How to Prepare a Business for Private Equity Acquisition

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I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during MA deals. Welcome to M and A Science Live where leading M and A practitioners share lessons learned from their experience. When you use proven techniques in M and A, more value is created. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our newsletter. You'll find tons of free content. Again, that's mascience.com I'm your host, Kisam Patel, CEO and founder of M and A Science and Deal Room. Joining me today is Philip sor, chairman and CEO of Closersteel Group, one of the UK's largest trade show businesses. Today we're going to talk about the process of preparing a business for private equity acquisition. How are you today Phil?

I'm fine, thank you. How are you doing?

Great. Can we kick things off with a little bit background on yourself for particularly your M and A background?

I've been in media trade shows. If you call trade shows media, it's interesting question mark as to whether trade shows and exhibitions are media forms at all. On and off for about 40 years. I've run some large media groups over here in Europe, in Germany, Italy and in Japan and moved into trade shows. Didn't know very much about trade shows to tell you the truth, but it's a very, very interesting sector and it's a very little known sector. It's a real under the radar sector. So I've been CEO of two, three of the largest trade show businesses in the world actually over the last 20, 25 years. And as I say, very, very interesting sector.

And those roles. How early did you start acquiring other businesses?

Almost immediately. Very interestingly, if you go back to 1990 or thereabouts, there weren't any publicly quoted trade show companies. I mean most trade shows are owned by associations and indeed in the States most trade shows are still owned by associations, which made them even more under the radar. But trade show groups which grew up were basically financial engineering at the time. It was possible to acquire very, very good trade show properties, very solid properties that had existed for maybe 50 years for three or four times earnings. Where at the time, if you wanted to pay for a good magazine group or newspaper group, you might pay 20 times, if you like. I'll tell you a story. One of my favorite cameos. 1989, my company bought a trade show called Batimat, which was French. And it's the largest trade show in France, usually has about 600,000 attendees. Enormous. It's for the building trade. That means the building trade. We paid about $8 million for it and we bought it at three and a half times EBITDA. That was 1989. In 89, Walter Annenberg sold a TV guide, that's the TV guide you see at all, the supermarket checkout, for $3.7 billion, which is the highest price ever paid for magazine before all sense, $3.7 billion now roll on just 19 years to 2008. And Batimat, which had expanded quite successfully and it also moved into Russia, one or two other markets was valued at that time at around 400 million. The show itself was $400 million. So it had gone from about $8 million to $400 million in that 19 year period. And the same year, TV Guide was sold to a private equity house in California for $9 million. Other words, it had gone from 3.7 billion to $9 million. And that in a nutshell, tells you a great deal about trade shows and what happened to trade shows in that period and what had happened since. In other words, they were unknown. They were massively undervalued relative to other media assets and it turned on its head. And by 2012, apart from the obvious web linked services, trade shows were commanding the highest prices of any media form. The companies that got in early, when you could buy for three and a half or four times were doing very, very well by that point.

Has that changed? You see multipliers go up since then.

Ignoring the last 15 months because we don't really know what's going to happen as we move out of COVID The multiples were doing very well in 2019. Last deal I did was in the beginning of 2019, quite a big show, 17 times. And there were quite a few deals in Europe and the US at about 15, 16 times in 2018, 2019, a lot of quite big deals. And for decent large properties, that was the kind of number, and you compare that with the multiples you get for most other media forms and it remains pretty high.

Your primary strategy is consolidations. What do you typically look for in a company?

You look for stability, obviously you do. There are really three reasons why people invest in trade shows. I often have these kind of conversations and one of the questions is why is private equity so interested in trade shows and exhibitions? And I think the answer is not why are they so interested, but why? Why did it take so long for them to become interested? Because all of the truths about trade shows were true 30 years ago, were true 40 years ago. And there are three principal elements why trade shows have become a very attractive investment. Number one, the margins are very, very high. Well run businesses, I like to think my companies are well run businesses will be generating 27, 28, 29, 30% margins year on year, number one. Number two, the cash comes in up front. It's a bit like insurance floats. Exhibitors pay you in advance, so you're taking the money in advance and you pay the costs of running the exhibition at the time you run them. So you've got advanced cash flow. That's very, very important. Number three is. Well, actually there are four things. Number three is a good solid trade show will be able to rebook all its exhibitors for the next event. So if you're running annually, if you're running biannually, every two years at the show, you talk to all your exhibitors, you ask them if they want to come back next time. Do they want the same slot on the floor in Vegas or Javits. A well run show will get 80 or 90% of people saying, yep, sign me up and we'll sign the contract on the spot. So you have that continuous certainty of a very, very good show. And the fourth reason, Classic Warren Buffett, I like businesses you can build a moat around and trade shows fulfill that very, very well. Because I'm speaking here worldwide. If anything, it's slightly less true in the US than most other markets in the world. If you've got a slot, let's just say security. If you've got a slot in a venue for a security show and that's well established and you have a good relationship with the people that own the venue, then they will not allow another security show into their venue. Most big markets in the world, there are probably only two major venues. So with that relationship with that slot, you've actually got control of the marketplace because other people cannot come in and compete with you. It's less true of the states, of course, because there are far, far more convention centers in the us. But it is also the case that out of the 25 biggest shows in the States, I think 21 run in either Vegas or Orlando. And broadly the same thing applies. It's very, very hard to compete in Vegas against an established show because the show is there, people rebook for it and the venues are very chary about allowing too much competition. So you build a moat around your business as well. It's not unlike airlines at major airports. Heathrow in London tends to be the major example. British Airways own 50% of the slots at Heathrow. There aren't any more slots because the airport's completely full. British Airways have been consistently one of the most profitable companies in the aviation world for at least 30 years. And that isn't because their service is great or their planes are better. They're not a bad airline, but they're not exceptional. The reason they're so profitable is they own 50% of the slots at Heathrow, one of the major airports in the world, and nobody else can buy their slots from them. There's a similarity there. You take those four things together and they're a very, very, very attractive business for private equity.

