Commenting on the acquisition, G4S CEO Nick Buckles said: “We’re tremendously excited to announce the acquisition of ISS and, in doing so, create the world’s largest integrated security and facilities services group.”
Buckles continued: “Since G4S was created in 2004, we have grown our business significantly and expanded our service offering beyond our traditional security heritage into much broader areas of facilities services and outsourcing in order to meet growing customer needs. We believe this acquisition will transform our business, significantly accelerate the delivery of our solutions strategy and create substantial value for shareholders.”
In conclusion, the delighted G4S leader explained: “G4S and ISS have very similar cultures and strategic ambitions as well as a strongly shared vision for providing service excellence to customers across the security and facilities services spectrum. The acquisition will also provide significant opportunities for staff at all levels to develop and broaden their skills into complementary areas as part of a combined team of more than one million G4S employees.”
Based on the companies’ joint fiscal results for 2010, this bold takeover by G4S will create a consolidated operation with combined revenues of close on a massive GB pound 16 billion.
G4S fully expects what is one of the biggest deals ever in the security world to deliver double digit earnings-per-share accretion within three years.
Financial details of the deal
The purchase of ISS from funds advised by EQT Partners and Goldman Sachs Capital Partners will be paid for in cash and new shares of the enlarged group.
In real terms, the price quoted is equal to eight-and-a-half times the pinpointed earnings of ISS, with G4S believed to be raising something around the GB pound 2 billion mark to pay for the deal by dint of a rights offering.
G4S has most certainly put its money where its mouth is, having first talked of a concerted market move towards the ‘bundled services route’ at the 2009 Security Industry Authority Stakeholder Conference.
The view from G4S is that this buy-out deal will also generate a substantial GB pound 100 million pounds in annual cost savings by 2014, not to mention drive growth in what the group describes as “emerging markets” (further details of which anon).
Jeff Gravenhorst, current ISS CEO, will join the G4S Board on completion of the acquisition as chief operating officer and regional CEO for Europe, bringing with him a wealth of experience in facilities services including almost a decade at ISS.
Speaking about the deal, Alf Duch-Pedersen (chairman of G4S) said: “This acquisition brings together two high quality companies and management teams with a very strong business performance and integration track record. We have a compelling strategy, significant experience in meeting a wide range of customer needs and in motivating a large and diverse workforce to deliver excellent service to our customers.”
He added: “I’m delighted that ISS CEO Jeff Gravenhorst will be joining the G4S Board, and I look forward to welcoming him and the ISS management and employees into the group.”
Approval of the transaction
The acquisition and rights issue are subject to G4S shareholder approval at a General Meeting to be held on 2 November at 2.00 pm.
Naturally, the acquisition is also subject to customary closing conditions (including securing the necessary regulatory and anti-trust approvals).
Deutsche Bank and Greenhill will be acting as joint lead financial advisors to G4S on the deal, while Deutsche Bank and RBS Hoare Govett serve as joint global co-ordinators and joint corporate brokers to the security giant.
HSBC and RBS Hoare Govett are also providing financial advice in relation to the deal.
Summary of the transaction structure
G4S has agreed to acquire 100% of ISS for a total enterprise value of approximately GB pound 5.2 billion reflecting a multiple of 8.5 times ISS’ last 12 months EBITDA.
FS Invest II (the sole shareholder of ISS and a company indirectly owned by funds advised by EQT Partners and GS Capital Partners) will receive DKK 130 per ISS share, equivalent to around GB pound 1,528 million in total. 50% is to be paid in cash and 50% in G4S shares, with these shares being subject to a nine-month ‘lock-up’.
The transaction is to be funded through a combination of a 7 for 6 fully underwritten rights issue to raise approximately GB pound 2 billion and new debt facilities (which will also be used to refinance existing debt). The latter have been fully underwritten by Deutsche Bank, HSBC Bank and The Royal Bank of Scotland.
Accelerating G4S’ strategy and creating a platform for further growth
The G4S Board feels that the combination of G4S and ISS provides a significant opportunity to accelerate delivery of G4S’ integrated facility services (or ‘solutions’) strategy in response to customer demand and address what the G4S directors believe to be a current market supply gap for such services.
In essence, integrated facility services is the provision of multi-service types under one contract – together with on-site management – through a single point of contact with the customer which allows the facilities services functions themselves to be integrated at the customer’s premises.
The G4S Board also believes that an ‘enlarged G4S’ will have a strong base from which to develop its integrated facility services proposition with a significant proportion of 2010 revenue in such services or solutions contracts (in 2010, 20% of ISS’ revenue was derived from integrated facility services contracts while 30% of G4S’ revenue last year emanated from solutions contracts).
The G4S Board feels that G4S and ISS operate in complementary geographies with overlaps in over 40 countries. On that basis, it’s fully expected that the deal will provide significant opportunities for cross-selling.
