G4S PLC Acquisition of ISS and Interim Management Statement Conference Call
Oct 17, 2011 AM BST
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
GFS.L - G4S PLC
G4S PLC Acquisition of ISS and Interim Management Statement Conference Call
Oct 17, 2011 / 08:00AM GMT
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Corporate Participants
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* Nick Buckles
G4S plc - CEO
* Jeff Gravenhorst
ISS A/S - CEO
* Trevor Dighton
G4S plc - CFO
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Conference Call Participants
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* Paul Checketts
Barclays Capital - Analyst
* Graham Brown
Evolution Securities - Analyst
* Andy Chu
Deutsche Bank - Analyst
* Andy Grobler
Credit Suisse - Analyst
* David Hancock
Morgan Stanley - Analyst
* Michael Rasmussen
ABG Sundal Collier - Analyst
* Iain Armstrong
Brewin Dolphin - Analyst
* Jaime Brandwood
UBS - Analyst
* Laurent Brunelle
Exane BNP Paribas - Analyst
* Dan Pearson
Cazenove - Analyst
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Presentation
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Nick Buckles, G4S plc - CEO [1]
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Well, good morning, everybody. If we could maybe close the doors, please. So I'm delighted to welcome you here to the stock exchange, where we're announcing the creation of the world's largest integrated facilities and -- security and facilities group.
Now, as we've got a few late arrivals, I thought we might spend five minutes just reading through these disclaimers here. I understand there's a very strong police cordon outside, not because of our announcement, but it's taken a bit of time to get people into the building, so if you could carry on reading the screen, just for a moment. And indeed this one's even more interesting; if you could read that one I'd be very grateful as well.
So what we're going to go through today, first of all, I'd like to welcome Trevor. You all know Trevor. I've also got Jeff Gravenhorst joining us from Copenhagen on the telephone to do his part of the presentation. He's there obviously to deal with the Danish end of this transaction.
So I'm going to talk about the summary of the transaction, the market background, the rationale; Jeff will then join us to talk about ISS; Trevor will talk about synergies and financing; I'll come back and talk about integration, the enlarged G4S summary; and then we'll move on to Q&A, first of all from the room here, and then from people on the telephone lines.
So today we're announcing the acquisition of ISS, from a holding company formed by Goldman Sachs at EQT called FS Invest. ISS employs over 500,000 people; operates in 60 countries, 45 on the ground, some with sub-contractors, but truly global coverage; and it generated GBP8.5 billion in the last financial year.
Alongside that, today we're announcing a GBP2 billion rights issue. And we're going to continue to trade on both the London and Copenhagen stock markets.
I'm also very pleased to announce today, we've brought forward our nine-month trading statements, both companies, to fit in with this announcement. And I'm pleased to say that both companies are trading in line with previously given guidance and expectation.
So, just the highlights of the transaction, and clearly I'll come back talk more about the individual parts, we're creating a near GBP16 billion revenue integrated facilities company. It will be the largest in the world by revenue, profits, and people.
It accelerates our strategy of multi-service provision, which we've talked of now for about two years.
Synergies of around GBP100 million, cost synergies of around GBP100 million a year; that's off a profit base of GBP1 billion plus, so a good uplift from synergies.
But we are reinvesting GBP20 million into service excellence centers, which I'll come back to, which is to make sure we drive best practice through the organization.
The good news is, as well, it's a very financially compelling transaction. We get within three years to double digit return on invested capital. That has been a very tough hurdle rate in the past, to overtake on all deals. We've managed it on this one, clearly.
Strongly double-digit EPS accretion within three years, and positive in year one. And by the end of the integration, margins back in line with where G4S has been previously.
And finally, and very importantly, it's funded to make sure we maintain a BBB credit rating going forward.
So in terms of the overview of the transaction, it's the whole issued share capital of ISS. We're paying DKK130 a share, which means the equity value is GBP1.5 billion, taking on GBP3.7 billion of debt, to give an entity value of GBP5.2 billion.
The revenue, as I mentioned, GBP8.5 billion; underlying profits, GBP480 million to GBP490 million.
And that translates to a multiple last 12 months EBITDA of 8.5 times, which we believe is in line with our own trading multiple, and certainly in line with the trading multiple of the large support services peers. So we think the right deal at the right value on which to do a transaction.
Savings of GBP100 million; and there's a GBP100 million one-off cost of achieving those savings.
In terms of the financing, Trevor will talk a lot more about this, of the GBP1.5 billion for the equity, 50% will be in cash coming out of the rights issue, and 50% is in new shares issued at the consideration price once the deal is approved. And that means that FS Invest, the former owners of ISS, will go forward with an 11% holding in new G4S and will be subject to a nine-month lockup on that shareholding.
And, as I mentioned, we'll be funding it by a GBP2 billion rights issue, and fully underwritten new debt facilities, too.
Disposals. The great news about this deal is very little competition overlap; a couple of small security businesses in Europe we think we'll have to divest to get it through a phase 1 approval.
But also, in reviewing the portfolio and countries of business in ISS, we've made the decision to divest, or certainly look at the divestment, of non-core elements of ISS business, particularly in France and other developed markets in Europe. But what we are saying is we will continue to deliver on integrated facilities in those markets, and for international accounts.
And the businesses we're looking to divest in terms of scale is about GBP1 billion a year of revenue; about GBP40 million a year of EBITA (sic - see slide 11); and about GBP50 million a year of EBITDA, just to give you an idea of the size and scale of the divestment. And we hope to do that in the first six months or so of next year.
But of course the most important thing about strategy, and we've said this all along when we went down the multi-service security strategy in 2004 and kept with it through to 2010/'11, is you've got to follow the customers and you've got to follow the market, and indeed, create market opportunities.
So just to give you a bit of background about the FM market, just so we're using the same terminology and understanding, single service, in the top-left, is the four main areas of service coming from property, cleaning, security, catering. The G4S's heritage is 80% in security, 20% in facilities; ISS, closer to 90% in facilities, 10% in securities. So coming from a different heritage, but definitely capability across all these services. And there are other companies that just focus on single service provision.
If you move to the top-right box, this is multi-service, this is where we're cross-selling into existing customers. Customers like the brand, they like the quality of service, and they want to buy more services from the same organization.
The bottom-left is more a management model. Some of the competitors do this, where they actually just provide management and information back to the customer that manage then the sub-contractors that are third parties, typically.
And then the fourth box on the bottom-right is the fully integrated facilities services, where you've got the onsite management, the account management throughout the organization, and self-delivering the four key areas of service. And this is the area where we believe you can deliver real cost benefit and real service benefit to customers.
You'd have seen the graph on the right-hand side, certainly from the G4S perspective, where we're looking at the estimated market growth rates in security from '09 through to '14, so this is through the recessionary period. And developing markets we flagged there, double-digit growth on average looking forward; and in the developed markets, mid-single-digit market growth. Just slightly ahead of nominal GDP growth latest estimates you can see on the right-hand side there. So good, strong growing market.
