Floating the Oval boat

Everything is subject to change. At the time of its founding in 2004, Oval said that listing the business was not part of its plan.

Now, chief executive Phillip Hodson is suggesting a float could happen within two years.

What is slightly strange is the timing of the move. For the very reason why floating would not make sense now – namely the prevailing economic climate – is the rationale behind Oval's summer suspension of its broker buying spree.

But despite the obvious implication of the latter development the company has, thanks to a strong set of 2007 results, emerged relatively unscathed.

Depending, of course, on what side of the Oval you’re sitting.

However much Hodson may want to suggest that Oval is more national broker than consolidator, the market does not seem to see things that way. More importantly, neither do the company’s financiers.

While other brokers have secured significant capital backing in recent months – and subsequently increased the size of their acquisitions – Oval has remained relatively quiet since its bankers Barclays and Lloyds extended its £53m facility by £15m in November. It has continued to buy small-to-mid size brokers, and this year fulfilled one of its core objectives of creating seven regional hubs into which it can roll future acquisitions.

Hodson adds the broker has around £80m at its disposal; a quarter of which is cool, hard cash, ready to be spent. And then there’s private equity backer Caledonia, who have demonstrated their commitment to the business by the granting it a further £9m so far this year.

But given the fact that the acquisition of Perkins Slade (albeit now dead in the water) would have cost Oval around £20m, Caledonia’s latest cheque is, as one source close to the broker says, “absolute peanuts.”

The cessation of Oval's acquisition drive, following so soon in the wake of Towergate’s scaling back, inevitably suggests liquidity issues.

“There’s not a problem with the business," a senior market source comments. "They’ve just run out of money.”

“Despite the obvious implication of halting its acquisition drive, thanks to a strong set of 2007 results Oval has emerged relatively unscathed.

But Hodson, while maintaining that discussions with regard to securing further finance are set to conclude, insists that the decision is not about Oval’s finances, but the finances of both targets and rivals.

“Look at what’s going on,” Hodson says. “We’re not paying silly prices, especially when you are not sure about the sustainability of your acquisitions.”

Most commentators would agree with Hodson that the balance of power at present rests with sellers, not buyers of businesses. And many have suggested that one consolidator, Giles, is prepared to offer more than the rest.

Whatever the case, if Oval wants to become £200m brokerage as Hodson says – including £140m by this time next year – it will have to make good on its pledge to resume buying in the Autumn.

How many of the seven other acquisitions it has on hold will still be available will be interesting to see, but Hodson clearly isn’t holding his breath.

More important for both Hodson and his private equity partners is the sustainability of the business. Good news then that revenues and earnings have both soared in the past year, and pre-tax profits have more than doubled to around £8.5m.

It is this as much as anything else that puts Oval into a different bracket from its consolidator cousins.

Oval’s business, 85 per cent of which is corporate, is characterised by high levels of client retention, such as 97 per cent in its high-end corporate business: up two per cent year on year. Coupled with a strong reputation among its senior management, the businesses' geographical scope, and Hodson’s desire to integrate and centralise the business, it is not hard to see why the company continues to be touted as a top acquisition target – and now, a company being primed for a float.

Given the shortage of targets with sufficient scale and quality, rumours of a sale will inevitably persist – and all the more so considering the number of chief executives, including David Slade himself, who have insisted they will not sell and subsequently changed their minds.

Hodson is clear on the need to raise equity, as opposed to debt in order to assert independence of the company, both to quash those enduring sale rumours, and also head off criticism of Allianz’s involvement in the strategic direction of the company.

He is also clear in his message that only small insurer stakes are an option – and even then, not a particularly good one.

“More important for both Hodson and his private equity partners is the sustainability of the business. Good news then that the company is turning a healthy profit

“Four or five insurers have offered to buy stakes over the past three years,” he says.

As for future stakeholders, he adds: “We’re probably going to have to say, ‘no thankyou’.”

Another option for Oval – switching its equity backers – is most people’s guess, but Hodson describes this as a “one in a billion chance,” stressing the importance of Caledonia’s ‘culture’ not just the depth of its pockets.

Given Oval’s aforementioned profitability, there is little reason to think Caledonia, who own 38 per cent of the company, could be looking for an exit. Unless, that is, they don't like the involvement of the aforementioned Allianz.

By process of elimination then, the only remaining option is a float.

Oval, with annualised earnings of around £23m, almost has the size. Another Top 20 broker, Cooper Gay, recently said it would look to float once it reached the £25m benchmark.

In the meantime Hodson will continue to emulate Joe Plumeri, both in business outlook and hyperbole.

“We are not in the same bracket as consolidator like A, B or C,” he concludes.

“We are a traditional player, specialising in high end business. We are trying to create a high quality national broker.

"We are a mini-Willis.”