In addition, there are a number of countries where only one business is present today, thereby yielding opportunities to broaden the enlarged G4S’ offering in those markets. In particular, the enlarged G4S will be able to build upon ISS’ presence in European countries including Spain, Italy and Switzerland, while G4S’ own footprint throughout the Middle East and Africa offers the perfect platform from which to launch and develop ISS’ service lines in those regions.
Bringing together two market-leading businesses
The acquisition brings together two market leading businesses with complementary strategies and service lines to create a market leader in integrated security and facilities services. A market leader with expertise in individual service lines, which is a key customer requirement, in addition to vast experience of providing bundled services and integrated facility services.
The group will continue to have significant exposure to the faster-growing developing markets, representing around a quarter of combined G4S and ISS 2010 revenues and targeted to increase to 50% of revenue by 2019.
In the first half of 2011, G4S’ new markets businesses delivered organic growth of 9% while ISS’ emerging markets delivered strong organic growth of 14%.
The combination provides Best Practice sharing opportunities which the G4S Board fully expects will improve the performance of ISS’ emerging markets businesses in line with that of G4S and enable the enlarged G4S to transfer ISS’ integrated facility services expertise into multiple G4S developed markets. It will also create an integrated facility services proposition to meet customer demand for such solutions.
The G4S Board states that the enlarged G4S will be well positioned to target what it estimates to be a GB pound 500 billion global facilities services market with the aim of developing longer term partnerships with customers, driving better value for those customers and generating more predictable, higher quality earnings for G4S.
Creating value for shareholders
The combination of its own business with the ISS offering will create shareholder value with expected:
- cost synergies of approximately GB pound 100 million per year by 2014 (primarily through reduced central, regional and national overheads with one-off implementation costs of approximately GB pound 100 million)
- investment of GB pound 20 million per year by 2014 in ‘Service Excellence Centres’ that will build on existing expertise in service standards and systems
- post-tax returns on invested capital which are ahead of G4S’ weighted average cost of capital within two years
- earnings per share (before goodwill amortisation and exceptional items, including one-off costs associated with the integration of ISS) accretion in the first year following completion and double digit earnings per share accretion within three years
- post-combination PBITA margin (post synergies and before one-off costs associated with the integration of ISS) which will be in line with G4S’ current level, with the potential to enhance margins in the future from increasing developing markets revenue, sharing of Best Practice, cross-selling and increasing the contribution from solutions contracts
- further value from significant revenue opportunities and enhanced future growth prospects
The G4S Board is targeting an effective tax rate of approximately 24% for the enlarged G4S and combined cash conversion of at least 85%.
Compelling service proposition for customers
The acquisition enables G4S to offer a full range of integrated security and facilities services, and to meet demand from national and multi-national customers who require:
- management of risk and reputation protection
- quality and consistency of security and facilities services (across both individual sites and countries)
- better visibility and management of costs
- a single account management structure and accountability for service delivery
- access to the latest technology and service innovation
- a commitment to continuous improvement in terms of cost and service
To ensure the enlarged G4S continues to deliver service excellence and focuses on customer needs, G4S is intending to invest GB pound 20 million per year by 2014 in creating ‘Service Excellence Centres’ to share Best Practice across the group, including common systems and processes, and to deliver global consistency for an increasingly international customer base.
ISS has been successful in the implementation of large integrated facility services contracts with major customers such as Citi in the EMEA region and the United Kingdom Foreign & Commonwealth Office in Asia Pacific and Telefonica.
G4S has delivered integrated facility services – particularly in the Government sector – for some years now, and only recently announced a major contract with the UK’s Ministry of Justice for integrated facility services across its courts and related buildings.
Strong management team with extensive integration experience
The enlarged G4S will have an experienced combined management team at a corporate and regional level with a strong performance track record, substantial integration experience and a shared vision for integrated facility services and the combined group.
G4S’ own management has experience of acquiring and integrating over GB pound 800 million (consideration of GB pound 630 million plus net debt) of acquisitions since 2008, including the integration of GSL (a large Government outsourcing business) in 2008 and the successful integration of Securicor plc and the security business of Group 4 Falck A/S in 2004. ISS’ management also has strong integration experience, having acquired and integrated over 600 acquisitions since 2000.
The two organisations have similar cultures and extremely strong operational management teams well positioned to deliver service excellence for their customers.
ISS: a quality business which adds value to G4S
G4S and ISS have a shared tradition of respect for employees: people are central to the success of both G4S and ISS. The enlarged G4S will continue to invest in processes, training, skills and tools to provide employees with the means to deliver excellent service and to be proud of the role that G4S employees play in society as a whole.
The creation of the enlarged G4S will also provide career opportunities for multiple layers of the combined workforce given the geographical and service breadth of the combined group, and it will feed additional high quality employees into the succession pipeline.
