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MIDAS SHARE TIPS: Top dealmaker K3 Capital

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Mention the razzle-dazzle world of mergers and acquisitions and most people think of big American banks – Goldman Sachs, JP Morgan, Morgan Stanley and the like.

Over the past five years, however, a down-to-earth company based in Bolton, Lancashire, has bought and sold more businesses than any other firm in the UK.

K3 Capital completed 605 deals between 2017 and 2020, 50 per cent ahead of its nearest rival, the patrician investment bank Rothschild & Co. 

Small fry to big fish: K3 has bought and sold hundreds of firms

K3’s track record continued into 2021, selling 167 businesses in the first half alone, with about 330 transactions expected for the full year, again comfortably ahead of better-known peers.

The group focuses on privately-owned businesses in Britain and sales range from a few thousand pounds to £100million.

K3 shares are at £3.37 and should increase materially over the next few years. Chief executive John Rigby is ambitious, the company is growing at pace, and dividends are generous, with attractive payouts pledged until 2023.

When Rigby joined K3 in 2000, the firm was best known for buying and selling local businesses from fish and chip shops to newsagents. Since that time, the group has progressively upped its game, developing a sophisticated database of millions of small and mid-sized businesses across the UK.

K3 uses this base to contact firms via email, phone or post, trying to tempt them into doing deals.

Being bombarded with sales pitches may not sound like fun, but Rigby and his team strive to be targeted in their approach, alerting firms to transactions that have recently completed in their locality, their industry or among businesses of their size, as well as contacting directors who may be close to retirement.

The process works – with hundreds of meetings set up between buyers and sellers, across every sector of the economy, from engineering to dentistry to online petfood. K3’s buyer database is extensive too, with purchasers including competitors, private equity firms and overseas peers.

Buying and selling companies is a lucrative business but, going into the pandemic, Rigby wanted to do more. 

K3’s tax division helps firms to claim tax credits from Revenue & Customs

K3’s tax division helps firms to claim tax credits from Revenue & Customs

In June 2020, he raised £30million on the stock market and used it to buy firms specialising in tax advice, insolvency and corporate restructuring for UK private companies. Another £10million was raised in June, giving Rigby more firepower to invest in these areas.

K3’s tax division helps firms to claim tax credits from Revenue & Customs if they have been investing in research and development. 

Some 60,000 companies claim this relief each year, but many more could follow suit if they knew they were eligible. K3’s subsidiaries alone help about 1,000 firms a year to claim cash back from the taxman and the number is likely to shoot up, as the tax division uses K3’s database to reach more potential customers. 

The restructuring arm works with companies that have fallen into difficulty, and here too, strong growth is expected.

At the start of the pandemic, economists predicted that insolvencies would surge. Government measures have kept many companies afloat but, as support eases, restructurings are likely to become more commonplace.

Last week, K3 said that trading for the six months to the end of November had been strong, with sales up 70 per cent to £30million year-on-year and earnings increasing at a similar pace. 

Brokers expect annual turnover to grow by more than 20 per cent to £57million, driving a 30 per cent increase in profit to £17.7million for the year to May 2022, with even more robust expansion pencilled in for 2023.

At the time of the 2020 share placing, Rigby said K3 would pay out 9.1p in dividends for 2021, rising to 12.1p next year and 15.5p the year after. The 2021 payout has been made and future payments seem assured, with sustained growth in dividends thereafter.

Rigby believes that K3 can deliver £25million of profit in the next couple of years, doubling to £50 million thereafter, through organic growth and complementary acquisitions. Today, K3 is valued at £256million but Rigby has set his sights on a £1billion valuation. 

Midas verdict: There are around four million small, privately owned businesses in the UK and K3 keep tabs on around half of them. 

This helps the company to attract more buyers and sellers than any of its peers, a position that is likely only to become more entrenched as the business continues to expand. 

The tax and restructuring divisions add a further dimension and more complementary deals are expected to follow in time. 

At £3.50, the shares are a buy – and the dividend provides an attractive 3.5 per cent yield on top. 

Traded on: AIM / Ticker: K3C / Contact: k3capitalgroupplc.com or 01204 555081 

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