We have good margins. The model of getting paid up front, so cash balance is good and then you're reoccurring or rebooked business. And competitive advantage, barriers to entry are.

Very, very high, very high. I mean, you can sit around and say, I think I've got a great idea. I want to do this, I want to do that. I've got a great idea for a show in this sector. And you go along to the Javits and say, we want to launch this show. When can we have a slot? And they'll say, well, you can't really. We've already got somebody who does that kind of thing and we're quite happy about that, thank you very much. Go somewhere else.

On the platforms you've been involved in, do you launch new shows? Do you identify?

All the time.

Market.

Okay, all the time. But of course, you launch into where you know there's a gap. If you're in particular marketplaces where 50% of our turnover is in medical and healthcare, therefore, you're very, very aware of medical and healthcare. And also, medical and healthcare moves quickly, which means you've got new opportunities for new ideas and you're watching out what's happening and you see a gap, you see a hole and. And you move into it. You can't go head to head against the American association of Oncologists or the American association of Physiotherapists. There's no way you can go head to head there. But there are plenty of other opportunities for coming events at the moment. For instance, a lot of people are launching vaccination events, of which historically there have been very few. But now, of course, it's a pretty sexy subject, right?

That would make sense. And I think cannabis, for example, is a big trending one right now. What's your approach to sourcing M and A opportunities?

It's very, very, very broad. I'll give you an example. Let's talk about the US because that's where you are. We have three people in the state to do nothing else but look for opportunities. And only last week we had a very, very long half day discussion of the board looking at, believe it or not, a list of 200 possible opportunities. In other words, we give people certain parameters. A business has to be a certain size, it has to be in certain sectors, et cetera, et cetera. And we ask our people over there to go out and talk to literally anybody they can think of and come back to us with a list of here are a series of possibilities. Now, we're not going to go and talk to 200 people and make them offers, of course we're not. But by doing that, we're attempting to filter them down, we're attempting to put them into a funnel and perhaps break that down. In fact, the figure we were talking about yesterday, we can break that down to 52 possibilities that we think are pursuing. And that's what we will do. We will actually knock on 52 doors. Most people will say, well, thank you for the call, but no, we're not interested in selling, but you have to kiss many frogs, et cetera, et cetera, et cetera. And that's basically how we do it. There are obviously the brokers, as there are in all industries, who will bring us anything that they have been commission to sell. So clearly when that happens, we look at all those opportunities, they go into the hopper as well. But over the last 18 months, there have been very, very few of those.

Very few in the past 20 years. How has that approach evolved? Were you always utilizing resources to do the scouting for you?

No. If you go back 20, 25 years, this is a very unconsolidated industry. I mean, the two biggest players in the industry, one's called Reed Elsevier, one's called Informa, both happen to be based in London, but actually very little of their business is in the United Kingdom. They're worldwide and they each have about 4% of worldwide trade show business. That's the sum total of consolidation. There is nobody who has more than about 4% of the industry. And if you go back 20, 25 years, the two biggest businesses then were one called Reid and one called Blenheim, which I was chief executive of and they each had about 1.5%. So it was an almost totally unconsolidated business. And little bit by little bit it's consolidated more. But even so you can take out the big players. You look at the big German messe because the German halls tend to own all the exhibitions run in the halls. They tend to own them themselves. And again it probably doesn't account for more than 20% of the industry worldwide. But a lot of medium sized companies have been hoovered up in that 20 year period. But again about 80% of the the industry worldwide is still independent.

That was the big attraction is here's this highly fragmented market and even after 20 years it's still very fragmented. Which brings us to the theme of this interview. That's what likely makes it attractive to private equity. And as you mentioned, it took some time before you saw private equity interest. Can you walk me through that? When you started seeing private equity interest in this industry and what did that look like? What do those conversations look like?

