Case Study: Jim McColl on how to persuade banks to back expansion plans

Turbulent times in the financial markets haven't thrown a spanner in the works for Clyde Blowers' international expansion plans, writes Patrizia Rossi.

It’s not every day that the words “billion dollar” precede “British manufacturing deal”. But Scottish entrepreneur Jim McColl, CEO of engineering group Clyde Blowers, has managed to persuade the UK’s largest banks to back his nine-digit expansion plans.

A self-made man and one of Scotland’s wealthiest, McColl has done what some might call impossible: rounded up a consortium of debt providers and equity partners to finance a $1 billion deal during a financial crisis that has been likened to the Great Depression.

The deal, which swallows up four businesses within Textron’s fluid and power unit, will swell Clyde Blowers’ portfolio of companies from four to seven, almost doubling the number of employees to 5,000 and boosting turnover from £700 million to £1.2 billion.

Some 45 per cent of the hefty $645 million price tag was funded by HBOS, Barclays, RBS and HSBC. Working capital and integration costs are estimated to push the value closer to $1 billion. Clyde Blowers will also assume $41 million of employee benefit liabilities.

The vendor, a US aerospace and defence company ranked 202 in the Fortune 500 this year, will receive $526 million in cash along with a six-year note worth $28 million and an additional $50 million provided certain targets are met.

“We started looking at the deal last September before the credit crunch really gripped. As we progressed through the transaction, debt funding became tougher to obtain and dropped by around 20 per cent. Equity funding had to go up. Everyone was nervous that the banks wouldn’t follow through, but they did,” he says.

The banks looked to McColl to pick up the slack.

The balance came from Clyde Blowers Capital Fund II, a £230 million war chest established by the engineering group and raised by JP Morgan Cazenove, with HarbourVest Partners in Boston and the UK’s Pantheon Ventures among its lead investors. McColl is reluctant to shed light on how much of the fund was invested in this latest deal, but reveals that a there is a “significant amount” available for future bolt-on acquisitions.

Other co-investors on the deal included Houston-based private equity group SCF Partners.

“It was a turbulent time in terms of funding. At one stage, we had to drop a co-investor in one of the four businesses. Initially, we were looking to take a 60 per cent stake in the company, but in the end we bought the entire company because the co-investor wasn’t aligned to our values, or way of thinking,” adds McColl.

“There were various stages where advisers didn’t think the deal would come off. It required sheer determination and focus on what we had to do to get it over the line.

“I’ve been through two recessions and haven’t seen this kind of nervousness.”

Good to talk

Negotiations with Textron began late last year when McColl set out to convince the group to sell him Union Pumps in Michigan. He was looking at the business as a bolt-on acquisition to Clyde Pumps, created by McColl with the £45 million acquisition of Weir Pumps in May 2007.

Once regulatory approval has been gained, the Union Pumps deal will make Clyde Pumps the largest pump supplier to the nuclear industry. The group’s end markets are the highly buoyant nuclear energy, conventional energy and oil and gas sectors.

But McColl didn’t stop there.

UK-based David Brown Hydraulics, David Brown Gear Systems and Maag Pumps of Switzerland followed. McColl explains that the deal took longer to close than expected as banks got cold feet and new sources of equity had to be found. “The banks were focused on being extra careful. They did exhaustive due diligence. It was almost like they were checking and then double-checking to make sure everything was good to go,” says McColl.

Graeme Bruce, partner at Dundas & Wilson LLP, who advised on the four acquisitions, tends to agree: “Logistically it was a lengthy process; co-ordinating due diligence of operational assets over 19 different jurisdictions was a full-time job for a couple of people for a couple of months.

“From a legal perspective, it was quite challenging as there were four deals rolled into one, with four debt facilities over four product lines from four different groups, which definitely made things more complicated. It didn’t quite quadruple the amount of documents, but not far off.”

Overseas expansion

Headquartered in East Kilbride, Clyde Blowers is a speck of light in British manufacturing gloom – nationally, output, employment and new orders tumbled last month, according to the latest Purchasing Managers’ Index (PMI) as UK manufacturers faced weak domestic and foreign demand for their products. The housing and construction industries were particularly hard hit.

Bruce observes: “At this time, many of our clients are retrenching, or waiting to see what will happen in the financial markets. Activity is mainly behind being driven by sales, divestments and restructuring work. Clyde Blowers is one of few clients expanding in a positive way.”

Craig Anderson, head of KPMG in Scotland and who has worked with McColl since 1999 when he led the MBO at Clyde Blowers, is also upbeat about the Scottish manufacturing group. He explains that McColl’s strategic mind is behind the group’s rapid expansion since it was taken private in 1999. The group sells into buoyant, high-growth sectors and then tends to consolidate. “He is very much a glass-half-full type of guy.”

Clyde Blowers has come along ways since McColl led the MBO almost ten years ago.

“When we took the company private there was a financial crisis in Southeast Asia, the stock market was turned down and really switched off for small companies in terms of funding. Our vision was to split the company into industry focused groups and diversity, but within markets that we understood. This is how we have the position we hold today,” says McColl.

He believes that UK manufacturers have been slow to globalise and to gain a foothold overseas while retaining a base in the UK. “People tend to be fearful that opening up overseas means job cuts at home – that doesn’t have to be the case. Once you expand overseas, it generates business at home. In the early days, UK businesses were too slow to manufacture and sell in the big markets like India and China.”

UPDATE: As this article was published, McColl was on the point of signing a joint venture in China to build on existing business and also has the Middle East within his sights. “I need to get this deal bottomed out to get on and make the next deal.” he says.

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