And then we did the same exercise looking at the GBP500 billion facilities service markets, so GBP90 billion security, GBP500 billion facility services, with those other three service lines bringing into the mix. And what we found was the actual individual service line growth expectations are very similar to security. So you've got double-digit growth expectation in developing markets; slightly lower in developed, but only a tad. So you can see the mix, going forward, of different service lines have all got good underlying growth metrics.
And then about February/March time this year, as we were undertaking our major strategy review we do typically annually, we decided we needed to have a better look at the facilities management market in detail.
We started talking about it a bit at the Capital Markets day in May. We would always been very confident about the integrated facilities market in the UK and parts of Europe; and certainly in developing markets we were very clear about the benefits of multi-service and integrated. But we took the opportunity, alongside a top three player in the research space, to actually do a real detailed review of the market.
And these were the key conclusions. Firstly, it's a very large market, that goes without saying; GBP500 billion is our estimate. It's really as big as you want to make it, to a certain extent. The growth and margins by service line are very similar to those we experience in security, ranging from fairly low in the commoditized end of the market through to double-digits in the more complex versions of the single service and multiple service that you provide for customers.
As I mentioned, much faster growth in developing markets, but that's true across all the service lines; and that there are continuingly going to be outsourcing opportunities in developed markets, particularly from customers looking to save money and outsource away from their core business -- with they're outsourcing, sorry, into third-party hands.
And then the final point on the market is that the integrated part of the market that I talked about, that bottom-right box, when you're bringing service together, is currently less than 10% of that GBP500 billion. But it's growing 1% or 2% ahead of the market. And Jeff will talk a bit more about his experience in ISS in this market segment, going forward.
In terms of the customer, there's definitely this growing demand in ISS, bringing services together in developed markets. And in developing markets, bundling is becoming ever more important as the brand and reputation and reliability of service for multi-nationals becomes increasingly important. But also integrated; they make a step change from single service to integrated in developing markets.
And the big key driver, or the reason it's not growing even quicker, is there's a supply side issue. There's a lot of customer demand. We interviewed a large number of multi-nationals; a big need for this type of service, with a supply side issue in actually delivering it.
And the ability to integrate means that you can deliver more, and more longer term cost savings, rather than just the one-off benefit of renegotiating contracts. You build in process improvement to the service you're delivering.
Then we looked at the options; how could we deliver on this strategy? Clearly, we could continue to grow organically, and we've had a good track record there. But basically, to really fulfill this customer demand, we needed a step change.
We looked at local acquisitions in the facilities arena, but very little opportunity in terms of value and in terms of quality, and of course the speed of execution would take significantly longer, and so ISS became the best transformational opportunity by far. There was a lot more visibility around the business because of the IPO process so we could do a lot of desk research around it; it's financials, its fit, its ISS capability, and its management. So we got very comfortable very quickly this was going to be a great partner for G4S.
To move us on to the rationale, the first one, which is going across a couple of slides, is clearly we think, and the Board think, this is going to accelerate our strategy significantly. It's a step change, it's a transformation, and we really are going to create a new business.
Driven by the need for ISS, from customer demand and the fact that there's a supply gap -- and just to give you an idea of where both companies are, and it's quite difficult under due diligence to get real commercial assessments of contract, ISS have got at least 20% in integrated services currently, and another 17% on top of that in multi-service provisioning. So we're talking 37% plus in non-single service delivery; and G4S, in our solutions contract we've got 30% plus already. So you've got a very strong base and capability of bringing together multiple services for customers.
We've got overlaps in 40 geographies; clearly, that's going to lead to synergies, but also very strong cross-selling opportunities. And alongside that, the deal brings two absolute experts together; one in security, one with a cleaning heritage going back 100 years, and where we can show global leadership in those individual service lines as well.
And it's very critical that we maintain that service-line leadership by service so, to that end, we're going to be investing in service excellence centers, to be four of those. And they're designed to actually drive real product expertise down throughout the organization, at a cost of around GBP20 million a year we're reinvesting. And so we'll have one for security; one for Facilities; one for Care & Justice; and one for Cash, where we're going to actually focus on getting operational systems rolled out by service, common processes, getting best practice working.
And importantly, and becoming even more important for global customers, is global consistency, global management information reporting, and we can do that through these service excellence centers.
And finally on this point, clearly we want to get a return on that investment and we'll be looking to improve individual service line margins over time.
In terms of developing markets, I'll come back to that, but post-divestment we'll have at least 25% of the new Group in developing markets, with a broader range of services for selling to customers.
And, I have to say, we've come across a very strong management team with ISS; very strong track record, which we'll come back to. Both have substantial integration experience. Great cultural match; can't over-estimate the -- over-emphasize, sorry, the fact that the cultural match between the two businesses is very strong. And we've got a shared vision for where we want the new organization to go to.
In terms of financials, Trevor will spend longer on these, GBP100 million pre-tax synergies; the GBP20 million, I mentioned, re-investment in service excellence; and GBP100 million one-off costs.
Post-tax ROIC over the WACC in two years; not far off in year 1; and double-digit within 3. EPS enhancing in year 1; and strongly double-digit earnings enhancing in year 3. So really good, strong financials.
But beyond that, I think this is a key point to make, beyond the 2013-2014 horizon, where we've got very clear visibility on where the earnings and the returns are going, why do this deal? Why is it good for G4S customers, shareholders, and employees?
Well, clearly, we think we can even improve our organic growth further through multiple selling of cross-service -- cross-selling of multiple services.
We'll have a strong service excellence throughout the Group in a number of services; bringing those into existing customers is a key driver of growth. And bringing up the proportion of integrated facility services contracts; currently around 25%/30% of the Group, they're going to grow a couple of percent ahead of the general market. So that would drive -- both those factors will drive increasing organic growth in the longer term.
We still very much have our vision and our target of having 50% of the Group in developing markets by 2019. Slightly lower base proportionately, but not that far behind. So we still very much think we can get there, to that 50%. Looking at the way the markets are due to develop, we get there pretty close to that anyway in terms of following the market.
In terms of margin, post-synergies back up to 7% plus. And over the longer term, again, developing markets mix 50% by 2019. Margins are typically a couple of percent higher; you'll see some general margin uplift from that.
Sharing of best practice; driving improvements down through the organization; cross-selling, particularly in developing markets off the same cost base, into new customers; same sort of overhead infrastructure base across 80/90 countries; and getting more contribution from solutions contracts, which are typically across the piece a couple of percent higher than single service contracts.
We've got two medium-size acquisitions we're still working on. We've reviewed those against the go-forward strategy; we think they're still very important to the business in terms of building. About GBP200 million expected to be spent this year that's built into the ratings and cash flow forecasts. Thereafter, we don't expect any acquisitions through 2012 and 2013, and maybe '14, as we bring the organizations together in that period.