It wasn't until around 1999 Warburg Pincus who were interested in tech, that was the buildup to the 2000.com crash. And there was a great deal of interest in tech investment generally from the PE house. Of course PE world's very different in 2021 from the way it was in 1999. But Warburg Pincus were a relatively big player at that time and they'd invested quite heavily in tech. As a result. They had come across a series of reasonably large tech events in the States and their interest in tech led them into those investments. That was the first one of any size that I noticed. The first one that I did was in 2000 was in fact for a large defense show, interestingly. But even then we were talking about 8 times earnings. Although it was a very very good show, it was very very hard work explaining the industry. Everyone in the financial community found it very, very hard to get their heads around the fact that the Javits doesn't own the shows that run in the Javits or the McCormick center in Chicago doesn't own the shows that run in the McCormick Center. Somebody else owns them. It's not that difficult to conceptualize. It's like a printer doesn't own the magazines that are printed on his printing machines. It was quite difficult to get over what the IP really is. What is the IP in a trade show? It's not like Vogue. It's not like the Economist. It's not like that kind of ip. And a trade show looks like a trade show. I mean, you don't go into a trade show and say, hey, this is just completely different from any other trade show I've been to. So the IP is somewhat diffuse, if you like. It took quite a long time to point out, actually how solid these properties were. And of course, you go around in circles. You go around in chickens and eggs, which is, again, one of the conversations I had often was, well, if they're so attractive, why haven't private equity invested in them already? It's the classic. You can be walking along Fifth Avenue and you see $100 bill on the floor in front of you, and you say to a friend, look, there's $100 bill in front of me. And he says, no, there isn't. There can't be, because if there was $100 bill, somebody would have picked it up by now. And so we had that issue for quite a long time. Then, little bit by little bit, in the early 2000s, there was an interest at a relatively low level. By about 2010, there were serious investments, serious numbers coming through. And now, if you take the UK in the 15 months prior to Covid, there were six deals in London which were in aggregate, three and a half billion sterling. So the numbers now are really quite significant.

So at the current firm, when did you start seeing private equity start approaching you, what those conversations look like for the current one?

They're permanent. They don't go away. There isn't a period where people approach or don't approach. You get approaches all the time. I don't mean by that you get an approach every week, but there is a regular flow of people that one knows in the industry or intermediaries saying, I've really got somebody who really wants to invest. Have you considered is it time to talk? And even if it's not time to talk, can we at least come and have a chat and see what's happening? That never goes away. That's pretty well permanent now because we are a fixture, if you like, in the private equity calendar and the private equity playbook.

Okay, so you got a regular flow of inbound interest coming in. Now, we talked earlier about what drew you in in those four key areas that made you interested in this industry. What makes A company attractive for a.

PE firm, as we said earlier, very high margins, consistently high margins as well. The margins don't go away. And the reason the margins don't go away is very, very Darwinian. Because you've got the moat around you, because you've got the barriers to entry, you can sustain the margins. I'll use the British Airways analogy. Heathrow Again, 50% of the slots, and there are no slots left over. There aren't any other slots to be given to anybody. If there were 10 runways within 40 miles of Heathrow, then British Airways would probably be bankrupt because there would be lots of places for lots and lots of other airlines to land their planes and take off. It comes down to exactly the same thing. Uk, France, Italy, Poland, Spain, not to. In the us, there are only two venues of any size. So if you've got a show in one of those venues and the venue is not going to let anybody else come in and compete with you, then you've really built a very solid wall around yourself. Barriers to entry, et cetera. That's why it's an attractive industry. It isn't obvious. I mean, if I talk to people who don't know anything about the trade show industry, but I say, okay, let's start. What are the value drivers? You tell me what the value drivers are. Why you're sitting here and you're saying you're interested. If people don't know very much about it, they virtually never talk about the barriers to entry and the slots. It's one of those things, like a lot of industries, unless you're inside it, you don't actually know what matters.

Let's go back to all this inbound interest you get from PE firms.

Yeah.

What actually sticks out to you that makes you want to have a conversation? What are you looking for in a PE partnership?

What are we looking for? And it's difficult to say, isn't it? Because you don't ever talk to a complete PE firm, do you? You talk to representatives, you talk to maybe one member of the investment committee. More likely, at first meetings, you talk to a vice president or a managing director whose job is to scout media opportunities, et cetera. But it's inevitable that you respond to the individuals. I mean, I would like to say that wasn't the case, but it is the case. You have those kind of conversations that you like sounds of, and maybe you continue with those conversations. Other organizations, I won't name any actually, but some of the bigger ones, you actually have a couple of meetings and you think, I really don't want to work with these people. A little bit too much arrogance. A little bit too much. We are pretty big. And you should be pleased I'm here and talking to you. And you don't pursue those. That's always the starting point. It helps if it's a private equity house or a venture capital house that has had some experience in your sector. That helps a lot.

Okay. When these firms are reaching out, are you taking all the meetings or do you ever look at a firm, look at their website and say, no, I don't want to talk to them? Is it sort of.

No, we very often don't talk to people.

Okay.

But I have to say, the website doesn't tell you anything. You are talking about private equity. You know a lot about private equity. You give me 100 private equity websites and tell me to find distinctive points. Every single private equity website basically says the same thing. We're warm, we're cuddly, we're friendly, we're very supportive. We're great supporters with acquisitions. We can help you on this, we can help you on that. Got a great track record. They're all the same. Sorry, I mean, that's a bit unkind. Of course, they're not all exactly the same, but I think you know the point I'm making.

