A market mini-crash marred the Ronnies Frost relaunch. He could have cancelled but instead pressed on and won through. Annabella Gabb.
It was like a bad dream. After years of preparation and six months' intense planning, the re-launch of business services group Hays on the stock market was a flop. Only 8.1% of the shares were taken up, the rest being left in the hands of the underwriters. In the days before the scheduled launch of the offer in October 1989, the stock market suffered a mini crash with the FT ALL Share index dropping sharply, reviving memories of the great crash of October 1987. For Hays, those memories were all the more bitter. The group's management, led by chairman and chief executive Ronnie Frost, had launched a £257 million management buyout from the Kuwait Investment Office (KIO) in the fallout after the 1987 crash. Timing, it seemed, was not Hays' lucky card. 'I thought when we came to announce our first year's results, that World War III would break out,' Frost jokes wryly. Of course, he could have cancelled the flotation. But after consultation with his colleagues, they decided to go ahead, albeit at a price that valued the group at £393 million instead of the £450-500 million that some had deemed possible earlier that summer. Says finance director Graham Williams, 'lt was the future of the company that mattered. We felt it was best to enter the impending recession with little borrowing and the wherewithal to make acquisitions.' Nevertheless, hoisting the share price to its current 165p has been a long hard slog, which only really began to show results this year. Says Frost, 'I was positive that the shares were worth considerably more than 105p (the offer price). But the City wanted it demonstrated that what we said was right.'But even when Hays announced 1990 profits up 12% in September last year - in spite of the recession - there was little improvement. The strategy that Frost and Williams have toiled tirelessly to convey to the City is based on the creation of a balanced portfolio of essential, added value services, each affected differently by the ups and downs of the economic cycle.
Through a process of organic growth and acquisition Hays has developed market leading positions in specialist sectors ranging from food and chemical distribution to business mail, document storage and recruitment agencies. The current recession is the ultimate test of the efficacy of its corporate strategy. Results for 1991 showed Hays holding its own, with pre-tax profits up 1% to £56.8 million on turnover down 2% to £668 million.
Irrepressibly enthusiastic about his work, Frost was understandably frustrated at the City's slow acceptance of the company. The shape of the group is largely his handiwork. He joined Hays in 1981 when his own food distribution company, Farmhouse Securities, was acquired by Hays. A man of comfortable proportions, Frost began his business life as a 'chicken salesman' with a company in Smithfield's central meat market. From these modest beginnings he built up a business in temperature controlled food distribution, encountering Hays when he rented warehouse space from the company. Hays' history goes back to 1651, when Alexander Hay leased wharves along the south bank of the Thames. The company was bought up by the Kuwait Investment Office (KIO) in 1980. As well as valuable property interests, which the KIO hived off on day one, Hays then comprised a mixed bag of activities including manufacturing which has since been sold off.
Frost became chief executive of the group in 1983, on the understanding that he would have the opportunity to buy it back at a later date. He was given a clean slate and the opportunity to build the group as he wanted with the KIO acting as banker.
'It was almost like a Harvard Business School exercise,' he recalls. If return on capital is any measure of success, he must have scored well: today's average is 45%, compared with just 9% in the early 1980s.
Having moved the head office to an undistinguished modern block in Guildford, Frost set about developing a strategy. 'I liked the idea of a three-legged stool,' he says. 'We already had the basis for two legs - distribution and office support services - but what to do for a third?' The third core finally identified was personnel recruitment. Hays initially bought a small industrial staff agency called 'TAV 'to test the water, but, admits Frost, 'We learn how not to do it with TAV. Organic growth in recruitment agencies is substantial in good times but nosedives in recession,' he says. Rather than 'arms and legs', the answer was to go for a specialist niche - accountancy. Accordingly, in 1986, Hays bought Career Care, which included the brand-leading Accountancy Personnel chain of job agencies. AP represents 80% of the personnel core, with the balance made up of smaller chains in staff for the banking and insurance industries plus Success After Sixty for older jobseekers, Montrose for construction staff and an Australian subsidiary.
Predictably, given the stress laid on resistance to recession, all eyes have been on Hays' performance during the downturn. The key to growth in most of its markets is the trend in industry towards contracting-out of services to allow companies to concentrate on their own specialist activities. 'If we want to persuade a company that we should handle its distribution, for example, they are more receptive to the suggestion when times are bad,' explains Frost. In distribution, Hays" largest core, operating profits to end-June 1991 were up 5% to over half of the group total. On the chemicals side, where Hays specialises in bulk and packaged chemicals, both profit and margins rose despite an overall drop in sales. New niches through joint ventures with French partners in solvent recovery and chemicals for water treatment are seeds for the future. At the same time, a number of new contracts in dedicated distribution for retailers and manufacturers, due to come on stream in the next 18 months or so, are encouraging signs. One recent addition is all primary distribution for brewing giant Scottish and Newcastle, to add to others such as home delivery for Marks and Spencer and World of Leather and shopfitting distribution for M and S, Barclays Bank and National Westminster Bank.