And now I'm delighted to welcome on the phone Jeff Gravenhorst, CEO of ISS. He'll be joining the G4S Board, COO; and also will look after our operations in Europe, which will be up to 50% of the Group pre-divestment. So welcome, Jeff. I'd now line to hand you over.
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Jeff Gravenhorst, ISS A/S - CEO [2]
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Thank you, Nick, and thank you, everybody. I'm very existed to take part of this transaction. You just heard why from a G4S perspective this combination is a good deal for the shareholders, the customers, and the employees; I will now try to take you through why I believe this is a very good deal for ISS's customers and employees, and, therefore, at the end of this, also for the G4S shareholders.
There is no doubt that over the last few months Nick and I, and some of our key employees, have been working together on how we could take advantage of this opportunity with the -- how the fit is. The conclusion is that we have a very good fit from a service perspective/
But more importantly is that our strategy are basically the same; we both believe in the same direction. And if you looked at the first page, this is the way that we, in ISS, portray what it is that we want to do in the future. That means we want to become a self-delivery organization that can service -- that can deliver all the various services delivered to a building in order to fulfill the customer needs.
We have not only the same strategy, we're also built on the same values and the same visions; and, with that, I do believe that is a very good fit.
Now, if you look at ISS, we have gone through a transformation throughout the last 10 years. Around 10 years ago, we did see that we needed to go from cleaning into further services, expanding into bundled services, and expanding into how we could deliver all of these services to the premises as one single solution. This is what we call the integrated facility services solution.
And at the same time we also wanted to have better exposure in the emerging markets; one, to follow the customers that we had in the old markets; but also to gain the growth from the new markets across the world, particularly Latin America and Asia.
So the transformation that we've gone through is a transformation of geographic transformation, it is a service transformation, and is a service delivery type of transformation. And I would like to take you through the results of those three.
If you turn to the next page, we have the transformation of the geographical spread. ISS have moved from being a very European company to now have about 20%, one-fifth, of our business in the emerging markets. This gives us the opportunity to service our clients across the world. It gives us opportunity to have consistent delivery of self-delivered services, which is making the world simpler for our customers; but also gives us the opportunity to harvest on the high organic growth in the emerging markets, particularly in the growth in the domestic part, that means the need for airports, the hostels, the education systems, areas where we have placed ourselves very well with our services.
The customers that we can see that actually want to work with us, in particular the emerging markets across the countries, are blue chip companies who is looking for blue chip delivery. We now have contracts across regions with IBM; Citigroup; UBS; Shell; foreign commonwealth offices; and others.
If you look at the other transformation on the next page, the transformation on page 25 of our services, as Nick already alluded to, ISS comes from a cleaning background. Basically, both of the companies, both G4S and ISS, come from the same background, originally out of Copenhagen.
The idea was originally to take relatively simple services and turn them into a professional service. That means just giving uniforms to people, having consistency in delivery, training and development, and actually finding niches within our service areas that can give higher margins and higher growth.
With that, ISS has over the years built up competencies in hygiene cleaning, such as food processing, slaughter houses. We have built up competencies in industrial environments, like cleaning for (inaudible) production. We've also moved into areas of hospital cleaning, where hygiene cleaning is extremely important.
It is a matter of not only delivering the daily office cleaning as we all know, but basically finding our niches where the margins and growth are better. But even in the daily office cleaning, we have invested quite a lot of money into resources into developing ways of delivering our services even more efficiently. That means, technology wise, we can benchmark our cleaning efforts between the countries throughout the world and between the individual contracts.
We have very sophisticated ways of knowing how to clean a room, effectively only entering the room once as an example; 57 different ways of rooms has been specified.
We have then moved into other services as the demand actually came from the customers and we could see the customers opening up for this market, i.e. putting on more services; the washroom services; putting on the receptionist; the mailroom; the catering; the patient feeding, etc.
And on the bottom of this slide you can see that what we now do is call centers; we take care of receptionists; we do the portering services; the damage control; pest control; catering, we take care, as I said, patient food, but also event catering; gardening services. And then we can manage all these services on top; all delivered as either a single service, a multi-service, or an integrated services. Customers that we have within these are Danish Crown, Tulip, Philip Morris, etc.
The last transformation that we've gone through is how do we actually, on page 26, show the way towards integrating these services? So today we can deliver all of these services as a single service; very important that we keep our excellence within the single services, and also maintain the growth in our profit margin on these. We have grown the single services around 5% on average over the last five years.
We can also deliver these services as multi-service, i.e., cross-sell; sell more than one service to the client. We also have even better growth on that. The margin is typically for single services between 4% to 7% ,and it's 1% or 2% higher when you go into multi-services.
Then we can mix all of these products into one solution, which is delivered as one contract with onsite management; that's what we call the integrated facility services. This is where the growth has really taken off. Over the last five years, we've grown 16% a year in this area of business. We're now able to service customers across the world with a fully integrated service; customers like HP, Philip Morris, FCO, Sony Ericsson, Citigroup, and others.
We have, with these capabilities, taken advantage of the emerging markets and we have good organic growth in the emerging markets, good profit margins in emerging markets. But the fact that we can deliver the integrated facility services actually makes sure that we have decent organic growth in the old markets in Europe, and good margins also. And we believe that this area in the old markets will drive organic growth even further.
So financially, on page 27, we have had strong financial development; the growth in the top line of 10% on average over the years. The same on the profit margin. The cash conversion's good and stable. And the profit margins over time has been also growing robust over the years, particularly also if we take out the French operations, as you can see it on the graph in the right-hand corner.
Overall, there is no doubt that this combination with G4S makes us capable to pursue this strategy even further. We get a greater geographical spread, where we can together actually grow the markets even further. We can grow the margins by integrating services also with the secure solutions coming from G4S. So, all in all, I believe this is exactly what the customers are asking for, and also what the employees can see as good opportunities going forward. Thank you.
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Nick Buckles, G4S plc - CEO [3]
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Thank you, Jeff. I'll hand you over to Trevor.
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Trevor Dighton, G4S plc - CFO [4]
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Okay, thanks a lot, Jeff, and morning, everybody. Right, you've heard about the compelling strategic benefits of the deal, and they certainly are very compelling, but there are also some very compelling financial benefits. And the way we funded the deal, we can still maintain the solid financial profile that G4S have today.
So, firstly, on the cost synergies, and these are just cost synergies, we haven't taken any revenue synergies at all, we've just over 40 overlapping countries and there are regional, country, and branch overheads to save totaling around GBP76 million. About 60% of this comes from 10 countries. There is also about GBP24 million of corporate head office costs, giving a total of GBP100 million in total savings.
This gives us about 0.5% margin increase, bringing the joint margin back to a similar level to the current G4S margin of around 7%.
We'll also be reinvesting about GBP20 million, as you've heard, in the service excellence centers; and this will be phased [GBP5 million], [GBP15 million], and [GBP20 million] over the next three years.