Hey, so what actually prompts you to take the call?

Having done it for quite a long time, I know most of the names. Occasionally you'll get one that you don't know, and you might well take a call from somebody you don't know just because you've never heard of them before. But you tend to know the firms and you tend to know the individuals. Obviously, we work mainly in the London and New York markets. The individuals don't change very much, to be honest. It's reasonably stable. I'm talking to people now about a couple of deals, not the main company, closer still, people that I was talking with 20 years ago about deals.

Got it. So being in the market, sort of understanding who the players are, knowing where they stand, you mentioned a couple things which I thought were interesting culture fit that you've even gone through having a few meetings and realized like, hey, this isn't going to work out. We're two different tribes or ways of looking at things.

Yeah, we're not that big organization. Blenheim was a much bigger company, but this one was last year was about half a billion dollars. So we're not big in private equity terms. And therefore there are certain people at the right level, if you like, who it makes sense talking to. Whereas if KKR come through the door or Blackstone are not so bad because they've got interest in the sector, your immediate reaction is we're kind of too small for these guys.

And then the other part was sector expertise was another area which you also referenced. If they've done deals in the sector.

Yeah, that helps a lot.

Is there anything else that gets your attention with getting a sense of who to talk to with the PE firm's interest?

No, it's difficult to say there's anything else. It's opportunistic, isn't it? It's not unlike when we're out searching for acquisitions. In an ideal world, I would say to my people, we want medical shows, we want healthcare shows. Our other strong sectors are E commerce and E learning. So only look at those sectors. But actually we don't say that because you have to be opportunistic because something may come to your attention in a sector which you haven't defined. Let's say security is quite a good example and it's well worth looking at. So it's best not to go in with a recipe and to refuse to move off the recipe. And the same is true to an extent of private equity companies. We're in a slightly different world, aren't we? It's not only private equity now we get approaches from very different organizations. We've had quite a few approaches from family officers, for instance, who are looking for long term investments. On one occasion from one of the university foundations and SPACs, for instance, we've had a couple of calls from SPACs in the last six months. Six months. It's not just a private equity issue anymore. There are other funding vehicles which one has to be aware of and has to pay attention to.

Even looking at private equity side, these funds operate on different strategies because you'll have buyout fund, you'll have growth and maybe even debt altering minority funds in.

One or two instances.

Can we talk about that? How do you sort of assess these different approaches that the P funds would have where when they're coming out with these different strategies, be it growth, buyout and sort of align that with your interest. I'd be curious on looking at that point of view and then maybe we can get into how do you start preparing your company to actually do the transaction with them.

There are certain things which are obvious. I've never talked to a private equity investor in 20 years who wasn't basically about buy and build. You almost start there. You have to get that out in the open straight away we're buying you. But then once we bought you, what we want to do is make more and more acquisitions and you will be a platform for X, Y and Z. That's what everybody wants. But it's quite important to sort of tease that out a little bit, you know. What do you mean by that? Okay, if this is a 500 million deal, are you talking about it? Buy and build to a billion or 2 billion or whatever else that's important. The other thing, of course, is the length of the fund, which is sort of blinding. The obvious. I know that it's almost so blindingly obvious you don't say it, but we all know that most of the funds have a 5, 6, 7, 8 year life cycle. You need to know very, very early on what fund they're thinking of putting you in and what is the lifecycle of that fund, because that's extremely important. If it's a five year fund and they're two years in. And of course it isn't an absolute truth because funds can sell assets from fund to fund. Of course they can, but actually that gives you a time horizon. And it gives you a time horizon for the people who are trying to invest in you. And you have to take a view on whether you think a maximum of three years is really sensible for what you're trying to do and where you believe your marketplace is and what you are. If, for instance, you've just launched three or four big shows and you're spending a lot of money on them and you're trying to develop them, you don't want to be in a position where somebody's saying, we'd like to sell you in two years time because it's a marathon, not a sprint. Big shows take maybe four or five years to develop into a size that's worthwhile. You don't want to be selling them after two years when you effect they're not producing any profit and you're still investing in them. Again, the biggest company is actually an eight year fund and we were the first investment. And that's absolutely ideal. Because you want as long a Runway as you can get. It doesn't mean it's eight years before there's another transaction, but it does mean you've got a nice long Runway and which gives you plenty of time to plan.

When you sell a company, you'll hire an investment bank to run a competitive process. When you're on this side of the table and you're getting interest from several PE firms and are you doing something Similar to create a competitive process depends.

The vast majority of private equity deals are not walkaway deals. Clearly, if a group of people are selling a business and it's a walk away, in other words, thank you very much, we'll bank the check and we'll never see you again, then clearly what you're looking for is the person that's going to pay the highest price. But I don't think I've ever seen one of those deals. I've never been involved in a deal like that. Again, I'm talking private equity. The SPACs may view it differently, but by and large the deal is we like the company. We like the company because we like the management. Therefore, the deal is the management stays on under whatever terms are agreed, two years, three years, whatever else, you start with that. And therefore it's absolutely fundamental to be working with people you trust and you like. Quite honestly. And I know that's dangerous, that's on.

