotiate legacy contracts where such provisions do not exist.

At this early stage it is difficult to assess the impact of this new legislation on the sector, but two considerations are immediately apparent: Firstly, the NLW is a UK specific piece of legislation although this could have wider ramifications for multinational service providers if the UK legislation sets a global precedent. Secondly, the legislation does not become law until April 2016, so as a result FM providers have time ahead of them to engage their clients and re-negotiate contracts where necessary. Moreover, this legislation has at the very least brought certainty to the FM sector on an issue that has been under consideration for some time and will hopefully re-focus debate away from a just a price/cost-led discussion, to one that also focuses on corporate social responsibility.

Despite some of the headwinds facing the sector, and the complexities involved in managing integrated FM contracts, the increased trend towards large outsourcing contracts in the facilities management sector both in the UK and internationally provides a significant opportunity for growth. The challenge for financial institutions who partner with companies in the sector is to help ensure that all businesses from across the supply chain, can access cost competitive, innovative and sustainable funding sources which will enable companies to capitalise on the growth opportunities that the market presents. 

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