'In the hands of the receiver' can be music to the ears of bargain hunters: after all, spectacular fortunes have been made from businesses that many would have regarded as not much more than carcasses. Matthew Lynn.
When Robert Bischof first walked into the Leighton-Buzzard plant of the fork-lift truck manufacturer Lancer Boss he was dismayed by what he saw around him. Antiquated machinery, a demoralised workforce, poor quality and incompetent management surrounded him. It was, he decided, hardly surprising the company had wound up in the hands of the receivers.
'Everything was old-fashioned and suffered from underinvestment,' Bischof, now Lancer Boss's chief executive says. 'The workforce was hostile. There were excellent ideas and some talented engineering, but it was all poorly manufactured. That was why it went bankrupt.' Lancer Boss was an old established British company, which had been one of the largest and most successful private companies in the UK. By the early 1990s, however, it had fallen into disrepair. In May 1994, after the banks had pulled the plug on its German subsidiary, the company was forced into receivership.
It was bought by a competitor. The German fork-lift truck manufacturer Jungheinrich, which had long known Lancer Boss as a rival in the market, saw its chance to take over a competitor that, although it was ailing, was still in possession of a sizeable chunk of the market. It first bought the German subsidiary from the receiver in that country, and then, a week later, paid £38 million for the British parent company.
Eighteen months later, the business has been transformed. Early in September this year, the company announced that it was spending an additional £10 million on its new British operation: a move which followed the investment of £1 million earlier this year on revamping its UK sales operation. The spending spree was prompted by the success of the operation since it was taken over.
By September, the order book, which had stood at just £10 million when the company was bought, had grown to £29 million. And productivity, even with the split production sites, had grown by 38%.
Lancer Boss may sound like a typical tale of a swift turnaround by new management, but the difference in its case was that it was rescued from the hands of a receiver. To many people, once a business is bankrupted, it is little more than a carcass, ready to be dismembered piece by piece. It is certainly not something that is likely to have any viable future in anything resembling its old form. And yet, in truth, there are many, many examples of companies rising successfully from the corporate graveyard.
Companies head towards receivership for lots of different reasons, but they all finally have one thing in common: they have run out of money. Just because the cashflow at a business has dried up, however, does not mean it is forever doomed. It can happen that, with an injection of fresh capital, and with new management, a flourishing company can rise from the ashes. 'Often there is a sound business, which has been weighed down by having too much debt,' says Chris Hughes, insolvency partner at Coopers & Lybrand, the accountancy firm. 'In other examples there is a company which has the wrong management. In either case it can recover.' Lancer Boss was an example of an entire company going under and being brought back to life by a rival. In many other cases, it is only one or two divisions that can be successfully salvaged from the wreckage of a receivership.
Sale Tilney was a mini-conglomerate, one of many that was put together in the 1980s by entrepreneurs hoping to emulate the success of companies such as Hanson and BTR. Unfortunately it did not have the strict financial controls of those mentors, and by 1991, sunk by rising interest rates and the downturn in the economy, it had collapsed into receivership.
One of the companies it had taken over was Tesla, a specialist engineering business making electro-magnets and coils to be used in medical scanners and other high-technology machinery. The managing director at the time of the collapse was Mike Begg, who, despite the travails of his parent company, believed that he was running a sound businesses.
After the parent company went down, Begg decided to form his own rescue of the division. From his own resources he put together enough money to pay for 10% of the business, and to raise the rest of the money he went to the man who had originally founded the business before selling it, John Wheatley. Wheatley was initially reluctant to re-involve himself with an enterprise he had already sold once, but, persuaded by Begg, agreed to join the venture. Together they paid £1.5 million for Tesla, an offer the receivers were happy to accept: Wheatley took 84% of the equity, and Begg 10%, with another 6% set aside for other managers at the firm.
Although it had made a small loss in the previous year, Begg was convinced that Tesla could make good profits once it was freed. 'The company had been mucked about by Sale Tilney,' he says. 'It had put in an inadequate managing director who made a loss in one year.' Since moving back into the private sector, Tesla has flourished. In its first full year since being bought from the receivers, the company made a profit of £1.5 million, meaning that the purchase price had been paid back in just one year.
Earlier this year, Wheatley sold his shares once again, transferring majority control of the business to two venture-capital firms. The selling price valued the entire company at £14 million - a near 10-fold rise in just 30 months since it came out of receivership.
Both companies illustrate different aspects of the opportunities and difficulties that can be expected when buying from a receiver. At Boss, the entire group had crashed, and the state of the business was poor. Bischof recalls his first task on taking control as being to inject some life into a company that had become moribund.
'The first task was to talk to the people,' he recalls. 'I held staff meetings immediately, to tell people what we wanted to do, but also to invite their views on what needed to be done.' One advantage he had was a wealthy parent, able to start injecting money into its new purchase. More important, however, was to create a sense of enthusiasm and purpose. 'We had to put a new management structure in place,' says Bischof. 'And responsibilities had to be delegated, so that workers could take more control of their own jobs. Bringing out new products was not possible immediately. But what we could do quickly was to improve the quality of the trucks. And the first money we spent was on after-sales service, where it would improve our relations with the customers.' Tesla faced a different set of circumstances. Begg was already controlling the business he was planning on buying, and knew what was right and wrong with it. He had a good idea of the profits it could make; his main task was to ensure that he bought the business at a price that ensured he was making a sound investment. In both cases, the companies faced competition - Lancer Boss from rivals in the same industry, Tesla from entrepreneurs hoping to pick up a company cheaply. 'There were rival bidders,' says Begg. 'But I would have been disappointed if they won. They were people who would have taken what they wanted out of the company and then shut it down.' In that case, a buyer planning to operate the company as a going concern could afford more than one that was hoping to asset strip.