The buy side, right?

Well, that's on the sell side, on the basis that we're selling an entity. But the buyer is effectively saying to us, you sell to us, but we want you guys to stay on. So you're looking all the time for people that you feel you think you're going to be comfortable working with. It's easy to say that. Of course, everybody puts their best foot forward, whether you're buying or selling. Of course, you've done your makeup and you put your lipstick on and everybody's putting their best foot forward. So you have to be a bit cautious there. And of course, it's also true that you can buy into a private equity house, you can like a couple of guys, girls, very, very much indeed, and then find they leave the business two years later. And of course that can happen, but within reason, it's very important to actually work with people you like, you trust, and who've got a good reputation. Of course, again, the first thing you do when you start getting serious with somebody is you bring up everybody you know and you can think of whoever dealt with them before and you ask the question, you've worked with Fred, he bought you, he sold you. What do you think? Tell me honestly. And you do a lot of research of that, sort of. You should do a lot of research.

Like that over a company lifetime. There's a lot of things that happen. I've seen examples where maybe it starts private or it's a family business and then there's private equity. Growth capital comes in and like you mentioned the example of the fund sort of term ends and they need to get their exit and they end up selling it to another CEO. May get, you know, the full exit on the second time with the remaining of the original business, but then they keep them around and incentivize them on the new owner and then more recapitalization down the road. Fund comes up, it gets sold to another fund. So it's sort of like there's several different types of events that happen. Can you maybe walk me through some experience around that or maybe lessons learned?

I must be honest, I suppose I'd done, one way or another about 15 deals which have involved private equity or venture capital over the past 20 years. One or two of them, not that many, but a few of them have been a sellout to a large corporate. And even with the large corporates, they very, very often want the management to stay. But if you want to get out, a large corporate is a better deal than a private equity, even if the cash offer is less, because you'll have an opportunity to exit. If that's the case. Clearly, if you're doing it with a private equity company, you will be locked in. It'll be very, very difficult to leave unless it's by mutual agreement. There is a great deal of variation. I mean, one deal which we did with closest deal was a minority deal, which was extremely interesting. And the private equity company only took 47% and we retained 53%. And that had a very, very different dynamic to it because we really did continue controlling the business. And while they were the largest shareholder, they were very, very careful about not in any way imposing on the business. They made it one of the appeals of the deal that you guys will still own a majority, therefore you will be able to make the decisions. We cannot impose decisions on you. Now, of course, that's not an absolute truth. There are certain circumstances. If numbers were going the wrong way, then of course they could have imposed themselves as the largest shareholder. But that was quite an interesting one. And I think we're seeing a bit more of that. We're seeing a bit more of minority deals.

What tries the P firm to go that direction? I think it's rather interesting because typically you assume that they'd want the board seats and to really have some influence in the company and try to make changes.

It's a wall of money argument, isn't it? As we all know, private equity venture capital is in possession of far, far, far more funds than they can possibly dispense. And probably the single biggest problem at this point for private equity broadly is how they actually find targets for the funds they've got. It's actually quite attractive. If you're prepared to go along to organizations and you're not paying any more money than anybody else is paying, you've got something a bit special, haven't you? You've got an argument that nobody else is using. You're actually saying, okay, it's all the same, really. I mean, if you like, the total value, enterprise value of the business is the same. But what we're offering you is something that you might find very attractive, which is that you still retain the majority. And I think that's the reason for it. It allows a private equity firm that's offering that a bit of leverage. It allows them to tell a different story. And that was certainly true in the case I'm talking about. It really did make the difference.

It makes their proposal a lot more interesting. Attractive.

Yeah. To certain people it's not always attractive, but for a lot of people you think to yourself that sounds attractive. All right, they're offering a bit less money, but actually if we really can keep a lot more control, et cetera, et cetera, et cetera, you know, we like that.

So on these 15 deals you mentioned you had two that were complete buyouts from strategics. Walk through this minority. What were some other types of transactions that you worked on?

Most of them are pretty vanilla, quite honestly. You know, they are.

I mean, are they typically a growth investment and are the terms pretty typical?

They're invariably a growth investment. I don't ever recall talking seriously to anybody who didn't want to basically buy as a platform and invest, invest, invest. Once they bought into you, they have to find a home for their funds. They have to find a home for the money in the bank. And if they buy into a sector they like with people that they like, they want those people then to come out and acquire, acquire, acquire. So in that sense, every deal is like that. I can't recall being approached on the basis that it wasn't a platform, that it wasn't a buy and build.

They still leave percentage for you to continue with some equity stake in there.

Oh yeah, yeah. We're no different from anybody else. There will be a rollover stake inevitably, which is calculated by a very complex mechanisms where we have specialists who do that for us. And of course there is X percent of sweet equity 20, 25%, which if you like, is given to the management to dispense as they wish. In the case of closest still my biggest company, every single employee is a shareholder. And I don't mean share options, a shareholder. So what we do is we distribute it right across the whole company.

