The other week I had an interesting conversation with a non-Spanish industrial company. Let me first give you some background:
Late in 2008, when it had become clear that the real estate market had stopped growing, I was asked by this company to assist them in the acquisition of a Spanish company. They had already identified the target and I knew one of the owners, a professional investor who had acquired a significant stake in it some years before. Considering that the target had a certain exposure to the building industry, it was our expectation that this investor would be happy to get out while they could. And yes, we opened some preliminary conversations, but it became clear immediately that valuation was a bridge too far.
At that time, the Ebitda level of the company was above €6m and the sellers told us that they did not share our pessimistic view on the expected market development. In their opinion, Ebitda was expected to grow and this was not reflected in the Ebitda multiple of five we were thinking about.
Now, almost four years later, the company has lost around 30 per cent of its turnover, but it has been able to adapt its costs adequately. After going through a brief negative Ebitda period, it is again making money, closing 2011 with an Ebitda of €1m. The current owners, the same as four years ago, are considering selling, even if a reasonable enterprise value is in the range of its net debt. So you can imagine that I contacted again my foreign industrial buyer, to give him the excellent news that they could incorporate the company into their group and that this could be done with only a very minimal equity investment, if any.
If in 2008, at the top of the market, I was wrong in thinking that the owners would be willing to sell, now, being at the bottom, I was convinced that the buyers, being in good financial shape and having a clear strategic interest in a long-term position in this market, would jump on this immediately. But no, I was wrong again. The buyer told me they were not interested. The reason: the company is located in Spain.
This story first of all shows that even professional investors, both financial and industrial ones, in the end follow the flow: they buy at the top and sell at the bottom. But more importantly, it also shows that they believe what they read and hear in the press, even if the picture they get may be different from reality.
Which leads me to the main question: how bad is Spain really? Are the investors right in dismissing an opportunity just because the company is located in Spain?
This story shows that at least one of the frequently repeated “facts” about Spain is not true: Spain does not have a rigid workforce. As in this case, I know many other companies which have been able to adapt themselves to declining markets and remain profitable.
Another constantly misunderstood subject by all who comment on Spain is the outrageous unemployment.
Even though it is true that the Spanish unemployment figures are way above 20 per cent, once adjusted for part-time workers, the number of people who actually work in Spain as compared to the total population is very similar to other EU countries or even to the US, as shown in the document below.
Other countries in Europe are similar: France: 37.2 per cent; Italy: 35.4 per cent and at the bottom of the league is the Netherlands with only 31.8 per cent of its population full-time equivalent occupied (bearing in mind that the Netherlands is the EU country with the lowest unemployment figures, according to Eurostat).
So, what we see is that Spain is capable of generating similar amounts of work as the other countries. The difference is that until very recently, it has not been able to distribute the work between its population as the other countries have. Part-time work in Spain stands at 14 per cent of the active population, against 26 per cent in Germany. And part-time workers in Spain work on average around 1,229 hours per year, against 641 hours in Germany. Full time workers also do longer hours in Spain (1,746 hours per year) than in Germany (1,645 hours).
The latest changes in the Spanish labour regulations try to change this, allowing companies to introduce reductions of working hours of their employees when they have to adapt to lower demand, rather than laying off some staff and keeping the others on a full-time basis (often with extra hours as well), as was the standard practice until now. This was implemented a few months ago, so it is too early to see any results, but at least the framework is there.
You will not be surprised that this overall reasonable measure has not been very well communicated by the Spanish government and that the EU and all observers of the Spanish economy continue to insist on more flexibility. Can anyone tell me what they mean by that?
Maarten de Jongh is managing partner at Spanish advisory firm Norgestion.
