- The businesses are complementary in some respects
- Aggregate office demand has softened appreciably
On 22 July, support services group Restore (RST) rejected a £743m takeover approach from business service and software supplier Marlowe (MRL), citing a lowly cash component (71p a share) within the cash/scrip offer, while arguing that the conditional non-binding proposal is not strategically compelling.
And though the offer represents a 26 per cent premium to Restore's closing share price on the last business day prior to the announcement, it is well adrift of the five-year high of 597p a share recorded at the beginning of 2018.
Two earlier offer proposals have been made by Marlowe over the last few weeks and have been rejected. The cash argument is clear enough, but it is worth examining whether there is a valid strategic rationale.
What do the companies do and where is the overlap? Marlowe provides business-critical services and software designed to assure safety and regulatory compliance, be it linked to health & safety, HR & employment law, occupational health, fire safety & security and water & air hygiene. Restore is engaged in the slightly more prosaic business of storing and/or digitalising hard-copy paper documents, shredding and associated recycling, and commercial relocation services.
On that basis, it does appear that the two Aim-traded businesses would certainly be complementary in some respects. Analysts at Stifel are in no doubt, insisting that “the combination would unlock cost synergies and allow management to drive Restore's digital evolution into Intelligent Information Management, combining service with software to elevate the proposition”.
The broker goes on to point out that bosses at Marlowe estimate that c.60-70 per cent of services of the combined business would be procured by the same individuals or teams at corporates, giving rise to significant cross-selling opportunities.
Perhaps it is the cash component that remains the main sticking point? Well, whatever the degree of crossover between the two businesses, both will have to contend with an altered landscape when it comes to support services, or at least when that relates to the office. We still can’t be sure of the degree to which the pandemic will have on demand for office space in our major cities, but there is enough anecdotal evidence to suggest that we are seeing an accelerated shift towards hybrid working patterns. Indeed, Restore, no doubt mindful of the disruption that increased home-working could have on its business model, initiated a survey at the end of April 2020, looking at the potential impact of Covid-19, specifically whether it might change the way people and organisations behave permanently.
The survey seems to suggest that although we will not witness “an end to the office overnight, or even in the short to medium term”, there are material benefits for organisations that move to more flexible working arrangements for their employees, namely “decreased running and rental costs, a larger pool of talent to draw upon when location is not an inhibitor, and flexibility for its workers which makes them more committed”. Another survey conducted by human resources consultancy HRLocker showed that 76 per cent of UK employers plan to offer hybrid working as a new job perk. Naturally, not all positions can be conducted on this basis, but there can be no doubt that flexible working has already gone mainstream.
In a recent cover feature – “Death of the City” - Alex Newman pointed to research from estate agent Savills, showing that City office supply has risen markedly since the initial outbreak, with an attendant rise in vacancy rates. And those trends were established “before most companies have set out their new working policies or initiated lease discussions with landlords”.
Marlowe remains bullish about its prospects, having increased gross profits by 9 per cent through to its March year-end, highlighting “positive structural trends”, with forward demand underpinned by “increased corporate and societal focus on health, safety, well-being and compliance”, a dynamic increasingly in evidence since the start of the pandemic. Beefed-up regulatory strictures to ensure health and safety, compliance, air hygiene and occupational health feed into the investment case for Marlowe, but figures from Savills show that by the end of June the cumulative take-up for City office space stood at 1.29m square feet, down 20 per cent on the same period in 2020, but still 38 per cent adrift of the five-year average. Beyond any operational synergies, it may just be that the desire to drive scale benefits could prove the principal catalyst for the proposed tie-up.