So when the deal is done, what does the PE firm end up with? Like 60, 70% of the company?

Yeah, 65% to 70% is the norm.

Yeah, got it. What are your techniques to cultivate relationships with PE firms?

With PE firms, we don't actively ring anybody up and say, would you be interested in buying us? Clearly, when it comes to a transaction, we might employ somebody like Goldman to actually act on our behalf. And that's very straightforward because they can ring almost everybody under the sun and ask if they're interested that. But I don't actively approach private equity funds. I mean, we did in the early days when businesses were smaller. We would actually approach a number of people and say, might you be interested in investing in trade shows? And then if you like, get them interested in trade shows and then say, okay, these are the assets we've got at the moment. Can we start with that? And then we'll build on the back of that. And that's how a couple of the early ones started. And these were in the days when trade shows were not. Flavor of the months were not particularly exciting. And that required quite a bit of slogging around. But with smaller houses, boutiques really, boutiques based in Mayfair, in London, and to an extent in New York.

When do you need more money? You just go back to your current partners and run by them first.

It's all prearranged in the deals. In other words, you're assuming buy and build, and you have assumed it will be buy and build. Therefore, you have already built into the protocols and the shareholders agreements what will happen if 50 million is required to do X, Y and Z, if 100 million is required to do X, Y and Z, this is how it'll happen. This is how much will be loan notes. This is how much will be pref shares. This is how much could be equity. This is the maximum dilution that could occur in each of these situations, et cetera, et cetera. This is 200 pages of boilerplate, frankly, but it's obviously important. I've also never seen a deal where the management didn't have a right of veto. In other words, you can't really be in a position where a private equity house or majority holds. Holding private equity house says, we really want to buy this and we insist on buying it without the management being able to veto that. Which is sensible, because if the management really doesn't want to do a deal, then it would Be a bit foolish to put that deal into their hands.

What are metrics of success?

The usual, two and a half times, three times, et cetera, et cetera, et cetera. Nothing exceptional there. Internal rate of return. We as individuals, the management, use the same metrics simply because they're standard.

Anything between quarterly annual goals.

You mean what are we looking for in annual return?

Right. Or what benchmarks do they have just to measure progress through the investments?

Yes. I mean, they will have the absolute standard. They want a rate of return of X over a certain number of years. But of course, you're in a business where you've gone in and you're assuming a five year time scale between acquisition and next exit. What you would typically do in a buy and build. And it doesn't just apply to trade shows, it applies to lots and lots of other businesses I had an interest in. Is the first two years is the period where you will be looking very, very hard for the acquisitions and you also be looking very, very hard for launches. As I said earlier, launches are better than acquisitions because launches cost far, far less cash. But they take time. A good launch in a good sector which has got good prospects will take three, four, probably five years before it gets to the point where you're really happy that this is valuable business. And the EBITDA is of a level that justifies investment and makes it valuable. So you do that right at the start and by the time you get to year three, year four, year five, you don't do that. And the reason you don't do that is because you don't get any value for the fact that you've just launched three fabulous shows and they're going to be tremendously valuable in five years time. Mr. Buyer, Mr. Buyer says yeah, that's fine, thank you very much. Great if it's true. But we give you no value for that. So you're using up your assets, you're using up your best people to develop things which will actually bring no value to you in terms of a deal. And the same is true of acquisitions. You make acquisitions sometimes on the basis that they're steady state and you like them and they're not going to grow very much. But most of the time you buy things that you can see, you've got advantages, you can grow them, they're in a sector you like. So that EBITDA might be a million in the first year, but you would hope after three, four years you've built that up to 2 million. And so you try and do all of that in year one and two. And that's very interesting dynamic, which actually I was addressing a conference in London this morning about exactly that. It's a very interesting dynamic because you go back 25 years to the 1990s. The big exhibition groups, people like Reed Elsevier in former Blenheim 1 or 2 in the States, were just normal companies. They were just running on the basis of here we are, and next year we hope that our earnings per share will have risen by another 6% and our headline profits will have risen by another 8% and we make another acquisition and we're running the business. And we're running the business. And we may well be running this business for 20 years, but you didn't have a timescale. And now the trade show business has become very tied in to the private equity cycle. In other words, so many other big businesses are private equity or quasi private equity one way or the other, or hope to sell themselves to private equity, then they follow the private equity of doing exactly the kind of things I was talking about. And it does make quite a difference to the dynamics of how the industry works.

It's interesting you mentioned that cycle. And then here's initiatives where there's organic building out some of the new projects or shows, and then you're sort of need to look at your resources because you could also allocate that towards acquisitions. And then later in that cycle, you may not be as incentivized to create those new shows.

That's right. Effectively you're not, and nor is your private equity partner either. I don't mean by that that nobody launches a show in the fourth year of a deal. I mean, that would be silly. Of course, there are situations where you say that we've got this great show in, I don't know, it works brilliantly in the uk, works brilliantly in the States, works brilliantly in France, let's launch one in Germany. And of course you do that because you don't ignore these opportunities. But in broad terms, very much like Joe Biden. Very much like Joe Biden, okay, Joe Biden, he's in for four years, he might be in for eight, but we all know he's sitting there and his advisors are sitting there saying, we've got 18 months, we've got to do it in 18 months. Because in the midterms in 2022, we will probably lose the Senate, we will probably lose the House, and at that point, forget it. So we've got to get everything done now. And even if we're in for eight years, we probably still got to do everything we do in the first 18 months.

