Small firms face a growth dilemma

Last week’s PLC Awards, sponsored by the Stock Exchange and PricewaterhouseCoopers, were an opportunity to reward and celebrate success among smaller quoted companies. Amid all the celebration, however, there was tacit recognition of the plight of unloved SmallCap companies with few prospects of success. The engineering sector’s difficulties were obvious at the ceremony apart from […]

Last week’s PLC Awards, sponsored by the Stock Exchange and PricewaterhouseCoopers, were an opportunity to reward and celebrate success among smaller quoted companies.

Amid all the celebration, however, there was tacit recognition of the plight of unloved SmallCap companies with few prospects of success.

The engineering sector’s difficulties were obvious at the ceremony apart from Bullough, shortlisted for the quality of its annual report, there were no engineers on any shortlist.

Electronics companies did well, with Filtronic and Psion both winning awards. But for more traditional companies, even those in high-tech areas of the aerospace, space and automotive markets, there was no chance of a look-in.

With the gap between the main FTSE-100 index and the SmallCap sector as wide as ever, the only way of bridging the divide is by growing aggressively. Yet with depressed share prices, the chances of share-based deals are greatly reduced.

This isn’t to say they can be ruled out altogether. Senior Engineering is one company where takeover targets have been happy to take an equity stake. But for many others, pricing pressures, unfavourable exchange rates and market downturns make improved ratings difficult.

There are signs of fund manager disquiet. Many are actively pushing companies capitalised at below £50m in the direction of predators trade buyers and venture capitalists which can exploit the value locked up in the business. Those who want to remain on the market are being told they have to plan to double in size and then double again.

Parts of the engineering sector are due a re-rating better than expected results from GKN, for instance, mean the market cannot justify the lowly level.

The £94m stake US buyout specialist Kohlberg Cravis Roberts took in TI Group recently is further evidence that US financiers can recognise value even if their UK counterparts cannot.

However, stragglers will remain. Several manufacturers and engineers present at the PLC Awards admitted they have an uphill task in convincing the City of their worth.

Fund managers say the solution to their lowly ratings is in their own hands. They have to grow, and quickly.

Growth can be financed in numerous ways increasing borrowings, disposing of non-core operations or paper transactions. The radical option of a move off the market is the last resort. But it is one that more companies are considering.

British Fittings Group last week became the latest to announce plans, following Concentric and Wellman as other Midland engineers to have gone private, and Wyko, which recently admitted it was weighing its options.

BFG was hit just a day later by a third-party approach, showing how many potential predators are simply waiting to see where management thinks there is value before swooping in for the kill after the initial hard work has been done.

SmallCap companies which cannot grow must accept the hard truth that the status quo is not an option.

Guy Dresser