While the home delivery business has felt the pinch in recession, food distribution has benefited from higher volumes. As elsewhere in the company Hays has the security of big-name customers like Waitrose and Tesco. After a 24-year association Waitrose has just signed a new 25-year contract. Hays delivers chilled and frozen foods to all its stores. In addition, a £30 million composite warehouse in Milton Keynes, due for completion in July 1992, will allow it to handle dry goods as well for the 45 stores north of London (half the total). Hays' winning of the first privatised contract to supply an NHS region owes much to its experience in serving the big food retailers. Food at controlled temperatures requires the most sophisticated distribution systems. If it's not handled properly and quickly you can throw it away,' says Frost.
Last year, Hays won a £170-million contract with the Northern Regional Health Authority to distribute everything from bedpans to operating kits and linen to the region's 129 hospitals.
Frost sees clear parallels between delivering orders to individual supermarkets and delivering to hospitals and envisages considerable savings, not least in terms of waste - like chilled foods, many hospital supplies have the equivalent of a sell-by date. The contract represents one seventh of the potential market.
Hays has designs on as large a slice of that cake as the MMC will allow.
While food and the NHS are relatively resistant to recession, the same cannot be said for recruitment, even in the protected area of accountancy. True to form, the core grew rapidly in the boom years but demand has fallen well below last year, with the worst results from the construction and Australian sectors.
Profits fell 39%. Timely action to cut costs at API limited the negative effects in the UK, however, so that where other recruitment groups have turned in a loss, Hays' personnel core is in the black.
As personnel struggles, the commercial core is a welcome counterbalance. Hays managers almost rub their hands together in glee at its continued growth. Despite falling demand for its crate rental service, Rentacrate, there has been good growth from the Britdoc business mail and Hays Business Services archive storage operations which powered a 33% rise in profits. Frost would like to see the commercial core expand, possibly up to 40% of profits. 'It's the leg of the stool that's shortest,' he points out. This year, it swapped places with personnel in terms of profits, though the latter will bounce back come the recovery.
Britdoc profits grew by 29% in 1991. MD Henry Seymour starts every presentation with the statement 'I love recession' and Frost explains why: 'When times are hard, people look closely at costs to find where they can make savings.' Britdoc offers its members an overnight mail service on a formula based on two- thirds the price of ordinary first class mail (September's Royal Mail price increase translates straight to Britdoc's bottom line); its 99% success rate compares favourably with the Post Office's 89% record. The Britdoc system works on a network of 1,725 exchanges which now covers Britain - gaps in the North East and Scotland were recently plugged by two acquisitions costing £12 million.
Just as simple is the concept behind the document storage side of the business, Hays Business Services, which also prospers in recession. With the requirement to retain important documents increasing, growth potential, particularly from banks, solicitors, insurance companies, brokers and accountants is considerable. 'Our biggest competition is people out there who do it themselves,' says HBS managing director Simon Mounsey, gesturing towards the City of London, visible from his fourth- floor office in Stockwell. A tall, elegant and articulate man, Mounsey would look more at home in a City stockbrokers' than a dusty warehouse. He setup his own company, Safestore, which, with another called Datakeep, was acquired by Hays in 1979 to beef up its own basic storage business. HBS can now provide anything from simple space to a computer-controlled records management package.
Hays is also turning its attention to markets across the Channel where entry is likely to be by acquisition. With the share price now at a reasonable level and debt of under £20 million, funding is no problem. Currently, exposure to the UK market is almost total - an obvious weakness in time of recession; but Frost sees potential on the Continent, particularly for the commercial and distribution cores. Hays already has established Belgian business mail and document storage services and Francedoc has just opened, centred on the insurance industry. Germany, too, is being considered but finance director Williams (who is also responsible for corporate development) admits that 'the Bundespost is rather efficient. To an extent, the Britdoc concept works best where the local post office is inefficient.'
Williams, a quiet-spoken contrast to the extrovert Frost, is well qualified to spot potential acquisitions at home and in Europe.
An accountant with an MBA from the French business school INSEAD, he has worked for banking institutions on both sides of the Channel.
Top management was further strengthened and the reporting chain shortened with the appointment in January of John Napier as managing director. Former chief executive of market research and information service company AGB, Napier will complement Frost's spontaneous entrepreneurial style. While the latter concentrates on strategic development and the City, Napier will tighten the reins on the daily running of the group. Divisional heads now report to the new MD.
With the share price now where it should be and the City more attuned to the group, Hays can afford to go for the next stage.
The objective now is to double its size in the next three years, a task expected to involve acquisition and organic growth in roughly equal proportions. It is a tall order but one which Frost is now given himself the time to pursue.