The timing of the synergies, all the cost synergies will be in place by December 2013, so year three gets the full GBP100 million benefit. In year one we'll get GBP50 million benefit, and year two GBP83 million. And the cost of the restructuring, which is about GBP100 million, will be about 75% in year one and 25% in year two.
There's a lot of financial detail in the prospectus. There's a 300 page plus prospectus that will be coming out today and they'll answer a lot of your detail questions, but just a couple of summary guidance issues on the total figures.
Firstly, on tax, just to remind you, the tax rate the year after the Securicor Group 4 Falck merger in 2004 was 34% and has come down every year since then to the current level of 22%.
ISS have had a historically high tax rate with their high leverage and were forecasting low 30s after their recently projected refinancing. But we think we can still bring this down a little bit more and we're targeting 24% for the combined Group tax rate in 2013.
ISS's cash generation on a like-for-like basis is fairly similar to G4S's. The figures that you saw on Jeff's slide are slightly differently measured from ours; they don't include the CapEx and depreciation adjustment. But even so, they are slightly higher than our businesses as they don't have any cash solutions businesses. But our cash conversion rate of 85% is the maintained target. The higher growth rates of the combined business means that we'll keep this as the short-term target.
The synergy benefits bring the combined margins back up to the current G4S margin target level of around 7%, as I said just now.
Our interest rate with the new financial structure will be just under 5%.
And with dividends, we'll continue to be paying out in a fairly similar way to we have been and our existing policy of increasing it in line with earnings growth.
As shown earlier, the enterprise value of transaction is GBP5.2 billion. It's being financed with a fully underwritten rights issue to raise GBP2 billion, and new debt facilities that are also fully underwritten.
Turning to the equity first, shareholders are being offered seven new Gem shares for every six existing Gem shares that they hold at the record date for the rights issue.
The rights issue subscription price to take up each new Gem share is 122p, which results in a theoretical ex-rights price, the TERP, of 196p. That means the discount to TERP is 37.8%.
We've sized the rights issue at GBP2 billion to ensure that Gem's capital structure post-transaction is consistent with maintaining our investment grade rating from S&P and securing one from Moody's.
Turning to the debt, just to draw out a couple of points, we will be refinancing the majority of Diamond's debt facilities on completion -- we'll be refinancing the majority of ISS's debt facilities on completion. To support this, we've arranged new acquisition facilities totaling GBP3.8 billion.
The maturity profile remains comfortable with no maturing debt in 2011 or 2012 following the revolving credit facility we refinanced successfully in the first half of this year. But we will expect to refinance a large proportion of the acquisition facility in the capital markets after the acquisition to extend and smooth our maturity profile further, and we intend to go into the bond market early in 2012.
Most of these we've already mentioned. But just to flag a couple of numbers, the TERP, that's the theoretical ex-rights price, is calculated here at 196p on the basis of Friday's closing price. The theoretical nil-paid price, again calculated on the basis of Friday's closing price, is 74p, representing the difference between the TERP and the issue price.
Finally, the bonus factor is 1.44. It's worth just spending a couple of minutes on this. Okay, I won't go through the theory, which is at the top of the page, save to say that, to reflect the bonus element of the rights issue, our historic EPS and dividend per share will be rebased by the bonus factor.
And the bonus factor is calculated by dividing the current rights price, that's the closing share price on the general meeting date, by the TERP, which is also calculated using the closing price on that general meeting date.
To get the re-stated numbers, the historic EPS and DPS numbers are divided by the bonus factor so you get a proper comparison going forward.
Now we've done an illustrative example here based on Friday's closing share price. Adjusting for the bonus factor in this example gives for 2010 31.1p of earnings per share and 6.8p of dividend per share.
And finally, on the timetable, the record date for the rights issue is October 31; with a General Meeting on November 2; the nil-paid shares will be trading from November 3 to November 17; and the rights issue will complete on November 18.
We expect the acquisition to complete by the end of 2011 once competition approval has been secured, which we don't anticipate to be a problem. As you heard earlier, there are only very small overlapping businesses.
So, as I said at the beginning, some very compelling financial benefits and returns from the deal. I'll now hand you back to Nick, who's going to talk about the integration.
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Nick Buckles, G4S plc - CEO [5]
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Thank you, Trev; still deep undercover. I'd now like to talk to you about integration. Clearly, a deal of this magnitude, you've got to say the biggest risk is around integration, and that's why I want to spend a bit of time talking about it.
We clearly believe we've got the management strength and track record to make this deal happen. We've got 40 countries to integrate, a group office, and to set up one vision, one value, one set of values, one culture in the new organization.
But looking at our integration experience, those of you who remember, both Trevor and I were involved in bringing together Group 4 Falck and Securicor in 2004; at that stage both global businesses. It was a merger of equals. And we had a run rate of profitability around GBP180 million to GBP190 million, and we set about finding about GBP30 million a year in synergies and building a new G4S.
We delivered on GBP35 million a year of synergies, ahead of plan. And now, as you know, we've actually got profits in excess of GBP500 million seven years later. So I would have to say, we have done it before, and we're very confident we can do it again.
In terms of integration experience thereafter, G4S has acquired over GBP800 million of business in terms of consideration since 2008; the largest being GSL, which has been a great success. And prior to 2008, ISS acquired 600 businesses, which they successfully integrated. They've done none for the last couple of years but, even so, tremendous track record on integration.
So very confident we can bring these two companies together, and that's really been the focus for me of cultural due diligence; making sure we can make it happen.
On the right-hand side, the integration plan, we'll be setting up integration offices throughout the organization, to run for around 18 months, to make sure we've got dedicated resources to deliver on the synergies, but make sure we create a very strong business thereafter.
And on that score, I'm delighted at this stage of the process we've actually agreed the new executive team structure. Jeff and I, with our HR director, sat down over many days, went through the individuals, spent some time with them, and of our 17 strong executive team we've got six coming from the ISS team; 11 current G4S members. So a very good mix of business and product experience to ensure that we keep that best practice going throughout the organization.
Jeff will join the Board, as I mentioned, look after Europe, which is going to be around GBP7 billion in the new entity. And he will also run the service excellence center for facility services; Ken Niven will run it for Cash Solutions; David Taylor-Smith will run it for Care & Justice; and Grahame Gibson, currently COO and looking after the Americas, will run the service excellence for security.
So there you can see a good mix of people coming from both sides of the business, and a great place to start. And we expect to have all the country MDs in place in time for the new financial year on January 1, so a very expedited process there to make sure we hit the ground running January 1.
A couple of slides about what the new G4S looks like. You've seen this slide before for old G4S. New G4S, very broad geographic coverage; around 130 countries. UK and US between them down to about 26%. It was 42% before, so it's slightly dilutive. But that's really swapped out for the Nordics, basically.
