Price comparison services dominate TV ad breaks in the UK, promising to cut the cost of many things, including utility bills. But although saving money for households is a commoditised service, helping businesses and other organisations do the same requires specialist expertise. There’s much potential, given the growing need to improve energy efficiency and hit sustainability targets, set against a backdrop of rising energy costs that are hitting profitability.
And so we have companies such as Zenergi, in which ECI Partners has recently acquired a majority stake in a secondary buy-out from fellow private equity firm August Equity. The deal enabled August Equity to realise a return of 5.3 times its original investment, with ECI acquiring a business that slots neatly into its portfolio. “It was one of those rare transactions that was a win-win for all parties,” reflects Alex Hartley, a corporate finance partner at KPMG who advised August Equity on the transaction.
Founded nearly two decades ago, Zenergi provides customers with a range of services, managing their supply contracts with energy providers and other utilities, as well as offering consultancy in areas such as compliance, carbon reduction and infrastructure improvement. It has more than 4,000 customers, with a particular focus on the public sector – notably in education, healthcare and local authority facilities.
August Equity first invested in Zenergi in 2017. “We saw a really exciting opportunity because we’d previously invested in education businesses and could see how much they were spending on energy, and how the complexity of the energy market was increasing,” recalls partner Mike Biddulph.
Zenergi’s business model was particularly alluring. The company benefits from predictable recurring revenues, courtesy of the agreements it signs with customers to manage their supplier contracts on an ongoing basis. Plus, it can build on that base through sales of other support services and consultancy. “Our aim was to help the business expand into new verticals and to increase its range of services,” Biddulph explains.
To achieve those goals, August Equity helped Zenergi complete five acquisitions in a little under three years, from 2018 onwards. Each deal increased the company’s footprint in verticals adjacent to the education sector, such as healthcare and local authorities, or added to its technical expertise in areas such as engineering and environmental consulting. As previously illustrated in Corporate Financier, this is typical of the August approach.
Biddulph also pays tribute to Zenergi’s management team, which delivered strong organic growth alongside the buy-and-build strategy. “Graham Cooke is one of the best CEOs I’ve ever backed, with huge energy, foresight and drive,” he says. The company also benefited from the experience of non-executive chairman Peter Opperman. He had previously worked with a string of businesses that completed successful sale processes. He was non-executive chairman of Decision Tech, a BGF-backed comparison website that was sold to Moneysupermarket plc for £40m in August 2018; of Adestra, a BGF-backed software company sold to Upland Software in December 2018 for $56m; and of LDC-backed Connected Managed Services, which was sold to Apiary in July 2019.
In early 2020, August Equity began thinking about an exit from Zenergi and asked KPMG to look at the options. Hartley says: “It had reached a natural point to test the appetite of what we thought would be quite a narrow, but very enthusiastic range of potential suitors who were well versed on the sector.”
However, just as the process was getting going, the COVID-19 pandemic reached the UK’s shores. With many of Zenergi’s customers shutting up shop – including schools – and therefore consuming little or no energy at all, the sale was suspended. It was not until the summer of 2021 that August Equity and KPMG felt comfortable enough to start exploring their options once again.
“We knew we wanted to run with some very focused interactions,” Hartley recalls. “The aim was to find the right partner, who understood the sector and who could help Zenergi continue on its very rapid growth trajectory.” That meant looking at a handful of potential private equity buyers and a small number of strategic parties.
Commissioning EY to put together a vendor due diligence report, spanning both commercial and financial due diligence, was important in ensuring a speedy deal process. EY director Ben Collins explains: “With so much volatility in the energy market, we did need to do some work to help buyers feel comfortable. But the price spikes we’ve seen actually raise the profile of businesses such as Zenergi and how they can help customers, including on the broader environmental agenda. Buyers that understand the industry will look through the volatility to see the opportunity.”
ECI was one obvious contender. “We know the energy sector very well through our investment in Bionic, which offers similar services, albeit to a different end customer,” says ECI investment manager Faye Maughan. She adds that the firm knows the education sector well because of its involvement with CPOMS, a business that sells safeguarding software to schools, which ECI exited last October.
Such experience was crucial, according to Amish Bakhai, an executive director at DC Advisory, the investment bank that supported ECI on the deal. “ECI’s sector knowledge and a focused due diligence programme allowed it to get comfortable with the market backdrop and long-term outlook,” he says. “While there’s some short-term noise, in the long run Zenergi’s role as a trusted adviser to its customers becomes even more critical as market complexity and volatility increases.”
Still, even after ECI emerged as the preferred bidder, the deal could have faltered. As negotiations neared completion, the Omicron variant plunged the UK into crisis, with both sides pausing for thought. A deal that the parties had originally hoped would be signed before Christmas was put on hold until the new year.
Nevertheless, ECI was still very keen to go ahead. “Zenergi has a sector-leading net promoter score and an extremely high customer retention rate,” Maughan points out. “The management team is really impressive and there’s huge potential to grow the business.” The net-zero agenda, in particular, will be a crucial area, she believes, with high demand from Zenergi’s clients to reduce their carbon footprints.
More acquisitions will follow, says Maughan, supported by a secured debt facility that ECI has helped the business to arrange via Barings. Indeed, in March, Zenergi acquired a deal – Scottish utilities business DB Group. “There’s a very strong pipeline to follow that deal up.”
Further targets are likely to include businesses that have expertise in energy management, energy efficiency and regulation.
With about 70 energy brokers offering services that help businesses and other organisations to navigate a path through the deregulated utilities sector, Zenergi operates in a fragmented marketplace with plenty of competition. What that also means, of course, is that there are further opportunities for Zenergi and its backers to pursue a roll-up strategy by adding complementary businesses to the group.
In fact, the best-known business in the sector is probably Bionic, another portfolio company of Zenergi’s new owner ECI. Formerly known as Make It Cheaper, Bionic changed its name in 2019, reflecting the way the business had changed from offering a price comparison service to a more comprehensive broking and consultancy proposition. Other industry leaders include Global Procurement Group, which has expanded internationally.
“It’s a relatively crowded market, but Zenergi’s focus on the public sector definitely provides a point of differentiation,” explains EY’s Ben Collins (above). “Having the consultancy service as well as the broking business also provides some diversification.”
Customers such as schools, universities and hospitals not only have unique characteristics – irregular energy consumption patterns, for example, and large buildings estates – but they are also less likely than many businesses to have in-house expertise. Advisers that understand these customers’ nuances are therefore in a strong position to create value.
Here’s the deal
ECI Partners announced the completion of its deal to acquire a majority stake in Zenergi in mid-February. While terms have not been publicly disclosed, August Equity, Zenergi’s previous backer, revealed its exit had generated a return of 5.3 times its investment in the business.
The ECI team, headed up by partner Richard Chapman, received buy-side M&A and debt advice from investment bank DC Advisory, whose team was led by Amish Bakhai (1), James Wanless and Edward Godfrey. It also worked with investment manager Barings, which agreed to provide secured credit facilities as part of the deal. Addleshaw Goddard provided ECI with legal advice on the transaction.
On the August Equity side, partners Mike Biddulph (2) and Richard Muckle led the original investment in Zenergi, as well as the firm’s exit from the company.
KPMG corporate finance director Alex Hartley advised Biddulph and Muckle on the exit. EY provided financial and commercial due diligence work, with director Ben Collins and associate partner Rishi Shah leading the teams respectively. Legal support came from Travers Smith, led by private equity and financial sponsors partner Genna Marten.
ECI, August Equity, Addleshaw Goddard, Travers Smith, KPMG and EY are members of the Corporate Finance Faculty.