ERM chair steps down as group considers exit options

Surprise departure of Pete Regan follows 8% global headcount cut and controversial pay deferral

ERM has confirmed to Environment Analyst that Pete Regan resigned as group chairman two weeks ago to make way for new talent to steer the firm through its next period of ownership transition. The group’s current private equity investors, Bridgepoint Capital, are expected to seek an exit from the venture within the next two years.

One of the largest international pure-play environmental consultancies, ERM has offices in 41 countries. It ranks as one of the top ten firms in the UK environmental consulting sector according to Environment Analyst’s recently-published market assessment report, and has carved a niche at the high-end of this fast-developing industry. In 2008, ERM worked for around 60% of the Global Fortune 500.

Pete Regan has been with the business since 1994. He was appointed chief executive officer in 1999 and helped lead ERM through two rounds of private equity investment, becoming chairman in April 2008. He is to stay with the group as a director, while Mike Hauck, who has been a non-executive director in the UK business since 2001, takes over as group chairman. However, according to group president Robin Bidwell this is probably only a temporary arrangement.

“The likelihood is that we’re going to head-hunt externally for another chairman to take us through the next deal and beyond,” says Bidwell, who was one of the original founders of ERM. “The deal has inevitably been delayed by the situation in the financial markets, and I don’t know at this point if we’ll do an IPO [initial public offering] or another private equity deal.” Company valuations/multiples in the sector are currently running very low compared to a few years ago.

Bridgepoint supported the management buyout and exit of another PE firm, 3i, as ERM’s financial partner in 2005. The deal, which valued ERM at US$535 million (representing a multiple of twelve times EBITDA or operating profit), was then claimed to be the largest deal of its kind in the UK professional services sector, giving Bridgepoint a majority 57% stake in the consultancy while ERM management and employee shareholders held the balance.

Following ERM’s record financial performance for the year ending 31 March 2008 (Environment Analyst 28-Oct-08), things began to look less rosy. According to the group’s latest annual accounts, “deteriorating global economic conditions impacted growth in consulting revenue, which was flat during the second half of the financial year (October 2008 to March 2009) compared to the first half”.

Overall, net consulting revenues increased by 9.4% for the financial year ending 31 March 2009 to reach US$470.7 million (£296.8 million) at constant exchange rates, compared to a 19% increase during the previous year. Gross revenues were $694.7 million (£476.5 million), up 8.8%. Operating profit grew by 6.2% to US$59.6 million (£37.6 million) in constant currency. However, in a statement accompanying the financial review ERM financial director Andrew Silverbeck notes that operating profit would have grown by 11% if costs associated with redundancies were excluded.

Job losses

Silverbeck confirms “we reduced [global] employee numbers from a mid-year peak of 3,640 full-time equivalents (FTEs) to a year end total of 3,480 FTEs, a decrease of 4%.” A further 4% of staff left the business in the subsequent quarter after the year end (from April to June 2009), resulting in a total net headcount drop of 8%.

In the US business, the percentage headcount reduction has been higher. Over the last 18 months, staff numbers in the USA have been cut by 10% - with job losses affecting both consultants and support staff (but mainly the latter). Robin Bidwell told Environment Analyst that “employee numbers are now edging up again, although we have been tough on hiring”. In the UK, there have been around 17 redundancies (equivalent to approximately 4% of the total workforce).

The board and senior management team have been extremely cautious about budgeting for the current financial year in a market that is expected to fall flat, according to Environment Analyst’s market assessment forecast. Whilst Bidwell notes that “proposal activity is beginning to increase, with the UK team answering an enormous number of enquiries at present”, all ERM partners globally have been asked to defer 12.5% of their salaries voluntarily until the end of the year. It will then be paid out on a proportional basis, dependent on regional businesses hitting financial performance targets. Only two out of about 400 partners are reported to have declined to defer their pay.

In a further bid to cut costs – and one which Environment Analyst understands has left some staff in the US particularly disgruntled – a similar deferral scheme has been implemented for all of ERM’s US employees’ “401k” 40% matching contribution retirement accounts. ERM's 401k contribution will be matched, reduced or not paid at all, depending on financial performance. For higher level employees, the combined effect of these two measures could leave them over US$25k worse off this year.

One source close to the US business alleges that the level of debt taken on to finance the Bridgepoint acquisition has left ERM facing a “severe cash crunch as a result of slow-pay from its large stable of corporate client as well as a drop in billability”. However, the group’s financial review points to a strengthened year-end operating cash balance of US$46.7 million as at 31 March 2009, increasing from US$34.8 million twelve months previously.

ERM also reports trading in the first quarter of the current financial year (2009/10) as ahead of budget and that “our banking covenant headroom remains healthy”. Bidwell argues that "with debt levels of only around three times EBITDA, ERM is not a heavily-leveraged company."

The consultancy's financial results have not yet been made publicly available in a corporate annual review, as has been the case in previous years. This was, according to Bidwell, an oversight, which arose during the group’s reorganisation earlier this year – although he confirms that ERM had taken the decision not to publish a paper copy for financial reasons.

European business weaker

The geographic breakdown of results indicates that growth in ERM’s largest regional business, North America, was a moderate but healthy 9.4%, with net revenues reaching £221.9 million in 2008/09 (equivalent to 47% of the group's total net revenues). However, net sales in the second-largest region, Europe, Middle East and Africa – which accounts for 28% of the business - fell by 8.1%.

Operationally, the strongest growth region was Asia Pacific (c17%), where trading profits grew by 34% at constant exchange rates. This growth was achieved through “continuing to provide services for multinational corporations operating in the region as well as by delivering more projects for local clients”, says ERM. The Latin America and Caribbean business (c6%) also performed well, with trading profits up by 30%.

In terms of practice areas, ERM’s international environmental impact assessment and planning business saw a 25% leap in sales in spite of the global economic downturn, to account for a fifth of total revenues. This, it says, was driven by “continued activity in the commodity markets”. The contaminated site assessment practice also held up well, growing from 33% in 2007/08 to account for a 34% share of global revenues in 2008/09. Meanwhile, ERM's niche energy and climate change practice saw a startling sales increase of around 130%.

ERM’s M&A advisory services have borne the brunt of recession, with global sales down by around a quarter, accounting for a 9% share of the business last year (compared to 13% the previous financial year).

The group’s strategy going forward is to “continue to build presence in major markets, mainly through organic growth, using acquisitions where appropriate to broaden service offerings”. Environment Analyst understands that ERM was in the running to acquire Enviros, which has been put up for sale by its current owner Carillion plc (Environment Analyst 17-Sep-09). However, the £28 million turnover Cambridge-based environmental consultancy is widely tipped to be sold to a private equity buyer.