The Nordics have come up in terms of mix in the new Company. Just to give you an idea, we have GBP2.6 billion of revenues in the Nordics going forward, so superb market position there.
France and other developed markets clearly will come down in contribution as we go through the divestment process. But then you can see elsewhere, no company really with more -- no country with more than 7% of revenue. So, a really good geographic mix across the piece.
And then G4S on the left, ISS in the middle, you see the current service and geographic breakdowns. If you move to the right-hand side by single service line you see we're 55% in security; 25%/28% in cleaning; and then the balance in other facility services. And within that overall pie, we're 30% plus in integrated and multi-services within that sphere.
And then on the bottom-right, in terms of geographic coverage I've touched on. But over time, developing markets, post-divestment 25% plus, and still with the ambition of having that as 50%.
So, in summary, moving from left to right, we are creating the world's largest integrated security and facilities services Group; GBP16 billion revenue; 1.2 million employees.
We're definitely addressing a market need and a current supply gap. We think that's going to be a big driver of growth in the future because the ISS portion of the market is growing 1% or 2% ahead of the single and multi-service. That will definitely drive enhanced organic growth.
We've still got 25% plus coming from developing markets, and we'll build on that.
And we can start to cross-sell in multiple geographies where we've both got very strong presence.
And importantly, again, our study showed that national coverage is very important in this marketplace. And with this integration, we'll have very strong national positions in a number of developed and developing markets.
As I said, I can't over-emphasize the fact we think the cultural fit is very strong. Similar heritage. We've already merged a UK and Danish company in the past; we think they work very well together. Very little regulatory disposal; very limited deal conditionality; good substantial synergies.
And the financials, as we've said before, double-digit post-tax ROIC in three years, and strongly earnings accretive within three years.
So we think overall we're going to be changing the market with this strategy. It's a game changer, it's a transformation, and it really gives us an excellent business to move forward with.
And now I'm happy to take questions; firstly, from the floor, and then from the phone lines.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions).
------------------------------
Nick Buckles, G4S plc - CEO [2]
------------------------------
Yes, to go back through the G4S strategy development, May '10, at Capital Markets we started talking a lot about getting into facility services, moving away from security into other services; the UK had definitely started to move that way, other European markets. And we saw a huge opportunity in developing markets to add additional services.
So then over the next 12 months, we got through to about February/March time. This year, still looking at, under our major structure review we do every year, what sort of transformational options are around, and we got a big study done on the facilities management marketplace between March and May. And we alluded to that again in the May Capital Markets Day saying that we're looking to move into other areas in developing markets. The UK, we've got a very strong capability around integration, and we're looking to broaden that out.
So it came together. So we put -- so we spent a lot of time, as I mentioned earlier, studying the IPO documents, working through the market, working through the strategy. So between March and the end of July, through various approval processes, clearly internally, kept stress testing the strategy, looking at the risks, etc., so by the end of July we were absolutely confident it was the right things to do. We then approached the private equity owners of ISS, and basically have gone confidential for the last couple of months and managed to get the deal done.
So it definitely is market led; it's strategy led. It's slightly opportunistic in that the business is available now, but we think it's still a compelling strategy.
Are there any more on that score? Okay.
Any more questions from the floor, please? I know it was a very full presentation, but. One in the middle here, please.
------------------------------
Paul Checketts, Barclays Capital - Analyst [3]
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Paul Checketts, Barclays Capital. The double-digit returns on invested capital, what are your assumptions on growth rates? If we look at the Freedonia forecast, say, for security market, one of the assumptions within that is that there will be quite strong bounce back in the developed world, which now, since that report came out, looks a bit -- a little far fetched. Can you talk us through what you think is perhaps realistic in terms of growth to get to those returns?
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Nick Buckles, G4S plc - CEO [4]
------------------------------
As I've mentioned, the service environment's growth is generated by underlying GDP growth. What we've assumed to get to double-digit returns, we are above double-digit in our estimate, is a 4%/5% organic growth with a slight margin improvement, basically, in the business we're acquiring. So they're not stretching numbers by any means, but we still think that's double-digit return on investment.
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Paul Checketts, Barclays Capital - Analyst [5]
------------------------------
And can you tell us a bit about ISS margins, emerging markets versus developed markets; excuse me if it's in there and I've missed it?
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Nick Buckles, G4S plc - CEO [6]
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Typically, like ours, a couple of percent higher. Slightly lower than the G4S ones, but still getting close to 8%, I believe. So they are definitely higher margin.
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Paul Checketts, Barclays Capital - Analyst [7]
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And what about management lock-in on the ISS side?
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Nick Buckles, G4S plc - CEO [8]
------------------------------
Yes, under the agreement with the private equity owners, pre-IPO, all but the CEO and CFO are locked into a 12-month transaction (inaudible) transaction bonus deferred for 12 months. And, clearly, Jeff's coming across as COO, contract signed. So we've got pretty well committed management team coming across from ISS, and they believe in the strategy, that's the great thing. And we are very good at handling integration, so I'm very confident we can keep all the management on board.
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Paul Checketts, Barclays Capital - Analyst [9]
------------------------------
Thanks.
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Graham Brown, Evolution Securities - Analyst [10]
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Graham Brown, Evolution Securities. Excuse me if I'm wrong in the number, but [I was] a touch hazy as I was rushing through the numbers this morning. I've calculated your net debt-to-EBITDA is about 2.9 times. I just wondered, on the debt rollover, if you exclude the debt rollover into early 2012 that you're planning, where do covenant levels stand?
And also, Trevor, I'm guessing you've checked the market for BBB debt and where the interest rates on that lie, I just wondered if you could give us a sense of where that is; and also whether your interest rate, your interest -- Group interest guidance is based on a new level of refinanced debt, or the debt as it stands at the moment, at that 5% guide? Thanks.
------------------------------
Nick Buckles, G4S plc - CEO [11]
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Trev, I'll let you answer that.
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Trevor Dighton, G4S plc - CFO [12]
------------------------------
Yes, okay. Yes, you're right with your first calculation. Our covenant is 3.75 times for the first year, and then it comes back down to 3.5 times. The interest rates, we've got a blended just below 5%. We're not expecting that to change much by going out into the bond market because the rates aren't really very different at the moment, so that is quite safe for the future.
And was there another element to the question?
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Graham Brown, Evolution Securities - Analyst [13]
------------------------------
No, that was it.
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Trevor Dighton, G4S plc - CFO [14]
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That's it.
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Graham Brown, Evolution Securities - Analyst [15]
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Can I ask just one follow-up? Just how much of the debt's being refinanced in early '12?
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Trevor Dighton, G4S plc - CFO [16]
------------------------------
About GBP3.8 billion.
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Graham Brown, Evolution Securities - Analyst [17]
------------------------------
Okay, thanks.
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Nick Buckles, G4S plc - CEO [18]
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So it was a question how much of the debt is refinanced in -- ?
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Trevor Dighton, G4S plc - CFO [19]
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Sorry, I beg your pardon.
