James Murphy, partner at Next Capital, retraces the history of the PE manager’s involvement in the industry and discusses the rationale of the initial investment and how Next Capital transformed the business. Murphy’s deal profile can be found here. For an overview of Next Capital’s portfolio companies, please click here.
Next Capital’s investment in Forest Coach Lines in 2014 followed its previous success with New Zealand bus business Go Bus, which the PE owner exited in the same year after more than doubling the company’s earnings during its two-year tenure. Driven by the government’s push for more efficiency and corporatization in the transport space, Next Capital recognized that its strategy in building Go Bus could be “replicated” in Australia where the bus transport market was more fragmented than New Zealand, albeit with more robust population growth. Spot the opportunity.
Next Capital did a “market mapping” in Australia, which identified Forest as “the best potential” in the market because of its location in Sydney, its reputation as a great bus operator, as well as its future growth prospects, Murphy said Forest was one of Australia’s oldest family owned bus businesses, started by brothers Trevor and Eric Royal in 1930 in the northern suburbs of Sydney. It was managed by the family’s third generation including David Royle, the joint CEO, at the time Next Capital looked at it. Meanwhile, KPMG was mandated by the founding Royle family to run a sale process, while Sydney- based advisory firm Greenstone was working with David to buy out the whole business, Murphy noted. Next Capital then engaged with Greenstone to partner with David, who owned a small stake, and participated in the KPMG-led process, he said.
Make the deal
There were other trade buyers vying for Forest in the KPMG process, but the Royle family took the view that they would rather sell to a consortium including David so that the business could stay in family hands for longer, according to Murphy.
Next Capital also brought in Marcus Gerbich to the deal, who, as the original owner of Go Bus, had great experience of growing the New Zealand business along with the PE investor.
“David (Royle) was looking for someone with the capital and someone with experience,” Murphy said. “That is why Marcus and Next Capital’s experience with Go Bus and more broadly in growing family run businesses was critical to the (Forest) deal.”
On completion of the deal in December 2014, Next Capital bought an about 80% stake in Forest, while Gerbich came in as an executive chairman with about 5% and David Royal, the CEO, ended up with around 15%, according to Murphy.
Active management
Next Capital has been a “very active manager” in Forest, as with its other portfolio companies, said Murphy. The PE team spoke to the CEO and the chairman every couple of days and helped the company with recruitment, operation systems, banking, as well as strategic initiatives including acquisitions. It built a new management team within Forest, with every single manager that reports to the CEO (David) being a new hire, including COO, CFO, engineering manager, head of charter business, depot manager and HR manager, Murphy continued.
The company enhanced its capability in the Terry Hills depot, from which it could remotely manage businesses around Coffs Harbour in the north coast of New South Wales (NSW) and in New England in the northwest of NSW, he said. Apart from public transport, the PE manager also built up the charter business by engaging with private schools to strengthen the division.
Strategic acquisitions
Consolidation had been a complementary strategy in growing Forest, just as the PE investor did with Go Bus in New Zealand. Acquisition opportunities often came from bus companies with baby boomer owners looking to retire, Murphy said.
Backed by the PE owner, Forest made four acquisitions in NSW including Manly Coaches, a charter business in Sydney’s lower north shore, and three regional businesses: Wolters Bus and Coach Service, Sawtell Coaches, and Ryans Bus Service. The PE partner would not specify the acquisition values.
For Forest, the four acquisitions are strategic assets that bring in long-term contracts, he noted. Forest was also able to implement its own operation system in those businesses and therefore reduce cost and drive efficiency, he added.
Local market
Australia’s bus transport market is still highly fragmented, with the top 10 operators having about one third of the market and a long tail of approximately 1,000 operators, Murphy explained. It is hard to quantify the exact size of the market as there are different components including scheduled, charter, tourist coach, etc., he said. There is no obvious competitor to Forest in NSW, he noted. New government contracts were awarded about 18 months ago in rural and regional NSW, while in Victoria and Queensland new contracts are currently being finalized, Murphy said. This could drive a new wave of consolidation in the market, he said.
Exit to “logical buyer”
Next Capital has always known that a number of trade buyers would be interested in Forest, including Singapore’s ComfortDelgro [SGX: C52] that operates across Australia and has made a couple of acquisitions over the past few years, according to Murphy. The PE owner appointed Melbourne-based Heritage Finance earlier this year, which engaged with a limited number of strategic buyers. “It’s fair to say ComfortDelgro was the most interested,” said Murphy, declining to comment on other parties.
The process took a couple of months and ran smoothly as the due diligence was relatively simple, he said. ComfortDelgro knew the asset, the area, as well as the contracts and appreciated the strategic positioning of Forest, according to Murphy.
Financials
Forest went from AUD 6m in EBITDA when Next Capital invested to more than AUD 15m earnings at the exit, according to Murphy.
ComfortDelgro is acquiring the business for AUD 110m, according to a stock exchange announcement on 7 August.
Advisors
Next Capital used Heritage Finance (led by Candice Hendra) as financial advisor and MinterEllison (led by Glen Sauer) for legal service. PwC advised tax issues and did the financial due diligence.
ComfortDelgro used its internal team for M&A and Lander & Rogers for legal service. The fund
The exit of Forest was the second out of Next Capital’s AUD 285m Fund III, Murphy said.
Next Capital has raised three funds so far, all under AUD 300m, according to Mergermarket data. It is understood that 80% of the Fund III has been deployed now.
Murphy on Profiler
Murphy, a former banker with UBS, has been with Next Capital since 2007 and became the partner in 2014.
He has been involved in Next Capital’s investments in Scottish Pacific, Infinite Care, Forest Coach Lines and Lynch’s flowers.