For its part, ISS is one of the world’s largest facilities services providers with more than 535,000 employees in over 60 countries. In 2010, ISS posted revenues of GB pound 8.5 billion and PBITA of GB pound 481 million.
ISS offers its customers a range of facilities services, among them cleaning services, property services, catering services, support services, security services and facility management services.
ISS has delivered positive organic growth (including during the recent global recessionary period) and an organic growth rate of 6.0% in the first half of 2011. In the same period, ISS’ emerging markets organic growth was a strong 14%. ISS has also achieved strong operating margins, averaging 5.8% per year since 2005 and strong cash conversion averaging 98% over the same period.
Earlier this year, ISS backed away from initial plans to sell shares in a public offering mainly because of weak capital markets, and the company had said it might revive an IPO.
CEO Jeff Gravenhorst commented: “Since ISS was taken private we have successfully developed and implemented our strategy and transformed the company to a global leader in facility services. We built the delivery platform both through acquisitive and organic growth. Since the beginning of 2005 the average organic growth has been 4% per annum and we are today reporting 7% organic growth for the third quarter of 2011. Together, the two companies will create an even stronger platform for the future.”
Ole Andersen, chairman of the Board at ISS, explained: “The combination of ISS and G4S is a good fit both industrially and culturally. Together, they can increase their exposure to the significant growth opportunities in emerging markets and accelerate their efforts in the growing market opportunity for integrated facilities services.”
Andersen also stated: “The corporate cultures complement each other and the highly competent senior management at both G4S and ISS will together create a strong and experienced team to lead the combined group.”
Current trading at ISS
This morning, ISS has reported preliminary results for the nine months covering 1 January-30 September 2011. The key facts to note are as follows:
- revenue up by 6% to DKK 57.8 billion (driven by organic growth of 6.4%)
- for the third quarter organic growth was 7.0%: this marks the eighth consecutive quarter to be charactyed an increase in the organic growth rate
- operating profit before other items increased by 4% to DKK 3,180 million in the first nine months of 2011
- operating profit increased by 7% to DKK 2,958 million in the first nine months of 2011
- North America, Latin America and Asia all delivered double-digit organic growth rates (the emerging markets delivered organic growth of 13% for the first nine months of the year)
- operating margin (operating profit before other items as a percentage of revenue) of 5.5% for the first nine months of 2011
On these results, Jeff Gravenhorst said: “We’re encouraged by our results for the third quarter and for the first nine months of the year. We’re continuing to grow our business both in developed and emerging markets with increasing momentum now for eight quarters in a row. Our focus on integrated facility services, where we are continuing to expand our footprint and our strong presence in emerging markets and where we have more than half of our employees, is a strong driver behind our growth and success.”
In conclusion, the ISS leader opined: “With the announcements today, we are ready for a new era together with G4S. By combining the two companies which share history, culture and strategy, we will create an even stronger platform for the future.”
Latest statistics on group revenues
Group revenue at ISS amounted to DKK 57.8 billion in the first nine months of 2011. This represents an increase of 6% compared with the same period in 2010, and has been driven by organic growth of 6.4% and a positive effect from exchange rate movements of 1% (which was offset by negative net growth from acquisitions and divestments of 2%).
The organic growth of 6.4% in the first nine months of 2011 was a continuation of the positive organic growth trend seen in 2010, fuelled by the start-up of several large integrated facility services contracts in 2011.
Organic growth was 7.0% in the third quarter of 2011 and marks the eighth consecutive quarter where an increase in ISS’ organic growth rate has been posted. North America, Latin America and Asia delivered double-digit organic growth rates.
Operating profit before other items increased by 4% to DKK 3,180 million in the first nine months of 2011 compared with the same period last year The operating margin (ie operating profit before other items as a percentage of revenue) of 5.5% for the first nine months of 2011 was 0.1 percentage points below the comparable period in 2010.
Operating profit increased by 7% to DKK 2,958 million in the first nine months of 2011 compared to DKK 2,761 million in the first nine months of 2010. This increase was due to the rise in operating profit before other items as well as a net decrease in expenses recognised as other income and expenses (which was achieved despite recognition of costs of DKK 100 million primarily related to IPO preparations).
The preliminary balance sheet position and the preliminary LTM cash conversion as at 30 September 2011 is slightly lower than in previous periods as a result of a change in payment terms of VAT and payroll and social taxes in certain countries combined with strong organic growth and a slight increase in debtor days.
The emerging markets (comprising Asia, Eastern Europe, Latin America, Israel, South Africa and Turkey), where more than half of ISS’ employees are located, delivered organic growth of 13%. That’s 19% of total revenue and 37% of total organic growth for the group as a whole.
In addition to boosting organic growth, these emerging markets delivered an operating margin of 6.8% for the nine-month period ending 30 September 2011: well above most mature markets.