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Nick Buckles, G4S plc - CEO [20]
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Early 2012.
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Trevor Dighton, G4S plc - CFO [21]
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We'll leave that open until we see what the response to the first bond will be. But there will probably be a big chunk in the first half of the year, maybe GBP1 billion to GBP1.5 billion, with another chunk in the second half.
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Nick Buckles, G4S plc - CEO [22]
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The [GBP2.5 billion that's there] isn't it?
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Trevor Dighton, G4S plc - CFO [23]
------------------------------
Yes, yes.
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Nick Buckles, G4S plc - CEO [24]
------------------------------
Andy?
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Andy Chu, Deutsche Bank - Analyst [25]
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Andy Chu, Deutsche Bank. Nick, I wondered if you could just go through and talk a little bit about revenue synergies, maybe not the numbers, but where do you think the easy gains are in terms of revenue synergies? And over what sort of timeframe, please?
------------------------------
Nick Buckles, G4S plc - CEO [26]
------------------------------
We haven't built any into the go-forward three-year forecast, as I mentioned. And I've alluded to some of the areas in the presentation, but of course exposure to developing markets generates higher organic growth, which goes without saying, and that will continue.
Cross-selling, definitely. We've got customers where they're very key customers for individual parts of our business by country, or globally, where we can introduce either cross-selling or integrated facilities concept, particularly in the current economic environment where multi-nationals are definitely looking to drive down costs. And we can bring cost savings to bear through redesigning the supports services that we can provide, so moving into that integration and cross-selling.
And if you think about it, country by country, in developed markets we're going to have a large customer base that currently are using a mixture of single service, multiple service, and integrated. So, again, cross-selling into those developed markets.
But the big opportunity is also, what we've alluded to a couple of times over the last two Capital Markets, is our platform in developing markets in support services, or indeed in any business, is second to none. It's taken us 40 years to build. We've been in Africa, Asia, Caribbean 40 plus years. We've got a tremendous brand, a tremendous customer loyalty, and they really will buy additional services from us. We've seen that on the cash -- sorry, on the security side where we've got about five or six service lines going into these customers.
We've now got three or four more major areas of service we can introduce, and we can do that organically in developing markets. If we've got the service excellence centers in place, they can drive through the best practice, and we can start up these services country by country over the next five years. So the organic growth potential in developing markets, we think, is huge.
------------------------------
Andy Grobler, Credit Suisse - Analyst [27]
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Andy Grobler, Credit Suisse. Just one question on your employees. Before the deal you were one of the largest private sector employers globally, now you're, if not the largest, very close. How -- what do you need to do differently, or what do you have to change to be able to manage well over 1 million people globally?
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Nick Buckles, G4S plc - CEO [28]
------------------------------
It sounds like a lot of people, but both companies have got 0.5 million plus at the moment, and -- so we've both got similar processes around recruitment screening; vetting; supervision; management; trading reviews; audits; budgeting; business planning. As we've gone through the two company processes they could have been written by the same management team, basically. So in terms of standardized process and control, we can bring them together fairly regularly.
You haven't got a completely different role at the center, [the] role of country, so that part of the integration in terms of control process we think is going to be relatively straightforward. And that's really what controls the business in terms of making sure that people do what they're supposed to. But the fact is, from a G4S perspective, where we're only adding five or six countries.
So, yes, we are broadening the product range into areas that we haven't been as expert in the past, but in terms of geographic coverage very little difference.
To deal with the product expertise, which is a much more a strategic issue than a control issue, it's about setting up these service excellence centers to make sure we're still best in class in the individual service lines.
So, yes, no problem at all going from [600] to 1.2 million. It's really the controls and processes we've got in place that will remain, basically.
------------------------------
Andy Grobler, Credit Suisse - Analyst [29]
------------------------------
One other quick, unrelated question. In terms of new shares being issued, is it just through the rights issue? Or was there consideration paid to the owners of ISS in addition to that?
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Nick Buckles, G4S plc - CEO [30]
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It's in addition; so GBP2 billion rights issue, and then 50% of their equity in new G4S shares at the consideration price.
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Andy Grobler, Credit Suisse - Analyst [31]
------------------------------
Thank you.
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David Hancock, Morgan Stanley - Analyst [32]
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David Hancock, Morgan Stanley. First one on strategy. At the Capital Markets Day in May you talked about the facility services strategy, but you still had an emphasis on where security is key to the customer, in developed markets at least, and in terms of acquisitions you talked about risk consulting and systems integration. So, in developed markets, is this a bit of a shift in strategy because you will have a bit slug of business, which is facility services, where security isn't key to the customer?
------------------------------
Nick Buckles, G4S plc - CEO [33]
------------------------------
Yes, I don't think it's a huge difference because what Jeff and I both mentioned in the presentation is to not be a commoditized player in your chosen sectors, in your chosen products anyway. You have to focus on sectors that consider your service to be critical, or essential. So in terms of the security sectors, which we've highlighted as being crucial to drive both security and integrated FM, it's obviously oil and gas, aviation, ports, those type of sectors.
And actually, in the cleaning-driven sector, you're talking very similar sectors again where cleaning and facilities management in terms of health and safety is absolutely critical so the customer base actually is very similar on a global level in terms of customer requirements. But what we're looking for is focusing on segments whereby security, and safety, and cleanliness, and you're looking at places where essentially you have to deliver high levels of qualities of service.
It doesn't mean, like we used to say on security, you're not going focus on other sectors because clearly you have to have the volume of business as well. To be ultimately successful, you've got to focus on sectors where they see security, safety, facilities in terms of go forward stability as key to their business basically.
So you will find overlaps in sectors, and maybe broadening the sectors we focus on, but it's not a huge change from where we have been in the past.
------------------------------
David Hancock, Morgan Stanley - Analyst [34]
------------------------------
Okay, thanks. And then a second one on the potential disposals. So you mentioned France, I think, as one. I think I'm right in saying you don't do any security in France at the moment, and although these are not in the top 10, I think Spain and Germany are in the top 10 to 15 in terms of exposures of the enlarged Group, and I think you don't do any security there, so are you looking to exit the entire French operations of ISS? Or is it activities within that? And where do you see Germany and Spain sitting in the enlarged Group?
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Nick Buckles, G4S plc - CEO [35]
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The fundamental part of the strategy is we will deliver integrated facility services in every country we operate, so the large site, customer driven demand, and international accounts as well. And that will actually bring some of the G4S security customers back into self-delivery in some of those countries.
So we haven't exactly said what we are and aren't going to do. But we will still have a presence in every developed market and it's just a question of which parts we consider, when we get into a lot more detailed analysis, and non-core in those developed markets. But we think the GBP1 billion is a reasonable estimate of where we will end up divesting.
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David Hancock, Morgan Stanley - Analyst [36]
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Great, thanks. And last one for Trevor. Just in terms of the tax rate coming down, would you expect to start at a higher level than the 24% and take a number of years to come down, as happened after Group 4 and Securicor?
