International Merger Changes Close Strategy To Buy-and-Build –

Close Brothers Private Equity has injected GBP18.5 million equity into the funding package that saw its investee company, Yardbrace Ltd., change its organic growth strategy to one of buy-and-build with the acquisition of Rentokil Initial Plc’s intermodal bulk containers division.

The businesses in this intermodal bulk containers division are Initial IFF (IFF) and Initial Tank Containers (ITC). IFF focuses on dry bulk chemical movements in Europe and ITC on bulk liquids globally. The combined turnover of these two businesses was GBP100 million last year. Following the merger with Yardbrace the group’s annual turnover is expected to be in the region of GBP200 million.

The transaction, worth approximately GBP120 million, is technically being billed as a merger and appears to have been treated as such at a senior management level. John Snook, managing director at Close Brothers said the merger is meant to attain maximum operational efficiency for the businesses and that it is not about cost cutting. To this end, the senior management of both businesses have retained their current roles, albeit with enlarged responsibility, and few jobs will be shed throughout the organizations.

This has been possible because Yardbrace, which started in its core business of dry bulk transport and was funded in a rolling start-up in the transport of liquids by Close Brothers Private Equity, had a mirror business to that of the one Rentokil was selling. For example, the Rentokil managing director post merger will be the managing director of the liquids transport business, an area in which Rentokil has greater expertise and vice versa for the Yardbrace managing director.

The deal structure called for a total of GBP37 million of equity. Half of this comes from Close Brothers Private Equity’s 1997 fund, which is around two-thirds invested, with the other half coming from two limited partners in that fund exercising co-investment rights. Bank of Scotland has provided a total of GBP78 million debt financing, which constitutes GBP68 million in senior debt and GBP10 million in working capital and carries a tenor of ten years.

Following deal closure, Close Brothers Private Equity plans to refinance approximately GBP50 million in asset-based financing on containers and boxes owned by the merged entity. This will involve both consolidation and matching the asset-based financing with the firm’s income streams, which are currently split between seven different currencies.

This merger is a deal that Close Brothers Private Equity has had its eye on for the last couple of years. Snook says initial approaches were made to Rentokil Initial that time ago. Rentokil Initial refused to sell IFF and ITC and instead proposed that it buy Yardbrace. Snook says this proposal was refused on the basis that it was evident to Close Brothers Private Equity that there was a lot of value still to be extracted from these businesses.

However, when Rentokil’s share price took a tumble last year, shareholder pressure forced the group to make a move back to its core business, thereby leaving IFF and ITC as potential sale targets.

IFF and ITC were in the Rentokil Initial’s group following its acquisition of the BET businesses. Talks with Close Brothers Private Equity were resumed and by Christmas last year heads of terms were agreed with Rentokil Initial acting for itself. Snook notes that as much as three quarters of the house’s deals are found in this manner and that this is because the house has a preference for steering clear of auctions.

Yardbrace has a history with Close Brothers Private Equity. Yardbrace was first backed by the U.K.-based house in 1992. Snook says the house had known the Yardbrace management team since the mid 1980s and between that time and 1992 it had taken the firm to GBP10 million from a GBP4 million turnover. In 1992 Close Brothers Private Equity backed the management team in a management buy-in (MBI) with the house taking a minority stake. This was Close Brothers Private Equity’s first round of funding in Yardbrace and its equity stake has increased with rounds two and three that backed rolling start-ups. The fourth and latest is in support of the merger with the Rentokil businesses.

Since the 1992 MBI the Yardbrace business has grown from GBP10 million to GBP80 million turnover. Plans for the future include extracting maximum operational efficiencies and significant organic growth. As for a future exit from the business Snook says this is some way off, but he cited the benefits in a trade sale both for a European (consolidation of market position) and a U.S. operator (buying a strong European market presence). If the business reaches the GBP250 million to GBP300 million a flotation is a possible exit route.