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Expand with open eyes!

30 November 2011

Mike Daniels

What do firms need to think about when it comes to overseas expansion - risks, opportunities and considerations. Mike Daniels explores the issues

Global expansion is high on the agenda for many facilities management companies, whether it is making a first move abroad or growing an existing global footprint as opportunities in emerging markets appear. We have already seen a number of larger players pursue overseas growth; Mitie, OCS and Interserve PLC – mostly known as being UK focused providers, have all broadened their geographic reach over the last decade to become the major global companies they are today. Their quest for growth has encouraged them to search for overseas markets where FM services aren’t outsourced to the same extent as in mature markets such as the UK and this strategy has paid dividends - offsetting, to some extent, the slowdown in the UK.

This does not mean overseas growth is the right strategy for all businesses. Management teams should consider carefully the reasons why they want to expand overseas. Is the business driving the expansion or is the move in response to clients’ own overseas expansion? It may be that similar growth can be achieved organically or through an acquisition closer to home. For example by acquiring the energy-saving company Eaga, Carillion has considerably strengthened this aspect of its integrated FM offering.

Many FM providers’ desire for international reach is being fuelled by wanting to diversify and work successfully with global clients. Following existing clients abroad certainly has its benefits and many expanding corporates realise the efficiencies to be had in using an existing FM provider in other markets. However, companies looking to achieve higher profitability through new clients need to carry out sufficient due diligence, which will establish the market appetite and competitive dynamics and determine whether establishing a base abroad will provide them with the opportunity to win further new business at the expense of local operators.

FM companies may expand overseas to add scale to their offering as clients demand the ability to service multi-country, pan-European or even global contracts. Earlier this year, Johnson Controls signed an FM contract with Royal Dutch Shell plc to manage and maintain 12,000 Shell retail petrol stations in 27 countries in Europe, Middle East, Africa, Asia-Pacific and the Americas. The agreement is said to be one of the largest single deals in the fuel retail sector and underlines the global portfolio approach to managing facilities and resources.

Alternatively, FM providers could look to operate remotely from the UK or joint venture with or buy an existing firm overseas with an established client base.

Whichever route is taken, providers need to make sure that they are clear about their strategy, they understand local market dynamics and that they carefully evaluate the options available to them which will, in turn, help plan and budget accordingly - and as markets continue to develop so will the opportunities.

Once the decision has been taken to enter a new geographic market, FM providers will then need to consider how to fund the expansion both initially and then as the business develops.

When it comes to working capital finance, companies need to decide whether to borrow locally or from the UK. Typically, funding is done via the parent company which will raise the funds centrally and flow to the new business – branch / subsidiary. It may be more difficult for the new company to raise funds abroad as a local bank may be unwilling to lend to what is, in effect, a start up or require a guarantee from a UK bank. Explore all options as borrowing from the UK bank might be the most cost effective route. Another consideration will be the setting up of a centralised cash pooling structure, so that all surplus cash is efficiently held in the central treasury and therefore visible, easily accessible and available for significant events such as acquisitions.

However, it is not just how to expand or how to pay for the expansion that companies need to consider. Those looking to expand overseas today will be doing so to achieve strategic ambitions against a backdrop of US debt, European contagion concerns and unprecedented volatility in foreign exchange rates.

One further consideration for those moving overseas for the first time is currency exposure and how to mitigate the associated risks as the new office is likely to be billing and incurring costs in the local currency, as well as valuing the new overseas asset in the books as GBP.

The US Dollar traded at a high of $1.88 against GBP in mid-2008 before hitting a significant low of $1.37 in March 2009. Similarly the Euro has had a trading range of over 20% of its value.

Whilst once an overseas subsidiary is established most currency flows will be in the same currency, the initial investment and any repatriation of profits / dividends back to the UK can create exchange rate volatility. The parent can implement hedging strategies to minimise their exposure which will help smooth and remove unexpected currency movements. Prudent hedging can help protect against adverse exchange rate movements and therefore allow the company to budget for costs that they will incur when setting up abroad and importantly ensure that the value of profits are secured.

Further risks to consider when opening abroad include differing legal regulations, cultural differences, managing businesses from a distance, and cash management across borders, but FM providers can learn a great deal from those that have gone before and by undertaking thorough due diligence to ensure the right decisions are made before taking the plunge. Securitas successfully bolted on 15 acquisitions in 2010 and continues to expand further into emerging territories. The European countries, particularly those in the sovereign debt sphere, might present opportunities to buy companies at low valuation prices.

Many FM companies have ably demonstrated in recent years that expanding through the use of established sectors and specialisms into new geographies can prove strategically beneficial. With the right planning, support and commitment, along with good business advisors, a move beyond UK borders can be remunerative – but do so with your eyes open.

Mike Daniels is Head of Business Services, Barclays Corporate

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