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Trevor Dighton, G4S plc - CFO [37]
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No. The first year there might be some integration costs that are not allowable, so it might not come down straightaway in the first year. But the second year, we're expecting the 24% tax to be there.
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David Hancock, Morgan Stanley - Analyst [38]
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Thanks.
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Unidentified Audience Member [39]
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It's (inaudible) from Bank of America Merrill Lynch. I have two questions regarding the post-deal debt structure. First, are you going to repay all ISS debt excluding the ISS EMTN to 2014?
And second, can you confirm the new debt facilities and bonds going forward will be issued out of G4S? Thank you.
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Trevor Dighton, G4S plc - CFO [40]
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Yes, the one tiny bit that we're retaining is in 2014; GBP97 million of the ISS debt. But the rest of it, we're refinancing.
And I didn't understand the second half of the question.
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Unidentified Audience Member [41]
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Thanks. The second question is can you confirm the new debt facilities and bonds going forward will be issued out of G4S?
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Trevor Dighton, G4S plc - CFO [42]
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It will be issued out of G4S, yes.
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Unidentified Audience Member [43]
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Okay, thanks.
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Michael Rasmussen, ABG Sundal Collier - Analyst [44]
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Michael Rasmussen, ABG Sundal Collier. I think, when I look at the acquisition price you paid for ISS, it seems quite a solid discount compared to the low end of the range in the proposed IPO this spring of ISS. Obviously, the world has changed quite a lot.
Also, remember ISS management, Jeff, talking about a 6% organic growth target, and I think you mentioned 4% to 5%. Is that most of the explanation between this probably 15% to 20% change in price compared to the IPO price? Or what has changed since then, basically?
------------------------------
Nick Buckles, G4S plc - CEO [45]
------------------------------
The valuation really is based on what we believe we could buy the business for, what the current owners wanted to sell it for. And we made sure that we believe we got a good deal for our shareholders.
But I think it is one of these situations which happen very rarely; that it is real win-win for both parties. It's a good exit route for the current owners and it's a great entrance price for our shareholders. And it doesn't happen very often, but I think that's basically where we've ended up. So about 8.5 times EBITDA I think is a reasonable trading sort of range of where our peers are and where we are.
In terms of organic growth, it could well be if the economies pick up we'll be 6% plus. What I'm saying is, and taking the point, is the economies are not necessarily as certain as they were three or four months ago. But it's not -- we're not saying it won't grow at 6% a year going forward; I'm saying you can get to the numbers quite easily by just growing it at 4% or 5% a year.
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Michael Rasmussen, ABG Sundal Collier - Analyst [46]
------------------------------
Thank you.
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Iain Armstrong, Brewin Dolphin - Analyst [47]
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Iain Armstrong, Brewin Dolphin. Just a quick question on the mix of the business, public versus private sector. How does that change with the acquisition?
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Nick Buckles, G4S plc - CEO [48]
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That's the other thing, it hasn't changed at all. We're 30% in Government still post-deal, and so ISS bring the same proportion as G4S, basically.
If there's no more questions from the floor, we've got a couple from the telephone lines. If I could have the first question on the phone lines, please.
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Operator [49]
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Jaime Brandwood, USB.
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Jaime Brandwood, UBS - Analyst [50]
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Just wondered, on the commentary around EPS enhancement, I believe you've said that you think this deal will be EPS enhancing in the first year following completion of the transaction. Obviously, you've talked about the bonus factor, and the bonus factor of course won't be determined until November 2, but if we just look at where your share price is today I guess we'd be looking at a bonus factor of more like 0.83 rather than the 0.69 that you've used for your example. Just wondering, on that basis, do you still think this deal is EPS enhancing? And, if so, what cost synergies are you factoring into that first year post-completion?
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Nick Buckles, G4S plc - CEO [51]
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What the share price has done today I haven't looked at because we're clearly doing this deal because it's the right thing for customers and shareholders in the long term. So I think we've said that we're going to deliver GBP75 million -- or GBP80 million of the synergies in the first year, and that's essentially what we're gong to do. We'll see where the share price ends up in the future, I guess.
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Jaime Brandwood, UBS - Analyst [52]
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Yes, okay. And then just in terms of what you were saying about strategy and divestments of France and Germany was one question that came up, but are there any other areas, as you look across the ISS portfolio, that could be potentially strategically divestible?
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Nick Buckles, G4S plc - CEO [53]
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If you look at what one needs to do to deliver integrated facilities on large sites, or onsite, there will be other areas of business that you don't necessarily need to have in the portfolio to deliver that. There's not a huge amount of business, and it's included in that GBP1 billion figure we're talking. So it's a mixture of parts of key countries in developed markets, but also some service or product lines which we don't think are core to an IFS proposition.
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Jaime Brandwood, UBS - Analyst [54]
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So, sorry, can you just remind me, the GBP1 billion figure that you referred to was divestible revenue?
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Nick Buckles, G4S plc - CEO [55]
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Correct.
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Jaime Brandwood, UBS - Analyst [56]
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Okay, great. Then just in terms of the cash conversion, I guess as I look historically one of the things that ISS has stood out for is very strong cash generation, and I guess I would argue certainly perhaps superior cash generation to G4S. As you looked at the synergies of this deal, was that one element of synergy in terms of using ISS processes to perhaps improve the pre-deal G4S cash conversion?
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Nick Buckles, G4S plc - CEO [57]
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I think it's just a question of measurement and the type of business you're in. But my quick answer to it would be when we bring the two organizations together we will take the best processes from both organizations. So we'll maximize what each organization is best at.
It remains to be seen whether our figures are different. I think it comes down entirely to capital structure and the fact we've got Cash Solutions CapEx exceeding depreciation. But you can be rest assured that if there are better process to be had, we'll be taking advantage of them.
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Trevor Dighton, G4S plc - CFO [58]
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Can I just add to that? Yes, I think our cash conversion's been pretty good as well over the years. There is a slight difference, as I explained, to the way ISS measure their cash generation. But they are slightly ahead of us when you adjust it for that, and the reason is, as Nick's just explained, that we've got cash solutions businesses in our mix as well. But, yes, if there are any process in there that will improve our processes, for sure we'll be on them.
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Jaime Brandwood, UBS - Analyst [59]
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Okay. And last question, I don't know if Jeff Gravenhorst is able to answer this question, but I remember part of the ISS IPO at the beginning of the year, one of the key things was about winning very large integrated contracts, and specifically there was a lot of analysis and case study around a very large contract that had been won with HP. Just wondering if we could get an update as to how that HP contract has ended up progressing, and whether any other similarly large deals are in the pipeline over the next 12 months.
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Nick Buckles, G4S plc - CEO [60]
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Jeff, are you on the line?