Similar with that approach, if you're going to push for new shows, you're going to do a lot of that in the early part.

Yeah. And therefore it changes the psychology of the business. As I say, go back 20, 25 years. And that wasn't how the large companies in the sector we're talking about approach things.

When we look at some of the financial metrics to measure success and acquisitions playing a part of it, how do you keep from purely making it acquisition of revenue just to hit those targets and still be aligned on doing quality deals and balancing it out between the two?

Well, the answer to that is it's very, very difficult. You can only acquire what you can acquire where like a lot of industries, I can very easily say, Look, I've got 10 events which are absolutely perfect for ours. I really like this diabetes show in Cleveland, and I would really like this E Learning show which is fabulous in Singapore because they fit perfectly with our product, with our people, et cetera, et cetera. But just by writing it down, you can't make it happen because you can't force people to sell. And very likely the shows you like are owned by somebody who's in the same situation as you. We've never sold a show, ever. We never dispose of shows. If somebody came along with a ludicrous offer, of course we wouldn't turn it down. But we don't sell shows because there's no benefit to us in selling shows. I mean, we're trying to build EBITDA and we're trying to build a business that will be as valuable as it can be in five years, six years time, or whenever else. And a lot of people are in the same position. So you can only buy what you can buy, which has always made it a very opportunistic business. There isn't really an answer to that question. You can theorize with your private equity partners and say, we want to buy $10 million worth of EBITDA this year and we don't want to pay more than eight times and we want it to be in the sectors that we want to be in, but if the events are not there, they're not there and you can't do it.

Can we talk about negotiating these deals with PE firms? Do you have some lessons for me around that?

No, not really. You put your lipstick on and you put your best foot forward and you're very, very honest because you don't want anything coming out in due diligence which would cause anyone to say, hold on a minute, they didn't tell us that. Although of course, when you're buying, particularly when you're buying owner driver events, that happens all the time, of course, you actually say, you mean you didn't tell us that you didn't own the property? You mean you only rent it? All sorts of stuff inevitably comes out. But when you're being serious, at the size we are, you're very honest, you're very straightforward. Your numbers are very, very accurate. KPIs are very important. As we all know, private equity love a good spreadsheet, and therefore we have enormous spreadsheets full of KPIs. Anything that anybody would like to analyze, I'm just one very, very simple example. Average revenue per square meter. Exhibitions are always sold on square meters exactly the same as magazines are sold by page. What is the page rate? How much money is the magazine getting for every page of advertising it sells? Or if you're in the hotel trade, what's the revenue per room, night, et cetera, et cetera, et cetera. And so average revenue per square meter is absolutely critical. You get a massive information every single show we run its complete history. What the average revenue per square meter has been over 10 years, assuming we've had it for 10 years. Analyze down how it works. How much of that has come from price rises? How much of that has come from actual real growth? Does it come from exhibitors taking more space, the same exhibitors, or does it come from new exhibitors? We have massive spreadsheets on that. And the more and more information, analytical information like that, that you can provide for a private equity house, by and large, the happier they are. It saves them a lot of work, but it also allows you to say to them, these are the things that matter in this business. And we spend a great deal of time on that. All of our systems are geared to analyzing that and 1,000 other things in that kind of form. I think that's pretty important, really, knowing your numbers.

Do you use that in negotiating? If you get an initial offer and maybe come back with, hey, here's references on some of these metrics that we have.

Depends on what else is going on, doesn't it? We always have an intermediary, as you'd expect. And that's the intermediary role. And the intermediary will clearly, just like a football agent, will attempt to push prices, push prices upwards. But it depends on what the competition is. Clearly, if there are five interested parties, that's a lot easier than if there's only one interested party. The tough one is if there's only one interested party. And how do you maximize the price in that situation?

How's it been when the market goes upside down on you and all these plans and expectations?

You mean now, March last year? It's not been too bad, actually. We're very much at the sharp end, obviously. We run events around the world in 8, 9, 10 different countries and everywhere is the same. We've not been able to run them, obviously. Actually, you can run event Vegas now. We ran two events last month. They were the first ones for 14 months. One was in Spain, one was in Singapore. We've got another couple in July, not big ones. We're hoping that by September we'll be in a position where we can run most of our events without too many restrictions. That's certainly what it looks like. Fortunately, we're in markets which are not particularly restricted, with the exception of Germany. Germany is a worry to us because the COVID rates in Germany are still far too high. But the us, the UK are strong markets for us. France is getting much better, Spain is getting much better. But we've had 40 months of not able to run shows. One of the good things that's happened and surprised us is of course, you go back to your exhibitors and your delegates and you say, look, we can't run this show. We're not going to be able to run it until next year. Do you mind just rolling over? We keep the floor plan the same and we'll run it again, hopefully in a year's time. And, you know, will you leave your money with us and will you come back next year? We started off thinking this is a bit like the airlines. Are they going to have to have money back? We started off by thinking we might have to hand about 50% of everything that had been paid in advance back. And in fact, it's been less than 10%. I mean, we've been very, very encouraged that our exhibitors and our delegates and we take a lot of money in delegate fees have said no, that's all right, you just put us down for the next time. You don't need to send the money back. We'd be quite surprised, actually. And that's very encouraging because it means they will come back and fingers crossed by the end of the year that should follow through. Of course, the fact that somebody paid last year and they're prepared to roll over, you still end up with the situation. You haven't got twice the amount of money. You only get the money once. So there are clearly cash flow issues, but we've been able to handle the cash flow issues. Okay. We've not had to have great rounds of redundancy or anything like that.

