Consolidation: Building for the future

UK investor Sovereign Capital is a buy-and-build specialist and recently announced the latest acquisitions to be bolted on to its funeral home business, LM Funerals. Sovereign has so far grown the business from 29 funeral homes to 63, having first backed the company, formerly known as Laurel Management, in 2003. It says the funeral homes market offers the kind of opportunities which make it highly suitable for consolidation.

"We look to buy platforms in fragmented marketplaces, and with around 2,600 independent businesses in the funeral homes market, there are a lot of opportunities," says Kevin Whittle, partner at Sovereign Capital. Funeral homes benefit from a steady business, as death rates are relatively stable and projected to start rising from 2015, and thus have predictable revenues and a high rate of cash conversion.

Sovereign's strategy for LM revolves around leveraging upon back-office services, such as centralised accounting, and enabling the businesses to offer a wider range of products and services to the bereaved. However, acquired businesses keep their own branding, as local awareness is important in the industry. "Many of the businesses we acquire have built up a lot of goodwill in their local communities, with many of them having been around for generations or even centuries," explains Whittle.

Sovereign adopted a similar strategy in the veterinary market with CVS. With over 3,000 independent veterinary practices in the UK, CVS was able to bring a number of businesses together, allowing their vets to focus on clinical care without administrative burdens. The business floated in 2007, with Sovereign reaping almost 12x its investment.

Respecting the concerns of vendors can also be central part of a successful consolidation business, according to Whittle. "Many of our vendors have their name above the door, and are well known in their local communities. They want to ensure they are selling their business to someone who will respect and nurture it, and it's important we respect their wishes."

Elsewhere, recently created Ashridge Capital has, together with Core Capital, formed Ark Healthcare to target buy-and-build opportunities in the domiciliary healthcare sector. The platform was built from three existing home healthcare providers, and plans to acquire up to 20 businesses. Stephen Edwards of Core Capital says: "Ark is typical of the businesses we want to back. The domiciliary care market has strong growth potential, is highly fragmented, and Ark is fully resourced with management and capital to become a leading consolidator in the market."

The UK market has many small businesses operating in highly fragmented marketplaces which could benefit from the improved efficiencies offered in a larger operation. For consolidation players than can identify appropriate marketplaces, understand the specific needs of their target sector and, most importantly, work with vendors, buy-and-build can reap substantial rewards.

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