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Jeff Gravenhorst, ISS A/S - CEO [61]
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Yes, I am. We have started up the HP contract. Basically, we're now the global provider for HP. And in the -- this is particularly adding on in the US, but it's also extending Europe, and overall is according to plan. I think we're still in the process of converting to self-delivery in the US. But overall, it is profit making; and it's, of course, part of the reason why we have 7% organic growth in third quarter.
Of new deals, yes, we are working on new deals all the time. We are very selective of these because you need to make sure that these are companies that are actually ready to take global supply. So, typically, we go for regions at the moment, but we're also looking at one or two global deals. I cannot say the names, of course, at this point in time.
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Jaime Brandwood, UBS - Analyst [62]
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Okay. But you might hope for conversion of those global deals on a 12-month [view], as in you might hope to win those contracts on a 12-month view?
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Jeff Gravenhorst, ISS A/S - CEO [63]
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Certainly, we expect to win some on a 12-month [deal], but I think overall guidance you need to go for the numbers you get from Nick.
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Jaime Brandwood, UBS - Analyst [64]
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Okay, thank you.
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Operator [65]
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Laurent Brunelle, Exane BNP Paribas.
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Laurent Brunelle, Exane BNP Paribas - Analyst [66]
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Two follow-ups, please. First, on -- can you be a bit more precise in terms of cross-selling with new opportunities? And have you -- what kind of feedback have you received from your key clients? And can you be a bit more precise regarding that? I guess you have discussed with them.
Second, can you give us the contract retention rate of ISS, and also the churn rate? And what do you expect moving forward? Thanks.
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Nick Buckles, G4S plc - CEO [67]
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Yes, the second question's fairly straightforward. As again we've looked at the contract portfolio and the business model, it's almost identical to G4S in that the integrated contracts tend to have a seven to 10-year contractual life, so, say, 30% of the new Group, with indexation clauses on an annual basis.
Thereafter, most of the other contracts, depending on complexity, if they're fairly complex multi-service you're probably getting three to five-year contracts with indexation clauses; and then the single status or the single service contracts are typically evergreen contracts with annual price increase [dates]. The contract retention of ISS on evergreen contracts is 90%; the same as G4S, basically.
So the customer mix, the sectors in terms of government v private, the contract retention, the indexation formulae are almost identical between the two organizations.
In terms of the first question, that was about cross-selling in more detail, was it?
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Laurent Brunelle, Exane BNP Paribas - Analyst [68]
------------------------------
Yes, please.
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Nick Buckles, G4S plc - CEO [69]
------------------------------
I've talked about it in response to Andy's question. It is around in developing markets; having the customer relationship and introducing new services. We've done that in the security arena with some facilities expertise added on in the Middle East, particular in India.
Thereafter, it's in developed markets; using the customer base of both organizations, firstly, to add additional services where we've got service level excellence, but then that as a route to actually encouraging customers to do integrated facilities to drive cost benefits and service improvements.
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Laurent Brunelle, Exane BNP Paribas - Analyst [70]
------------------------------
Okay. But what kind of feedback have you received so far from your key clients? I guess you have already talked about this [post the deal].
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Nick Buckles, G4S plc - CEO [71]
------------------------------
We haven't had any feedback because, as you'd expect, it's a bit of a surprise to the market this morning. So -- but certainly what I would say is when we did the market research, which did involve some of our customers and some of ISS's customers, and we did hundreds of them, it came across loud and clear that there is a customer demand for integrated facilities, in that they know it's the only way you can get a single point of accountability, but also ongoing process and cost improvement. So that gave us the comfort. And now we, of course, will be talking to our customers about how we take that relationship forward.
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Laurent Brunelle, Exane BNP Paribas - Analyst [72]
------------------------------
Okay. And last one, maybe, what will be the measure risk in terms of integration process according to you?
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Nick Buckles, G4S plc - CEO [73]
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It's really what I mentioned; it's cultural fit and making sure we come up with one vision, one set of values, one set of business processes, that the selection of the management team is seen to be fair and equitable; and that we create something even better than the current G4S in the new G4S.
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Laurent Brunelle, Exane BNP Paribas - Analyst [74]
------------------------------
Okay, clear, thanks.
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Operator [75]
------------------------------
[Alan Pearson], Cazenove.
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Dan Pearson, Cazenove - Analyst [76]
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Question for Trevor. It's Dan Pearson at Cazenove. I wanted just to clarify the net debt-to-EBITDA ratio someone spoke of earlier. You said 2.9 times, is that correct? And is that based on the synergies to come out and the cost to achieve those?
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Trevor Dighton, G4S plc - CFO [77]
------------------------------
The net debt-to-EBITDA at the end of 2011, when we first set up the deal, will be about 3 times. This will come down over the first year quite substantially to about 2.4 times, but by the end of the first year. And then even further, in the second year, it would be down something like 1.9 times at the end of the second year. So a fairly rapid reduction in that metrics.
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Nick Buckles, G4S plc - CEO [78]
------------------------------
So, basically, you're looking two years down the line you're not dissimilar in terms of net debt-to-EBITDA as we currently sit, and in fact slightly better. So it doesn't take long to get back to where we are, and that's when we'll start to review the potential for new markets, acquisitions, typically.
I should have actually made the point earlier that with the new company we'll have tremendous positions in Brazil, China, and India, where we've both got a reasonable presence. So we do get a very strong platform for developing our business in those three countries.
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Trevor Dighton, G4S plc - CFO [79]
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I think what you might have heard before was the covenant. I was talking about the covenant on the bank borrowings; that's 3.75 times in the first year, coming down to 3.5 times after that.
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Dan Pearson, Cazenove - Analyst [80]
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Okay, thank you. Just a couple of other small points. Just in terms of maintenance CapEx spend for the combined Group, could you tell me that rough number on a historic basis?
And also, just in terms of the refinancing of the ISS bonds, are you -- is your understanding that some of the ISS bondholders may just choose to hold out?
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Trevor Dighton, G4S plc - CFO [81]
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We can refinance the whole of the ISS bonds with very little penalties, so that's what we're going to do. And the first question was what, sorry?
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Dan Pearson, Cazenove - Analyst [82]
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The maintenance CapEx spend.
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Trevor Dighton, G4S plc - CFO [83]
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Maintenance CapEx, yes, it's about GBP300 million the combined two organizations; a bit less than that, GBP280 million, something like that.
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Dan Pearson, Cazenove - Analyst [84]
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Thank you.
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Operator [85]
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[Diego Vaz de Silva], Goldman Sachs in London. Your line may be on mute; if you could unmute your line that would be very kind.
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Nick Buckles, G4S plc - CEO [86]
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Any more questions from the floor, before we wrap up? Okay, well, thank you very much for coming along today. I hope you enjoyed the presentation.
We are creating something very unique, and we look forward to telling you about it in the future. Thank you very much.
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Operator [87]
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This now concludes our call. Thank you all very much for attending. You may now disconnect your lines.
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