It sounds like everybody's had a level of flexibility between this.

Yeah, we're very lucky with our private equity company, which in this case is Providence, who were incredibly good, didn't come back and say, well, come on, you've got to start making people redundant. You've got to cut your head count, you've got to do all that kind of stuff. Didn't do any of that at all. We were unusual. We said right from the start, March last year, that we did not expect to run shows till the final quarter of this year, which was unusual. I think we were the only big exhibition company, certainly in England, that did that. Most people thought, oh, it'll be six months, it'll be nine months. We said, no, it'll be 18 months. And we did all our cash flows on that basis. And that was helpful because it helps your credibility with your private equity partner to say, okay, we're taking. I won't say worst case, but we're taking a really relatively pessimistic view and this is what we're going to do about it. And we did all the obvious things. Everybody took 25%, 30% salary cuts, the directors took 50%, salary cuts, all the kinds of stuff you'd expect.

Bill, what's the craziest thing you've seen in M and A?

Oh, yeah, you said you'd give me that as the last question. I've actually got a good one for you. At least I think it's a question. Good one. I've had quite a few publishing companies over the years as well, and one of the biggest happened to be domiciled in Paris. And it was a magazine publishing company which published pretty well every market in Europe. And really all the work was done in London. But it so happened that it was a French domicile business. This was 2010, 2011, when we did this deal. It's quite a big deal. It was €150 million in the end. And all private equity companies, all venture capital companies, have got certain parameters that they work to. In other words, we really only want to be in certain sectors, or probably more accurately, we don't want to be in certain sectors, we don't want to be in retail or we don't want to go. So they only work in certain sectors and they work to a certain size. In other words, we're interested in deals between 0 and 50 or 50 or 100 or 100 to 200, and that's our sweet spot and that's what we focus on. It's the only time I've done a product deal in France, I've done one in Germany. And a lot of the European private equity based companies have got a national bias and quite a lot of the French, the bigger French ones, actually part of the basis on which they raise funds from French pension funds and the big French banks like Credit Agricole, et cetera, is that they invest only in French companies. This is quite common. I didn't know this before 2010 and we only found it out during this process. And quite a lot of the big companies are restricted in this way. Well, if you go back to 2010 and the way that the market crash in 2008, 2009 affected Europe in the 100 million to 200 million range, this is euros. There were very, very, very few deals. You've got quite a few private equity companies looking around. It had to be French domiciled and it's in the range 100 to 200 million. We had a good intermediary which was Rothschild, and they were saying, well, actually this is really interesting because there's nothing of this size come to market for the last six months, so you will get a lot more interest than perhaps you would expect. That's what happened. It was quite a good company, but believe me, it wasn't an exceptional company for old raft of reasons I won't bore you with. And we got exactly that. We got four funds saying, look, we like it, we like it, we like it. But really what they were saying was, we've got all this money, we've got to spend it and there are no deals that hit our sweet spot. And your deal is exceptional because it hits our sweet spot and it's French domiciled and we want to be in, we want to be in, we want to be in. And Rothschild were able to conduct a very effective auction which ended up, as I say, with a number around 150 million euros. And to be honest, that was not a sum of money that the house, I won't tell you who it was, should have paid. They paid it because they had to get money out of the door and it fitted their parameters and it was a French based company without boring you to tears. Six years later, my two colleagues who were still the principals running the business, I wasn't, I was chairman, bought it back for seven and a half million and the whole thing, really. I mean, I'm not saying the deal should have been 50 or 60 or any other particular number, but the success of the deal from the point of view of us as sellers was all about the fact that you had all these funds and they could only buy French domiciled companies.

Wow.

Very interesting lesson.

Yeah, that is a really interesting one and definitely one of the crazier stories I've heard. Bill, thank you so much for your time today. I really enjoyed our conversation and learning from your experience. Here's to the deal. Thank you for taking the time to explore the world of M and A with our podcast. Please subscribe for more content and conversations with industry leaders. If you like our podcast, please support us by leaving a five star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's Kison K I s o n dealroom.net M&A Science is sponsored by Deal Room, a project management solution for mergers and acquisitions. Additional educational content is available on Deal Room's blog@dealroom.net blog thank you again for listening to M and A Science. See you next time. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.