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Tom Phipps

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Can Flexible New Deal invigorate M&A within the UK training sector?


Tom Phipps investigates how the government's latest initiative to boost the training sector is panning out.

The Office for National Statistics recently announced that unemployment levels have risen to 2.49 million, the highest figure in 14 years. Claims for unemployment benefit in November 2009 now stand at 1.63 million. The data also showed that a quarter of people aged between 16 and 24 are looking for work - the highest figure on record. The current problem is exacerbated by the number of school leavers attempting to enter employment for the first time, many of whom have limited or no vocational training.
Despite some recent small signs of recovery, the overall figure is expected to rise further in 2010 as improvements in the economy take some time to filter through to the job statistics. 

Enter: the Flexible New Deal (FND)

With an election on the horizon, pressure is building on the government to put a halt to these rising statistics or at least highlight a strategy which will have this effect. Employment minister Jim Knight said recently: “We know things will still be tough for some time and unemployment is likely to keep increasing, even once the economy starts growing again – that’s why it’s critical that we continue investing in people’s future and don’t just abandon them.” The Conservatives at their recent conference have already positioned the reduction of unemployment at the core of their election campaign.
Of critical concern is the growing number of long-term unemployed, which the government wants to target by encouraging more people into training. Following the launch of the latest Flexible New Deal (FND) on 2 January 2010, the government is hoping to help the long-term unemployed back into work. Contracts have recently been signed with private or third sector contractors who will be rewarded by the results they achieve returning people back to the workplace as well as preparing them for employment.  However, the name of the game is to provide the unemployed with the skills they need to rejoin the labour market.
The launch of FND contrasts with the difficulties facing the corporate training market. While there is a very valid argument to continue training staff during a downturn; rationalisation programmes, expenditure cuts and limited recruitment have reduced numbers entering training programmes. Corporate training budgets along with marketing spend were one of the first costs cut when the downturn began. The professional services industry which was a large investor in training has made considerable cutbacks and there is a direct correlation between reductions in overall headcounts and the resulting reduction in training. As a result professional skills training companies have been some of the hardest hit by the downturn.  
Whilst M&A activity in this sector has been impacted alongside the rest of the market, the counter cyclical nature of government funded training continues to make this market attractive to buyers. In addition, the longer term nature of FND contracts will also attract new entrants into the market.

The early bird catches the worm

The initial round of FND bidding saw the likes of G4S and Serco – both large BPO providers, with limited training exposure - submitting tenders alongside more established providers such as A4E and Reed. DWP will be looking to award contracts to companies that can guarantee excellent service provision and the necessary delivery capability. The difference between FND and the government’s original New Deal, introduced ten years ago, is the size and longevity of contracts which is beginning to attract the attention of larger corporates. While these bigger companies can enter the market directly, their chances of winning contracts will be greatly enhanced if they partner with an established vertical sector player.
This could prove to be the catalyst behind further market consolidation in a sector that is still largely fragmented. Only a minority of training companies have sales in excess of £15 million, with the vast majority being smaller, more niche owner managed businesses. In addition with the demise of Carter and Carter and the takeover of BPP and QA Group, there are only a very small number of training companies that are quoted. Vocational training and assessment business, Melorio, for example, which Livingstone Partners worked with recently on its acquisition of gas, electrical and plumbing training business Gas Logic is one of the few quoted companies in the space. The rest of the market includes a multitude of companies with sales of £10 million or less. With government expenditure likely to be more skewed to the employability, rather than the skills / apprenticeships space, our view is that groups with a very strong focus on the latter may look to balance their portfolios by buying companies that have an established position in this part of the market.
Many believe that the introduction of FND will result in mergers and acquisition activity increasing over the coming months. With FND contracts constituting multi-million pound deals set out over a minimum of five years, training companies that win these suddenly become very attractive to both strategic buyers and private equity investors. These longer term contracts have also begun to attract the attention of international acquirers.


Tips for selling

For companies looking to sell there are a few basic guidelines to follow in order to make themselves an attractive target. Firstly, security of contracts is crucial, this relates not just to deals secured through FND but all client contracts whether as a prime or sub-contractor. A potential buyer will want to see an order book full of medium to long term contracts, with a balance of employability and skills that the training provider is sufficiently able to fulfill.

Having the right management structure in place is also important. Only having one person on the management team is not enough of a draw for a long term investor. It is also beneficial to offer a specialism. Whether this is geographical or market specific, being the best in your chosen sector is more likely to attract a potential acquirer.
Having completed deals in the sector in the past few years we have a genuine knowledge of how training businesses work, how they operate and the funding streams available to them. We genuinely see this as a time of both change and opportunity for the training sector.

Tom Phipps is the director at Livingstone Partners.


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