The small firm making a big name for itself

By Ian Fraser

Sunday Herald

December 19th, 1999

ENSCONCED in the boardroom of an ornate Georgian town house in Charlotte Square – David Murray’s Edinburgh HQ on one side and Donald Dewar’s official residence on the other – Jo Elliott has lately been acting as a go-between for the public and private sectors.

In the last couple of years, Quayle Munro, the mini-merchant bank founded by Ian Quayle Jones and Michael Munro in 1983, has gained a strong reputation for advising clients in the area of the private finance initiative, which has become the Blair government’s instrument of choice for financing for new schools, hospitals and sewerage works. And Elliot has been a key driver of this success.

His reward came earlier this year when he became managing director of all Quayle Munro’s fee-earning activities as his colleague, Ian Quayle Jones, stepped up to the chairmanship.

Merchant banks are thin on the ground in Scotland. When asked to name any, most people mention Noble Grossart before drying up. It seems that when it comes to mergers and acquisitions, Scottish-based plcs prefer to go to London for advice. There they are unafraid to use outfits which are more expensive and more experienced, including Goldman Sachs, UBS Warburg and JP Morgan. Their fees usually run into seven figures, but clients like the safety-blanket these firms provide.

And it doesn’t help that blockbuster deals involving Scottish companies – for example, the recent bids for NatWest – are a bit like waiting for a bus. You wait for ages for one then two come along at once.

Robert Smith, chief executive of Deutsche Asset Management, said: “There are no proper merchant banks in Scotland. The expertise just isn’t there. It would be like trying to assemble a Rangers team and then only giving it a game every three years. You will only get a Scottish merchant bank capable of [big corporate mergers and acquisitions work] when there are hundreds of listed companies in Scotland.”

The merchant banks that do exist in Scotland have therefore chosen to focus on specific market niches. In the case of Quayle Munro, there are three main legs to its business: an investment portfolio in listed and unlisted UK companies; corporate finance work for smaller plcs and large privately-owned companies, including advice on capital- raising, mergers and acquisitions; and advising on PFI.

Born into a business-savvy Edinburgh family, Elliot, 47, started his career with Scottish & Newcastle Breweries, where he was a graduate trainee, before moving down the road to Granton on the shores of the Forth to join United Wire Group.

One of Scotland’s growing band of former plcs, the group specialised in making wire products and filtration systems for the North Sea oil industry. Elliot was responsible for corporate development, although the company was subsequently acquired by the Lancashire-based Scapa Group.

Elliot joined Quayle Munro when the business was founded in 1983. During the 1980s, as Margaret Thatcher sought to inject new life into sleepy, state-owned industries through a string of privatisations, the firm advised the Tory government on a range of public-to-private transactions.

These included the privatisations of ScotRail, Scotland’s buses, options for the water and sewerage industries, and the disposal of the Scottish Development Agency’s equity portfolio. However, when the privatisation gravy train ground to a halt in the early 1990s, the firm was seeking to replace lost revenue.

The widespread adoption of PFI as means of funding large capital projects for the public sector could not have been better-timed. Today, half of Quayle Munro’s £1.4 million fee income is derived from these projects. It started with Elliot’s role in advising Class 98, a successful private sector consortium which last year won the contract to build five new schools in Falkirk.

Total construction costs are £69m, with a contract value of £300m over its 25-year term. The project was pioneering in more ways than one – it was the first multiple schools project to complete in the UK in addition to being the first major local authority PFI project in Scotland.

Quayle Munro acted as corporate finance advisor to the private sector consortium, which included property developer Ballast Wilshier, Charterhouse, Bank of Scotland and the European Investment Bank.

Unusually, the bank also took a £750,000 equity stake in the winning Class 98 partnership.

Elliot’s successful advisory role to this consortium has won him kudos in what has since become a growth sector for the company, but he admits that getting involved in such negotiations is not for the faint-hearted.

“It’s an exercise in stamina,” he revealed. “I was following it minute by minute, 100% of the time for nine months. This was partly because it was still so new.”

“There’s no denying that under PFI, the front-end costs are greater. But the advantage is the project is built on time and to budget. It means Falkirk will be getting five new schools in the space of two-and-a-half years, with the project due to be completed next August.”

Hospital projects, admits Elliot, are usually more difficult and certainly more contentious than education ones.

“The size of the planned accommodation becomes more of an issue and debate can become quite heated,” he said.

The British Medical Association, followed up by the SNP, has been leading a sustained anti-PFI campaign. However, Elliot believes many of their criticisms are ill-founded and disputes suggestions that the initiative will prevent clinicians from obtaining what they want.

“It is wrong to blame PFI funding for that. Affordability constraints are a reality of life and not a consequence of PFI funding,” he said. “PFI is the only show in town for capital expenditure and has been adopted by both Labour and Tory governments. Even Ireland is now looking at PFI for funding capital projects in its education sector.”

Since the Falkirk marathon, Quayle Munro has become involved in what could be described as several PFI sprints. These include the Craig Phadrig psychiatric hospital in Inverness, North Ayrshire College in Kilwinnig, and Larkfield hospital in Greenock.

And Elliot adds that as the process becomes more commonplace, “the fees are coming down all the time, because the time being spent is coming down.”

Unlike some Scottish law firms, Quayle Munro has no desire to seek PFI work south of the Border. “Scotland is a big enough market,” said Elliot. “Also, Scottish-based clients are becoming more accepting of home-grown advice.” And he added that the creation of British Linen Advisors and existence of rivals, such as Noble Grossart and Noble & Co, “helps rather than hinders us”.

When it comes to corporate finance, Quayle Munro specialises in offering private companies advice on mergers and acquisitions.

“Because of the low interest rates, listed companies are raising less money through the issuance of new equity. There has therefore been a shift at Quayle Munro towards raising money for unlisted companies, in addition to mergers and acquisitions.”

The company also has an investment portfolio which has been valued at around £12m, with the largest investment being £2.2m in Morris Homes, about a 23% stake.

The merchant bank has a habit of taking equity stakes in companies for which it orchestrates the management buyout. These include its 46% stake in Aberdeen-based Submersible Television Surveys.

Listed on the stock market in 1993, in September Quayle Monroe announced that pre-tax profits has risen by 82% to £1.77 million. However, since summer 1998, its shares have not been performing too well, partly because small-cap companies have fallen out of favour.

Today, the company’s market capitalisation of around £9m is at a significant discount to its ‘net asset value’.

While he admits to a degree of frustration about Quayle Munro’s poor share price performance, Elliot adds that the existence of the discount reflects the law of supply and demand. “We owe it to the shareholders to address that,” he said. In today’s business climate, smaller plcs need to be able to sing their own praises to a much greater extent than the shy and retiring Quayle Munro has done in the past.

Mini profile

NAME: Jo Elliott
BORN: 1952
ATTACHMENTS: Wife Alison, a convener of the Church of Scotland’s church and nation committee. Children Christina (15) and Johnny (13). Jo’s father Sir Gerald Elliot is former chairman of Christian Salvesen and member of Edinburgh’s “great and the good”.
EDUCATION: The Edinburgh Academy, Marlborough College, Oxford University (MA in Physics) and Cranfield School of Management (MBA).

Copyright SMG Sunday Newspapers Ltd 1999

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