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Gambit Corporate Finance releases quarterly M&A Market Review - Human Capital

Key Observations
The significant predicted increase in UK Human Capital transactions has yet to be witnessed as M&A activity levels fell 16% compared to the previous quarter, however average transaction values increased by 25%. UK market conditions remain positive with notable increases in transactions involving healthcare recruiters and online platforms, evidence of the growing role these sectors play in the temporary recruitment market. Specific international markets such as France and Australia remain a challenge for some companies but the consensus on market sentiment remains buoyant and this continues to augur well for UK transaction activity.  We anticipate UK transaction activity to grow strongly over the next 12 months.

Industry Overview
A surge in temporary recruitment this quarter has coincided with increasing attention from regulators of the sector, culminating in the introduction of the Small Business, Enterprise and Employment Bill primarily targeting zero-hour exclusivity clauses. Wages have failed to keep pace with an increase in vacancies though skill shortages in Engineering, IT, Transport & Logistics and Healthcare are beginning to emanate.

Feature Article
We consider the emergence of Generation Y, the newest entrants to the labour market and the implications and repercussions for employers and recruiters. Hiring new talent has proven hard for employers as graduates and companies face a mismatch in desires. We examine what employers can do to both attract and retain young talent for the long term.

Public Comparables
Share prices of the 24 companies tracked by Gambit contracted by an average of 0.4% this quarter. However, they outperformed the FTSE Support Services index for an eighth consecutive quarter but lagged behind the FTSE All-Share for the first time in the same period. Average EV/EBITDA multiples followed suit and decreased by 0.8 times.

Key Observations From This Quarter:

Transaction volumes decreased by 16% this quarter reflecting a number of companies playing the “waiting game” before undertaking significant M&A activity. Acquisitions continue to account for the majority of transactions (76%). Growing popularity in the use of online platforms was evident, having doubled from 9% last quarter increasing competition for the HRO & RPO sector. Greater demand for healthcare agency workers, as predicted in our Q4 2013 review, has resulted in a proliferation of healthcare M&A activity accounting for 12% of transactions and a number of notable healthcare recruiters are understood to be undertaking or preparing for a transaction. 

A number of sizeable transactions in Q2 has supported a continuing increase in average deal value, rising 25% from Q1 and 414% year-on-year. Prominent acquisitions include Staffline’s &pound65 million acquisition of Avanta Enterprise Ltd, a UK-based work training company and the private equity backed Management Buy-out of Education Personnel, the largest provider of supply teacher and educational support staff in England and Wales for &pound300 million. With growth prospects for these sectors underpinned by long term government drives for educational improvement and a reduction in unemployment, we expect to see multiples on transactions in Healthcare, IT and Engineering sub-sectors increasing in subsequent quarters as the economy continues its recovery and companies aim to take advantage of the significant growth opportunities available. 

Mixed performance for some Human Capital companies in H1 illustrates a complex picture in international markets, with a strong pound hampering growth whilst foreign economies such as France, Brazil, Australia and New Zealand remain challenging for transnational recruitment companies. Equity markets reflect such concerns with share prices on average contracting by 0.4% for companies tracked by Gambit, whilst EV/EBITDA multiples fell. However, a strong domestic market for UK companies is likely to counteract this as job vacancies reached a six and a half year high and skill shortages begin to emanate in several high tech industries. Trading updates for certain public interest companies therefore remain positive with Matchtech continuing its double digit growth in Net Fee Income, whilst Robert Half, RTC Group and Staffline all recorded continuing year-on-year growth.

Summary: Favourable M&A conditions are expected to continue for mid-market Human Capital companies

To acquire: The outlook remains positive for UK M&A activity as companies aim to realise plans for expansion. Appetite in public interest companies remains strong with favourable market ratings and available cash enabling them to pay a full market price and still be earnings enhancing.

Private equity: The Human Capital sector remains attractive to private equity as observed by increasing deal values this quarter, with several large deals backed by such institutions. 

Financing:  Debt lending remains a challenge for both lenders and borrowers. New regulation that will force banks to refer failed loan applications to alternative lenders is likely to fuel debt lending.

Human Capital Industry Overview 

The UK labour market has shown robust growth in the second quarter of 2014 with the Office for National Statistics (ONS) reporting unemployment at its lowest level since December 2008, a signal that the nation’s economic recovery is clearly gaining momentum. This is reflected among several leading recruitment companies including Robert Half, RTC Group and Staffline, as half year results indicate healthy profits and continuing year-on-year growth. However, a strengthening pound mixed with unfavourable international market conditions has proved challenging for a number of international firms including Michael Page, Randstad Holding and Robert Walters leading to a fall in profits this quarter. The latest REC Report on Jobs claimed demand for temporary staff expanded at its fastest pace in June for over 15 years, while permanent placements alone have hit a four-year peak. Consequently, industry concerns have largely focused on the quality and security of placements as reflected by several pieces of legislation passed this quarter.

