A Maltese M&A perspective on roll-up strategy

Thomas Cremona

One of the recognised merger and acquisition frameworks is referred to as the ‘roll-up strategy’. Such a strategy is often prevalent in fragmented industries whereby a company expands its operations by acquiring smaller companies. Prominent Maltese examples that have adopted this strategy are evident in the pharmacy and grocery store sectors, where fragmented owner-operated enterprises are now witnessing the emergence of sector-leading professional companies to operate these entities.

Consolidating

Companies that make acquisitions a core activity of their corporate strategy are typically motivated by the lower-risk expansion. Furthermore, those businesses following the roll-up strategy can significantly enhance their operations through greater economies of scale when purchasing from suppliers, increased efficiencies, increased pricing power, and centralising certain functions, such as, human resources, accounting, procurement, and legal. Each subsequent acquisition will thus be benefitting from the acquirer’s efficiencies.

Value arbitrage

A roll-up strategy also lends itself to valuation arbitrage, such that, a single owner-managed business is likely to have a lower valuation multiple than a business that owns several locations and an executive team.

Exemplifying this in a simplified manner, such as, a business owner with three salespeople may be able to sell their business for two times earnings, whilst the business that owns eight locations and includes senior management would be able to sell their business at five times earnings. This allows for a valuation arbitrage such that the larger acquiring firm can immediately apply their valuation multiple to the acquired business.

This will result that a business which has been earning €100,000 per annum, and previously valued at €200,000 (two times earnings), will now be valued at €500,000 (five times earnings) under the new ownership structure.

Search

The search to identify such roll-up opportunities is often extensive and involves notable resources. A starting point is to undertake an assessment of the various industries and target a sector that is suitably fragmented and provides a consolidation opportunity.

The prospective acquirer would then form an investment committee and begin the outreach to potential targets and subsequently assess the opportunities that arise.  

Regulatory

The Maltese consumer is protected against market concentration through the Malta Competition and Consumer Affairs Authority (MCCAA). In a roll-up strategy, initial acquisitions may be below the established threshold to report to the MCCAA, for example, the concerned parties having at least 10% of Malta’s aggregate turnover in the sector. However, should one grow their business beyond a certain size, then there would also be regulatory concerns to consider.

Conclusion

In conclusion, the roll-up strategy stands as a compelling avenue for companies seeking expansion and consolidation within fragmented industries. While this strategy demands thorough research, extensive resources, and meticulous planning, its benefits are manifold. From realising economies of scale to leveraging valuation arbitrage, companies can strategically position themselves for growth and value creation.

As businesses in Malta chart their paths forward, it’s imperative for boardrooms to recognise the strategic significance of acquisitions. Whether aiming to enhance market share or diversify holdings, adopting a proactive approach to M&A can unlock new opportunities and propel organisations towards sustainable growth and success.

Thomas Cremona is founder of idisav