Receivers are not sentimental about who they sell to. Their task is to secure as much money as possible for the creditors, not to ensure that the company survives. Usually they will have some knowledge of the company before they move in. 'It is rare for the banks to appoint a receiver without getting a report from the accountants first,' said Nick Lyle, insolvency partner at Touche Ross. 'So we have a good idea of the state of the business before we go in.' In many instances, the receivers will try to restore a business to financial health before selling it. At LDV, the van manufacturer which was successfully sold to a management team, the receivers laid off several thousand workers themselves, paying only the minimum statutory compensation, before negotiating the sale. That made the company a much more viable proposition for its new owners. On top of that, receivers will often restructure the financing. 'Usually you find the company has far too much debt, and that is the reason it has gone under,' says Hughes. If the business cannot be saved then the receivers have no option but to shut it down. That most often happens, they say, with businesses with few tangible assets such as software companies. So long as they can sell it, the main issue is always price. 'Receivers are not a soft touch,' says Lyle. 'We always try to get the best price we can.' In the case of Lancer Boss the receivers at Grant Thornton managed to talk the price up by several million before it finally agreed the sale. Usually they are not worried about who they sell to, unless there is an element of deferred consideration involved. Receivers, says Lyle, will accept deferred payment if it is the only way to achieve a sale.
'But we always favour a cheque-book buyer,' he says.
The key ingredients that buyers look for, according to receivers, are whether the business is in fundamentally good shape, whether it has been damaged by the departure of the old management, and whether the receivership has damaged its relationship with its suppliers and creditors so badly that it will be impossible for it to recover.
And yet, as all of those cases illustrate, there are spectacular returns to be made from buying businesses from the receivers. Indeed, there are now several examples of quoted companies which have been built on the back of businesses that only a few years ago were bankrupt. One is Oasis, the chain of women's fashion shops floated on the stock market this year, another the pottery business, Denby.
Some companies have even returned directly to the stock market from the hands of the receiver. Frost group, the petrol retailer, had been bought by the property developer Norfolk House for £60 million in 1990. A year later, Norfolk was being wound up, and the receivers, Arthur Andersen, rather than sell the company, floated Frost back on the stock market (placing the share at a price which valued the company at £46 million).
Spectacular fortunes have been made from buying businesses from the receiver. Hillsdown Holdings, for example, owes its origins to the purchase of Lockwood Foods when it was bankrupt. And Graham Kirkham, who made a £300 million fortune when he floated his DFS Furniture chain, owes much to the purchase of DFS from the receiver in 1983.
'We have a constant stream of people contacting us to see what we have on our books,' said Scott Barnes, the insolvency partner at accountants Grant Thornton. 'Many of them are hoping to pick up a bargain.' Given the fortune made by others, their interest is hardly surprising.
There are dangers, of course. Not all purchases from receivers end up with fortunes being made. Platt Saco Lowell, for example, an Accrington-based manufacturer of textile machinery, first went into receivership in 1982. It was bought by the American company John D Hollingsworth, which no doubt thought it had acquired a bargain. Eleven years later, it was back in the hands of the receivers, having done no better for its new owners than it did for its old. This time, after two-thirds of the workforce were sacked by the receivers, it was sold to a management team. As with most business decisions, success depends on buying the right asset at the right price.
Professional vultures make a dive for the bargains
Receivers can be appointed by any of a company's creditors, or by the company itself. Usually they are appointed by its bankers.
The job of a receiver is to find the maximum amount of money to pay back the creditors; the shareholders only receive what is left over after all the creditors, and the receiver, have been paid. Sometimes the best a receiver can do is put the furniture and machinery up for sale. More often, they will try to sell the business as a going concern.
Receivers have wide powers. Once they are appointed they are effectively the chief executive. Because they are appointed by the creditors, they are freed from many of the responsibilities that might have crippled the old management. They no longer have to pay interest on its debts. They do not have to honour supply contracts. And they can lay off staff without having to pay out big redundancy packages. For that reason, they can often keep a business running for several months, even though it was financially unviable under its old management.
So long as the receivers think there is some life left in the business, they will usually try to put it back into reasonable shape before looking around for a buyer. Nobody benefits from a fire sale. They can already be working from a good base of knowledge. 'Very often when we go into a company we have already done a review for the banks,' says Nick Lyle, insolvency partner at the accountants Touche Ross. 'The overriding point is whether the people lending money to the business have done something about it before the company has deteriorated too far.' If there is a sound business left, however, the receivers are unlike any other sellers of a business. Though they try not to conduct a fire sale, there is no doubt that they will sell, and quickly. While they will try to get the highest price possible, their first duty is to recover money quickly for the creditors. Whether there is any worthwhile value in it for the shareholders from the sale will not rank too highly on their list of priorities.
And when they do sell, they will be looking for cash. 'As a seller we like a cheque-book purchaser,' says Lyle. Management buyouts, he points out, often lose out on auctions conducted by receivers because they cannot guarantee to raise the money quickly enough for the tight timetable they are working to.
When it comes to picking up the bargains from the receiver, it is the trade buyers and professional vultures that start with a decisive advantage. Matthew Lynn is business correspondent on the Sunday Times.