These include the Small Business, Enterprise and Employment Bill which introduced a ban on exclusivity clauses within zero-hour contracts. Whilst the move was welcomed by most, ONS figures reveal as little as 150,000 of the 1.4 million workers on zero-hour contracts hold exclusivity clauses, suggesting the bill will have a minor impact regarding concerns surrounding exploitative employers. 

However, other elements of the Bill include a maximum penalty of &pound20,000 & lsquo;per worker’ rather than & lsquo;per notice’ for breach of the national minimum wage matching new regulations in May that doubled penalties surrounding employment of illegal workers. Furthermore, extension of the Regulation Freeze to enterprises with fewer than 50 employees will be welcomed by the business community, allowing firms to avoid new regulations if resulting in a disproportionate burden to a company’s growth. This is inevitably further good news for small businesses, a sector which is increasing recruitment at the fastest rate since 1998 according to the CBI SME trends survey, providing a sustainable boost to long term economic growth.

Whilst falling competition for jobs further heightens the sense of positivity that pervades the job market, wages have failed to increase in line, amplifying cost of living concerns as inflation leapt from 1.5% to 1.9% late in the quarter. Despite the strong showing in June, average salaries are still 1.2% less than last year.  

However, as job vacancies continue to rise, certain industries are finding it more difficult to retain their most valuable employees. Sectors such as Engineering and IT have witnessed large salary inflation this quarter as skill shortages are beginning to emanate. The trend has been mirrored in the UK Public Health sector with large cuts to the NHS, fuelling an unsustainable dependence on agency temporary staff. Furthermore, introduction of Driver CPC legislation on the 9 September will add further barriers to entry to an already stretched labour pool in the supply chain and logistics sector, likely to result in a skills gap in Q3. Conversely, such an increase in demand is good news for graduates who have seen their income rise 5% year-on-year since 2013, a clear sign that employers are looking to the long term. These encouraging signals seem likely to continue into following quarters as reports claim employers are expecting to hire 18% more graduates this year.  

Feature: Getting a Grip on Generation Y - A challenge or opportunity for companies suffering recession hangover? 

By: Joe Pithouse, Analyst 

As the economy is starting to pick up and the Human Capital market benefits, increasing attention is being given to the newest entrants to the workforce, Generation Y (“Gen Y”). Generally defined as the demographic cohort born between 1985-1995, Gen Y has received mixed billing from commentators, with remarks ranging from “self-sufficient, confident, and brilliant” to “needy, impatient and cocky”. Statistics do not paint a bright picture for employers either, with one in four graduates quitting within a year of starting work and two out of three graduates regretting accepting a job offer as soon as they start in the role. Furthermore, research by the London Business School claimed 90% of Gen Y employees do not intend to stay with any given employer for more than five years, signalling a dramatic shift in the mind-set of this growing portion of our workforce. 

So why are Gen Y so hard to hold on to? And what can employers do to attract and retain their new employees?

The current problem has largely emanated from graduates limited by choice in the recession, applying for jobs that do not interest them in order to secure their first role while they search for the career they want. This is being exacerbated by employers who are casting too wide a net in their recruiting methods in search of their notion of & lsquo;top’ graduates rather than targeting candidates that are a strong fit for their business. Dubbed a & lsquo;game of roulette’, such poor graduate recruiting has amounted to a sunk cost of approximately &pound112 million in 2013, a number which is only likely to rise in a recovering economy. A lesser known issue regarding Gen Y is the cultural shift within this generation. Succession planning and personal development are paramount when hiring these new workers as a clear and transparent route forward is required for a generation often impatient and over-ambitious in their desires to climb the corporate ladder. With & lsquo;lack of opportunity’ often cited as the main reason (20%) for resignations in the last 12 months and one in five businesses admitting to having no formal approach to succession planning, this gap must be addressed in order to limit the high churn rate witnessed in current markets. 

Furthermore, money is not a major concern for Gen Y. Employees are more likely to value the chance to demonstrate talent and recognition of making a contribution. In addition, flexibility is key on the part of the employer, with offers of regular sabbaticals, the chance to work from home, movement between work projects and flexible working hours all becoming necessary recruitment strategies in order to attract and satisfy such employees. Whilst these requirements may seem unrealistic for SMEs, the statistics indicate Gen Y are more likely to join such enterprises as they offer an opportunity to make a greater impact. Macro-management is therefore a preferable strategy from the perspective of employers in order to provide the autonomy required for Gen Y employees to work efficiently. 

Deemed the most high-maintenance, yet potentially high-performing generation in history, it is evident that Gen Y presents a plethora of challenges for employers. Nevertheless, if harnessed effectively, this tech savvy and independent minded generation could be an invaluable asset to companies who must continually adapt to stay relevant and attractive to today’s graduates.  

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