Restructuring to Improve Private Equity Returns
Manufacturing group of companies
Background
A private equity backed manufacturing group of companies had a turnover of £60m. Although making a net profit of £1m pre tax profit per annum, this was regarded as inadequate by investors who felt that management were running the business to suit their own lifestyle rather than to maximise the return to investors.
Position on Instruction
Unfortunately the buy-out documentation did not give investors the right to remove management, who were also substantial shareholders in their own right. They had attempted for over a year to persuade management to take steps to improve performance or step aside but without success. Investors, who were also holders of unsecured loan notes, were able however, to take action to create a technical default under banking covenants enabling the group’s bankers to appoint administrative receivers over the parent company.
Immediate Action
The directors were immediately suspended from duty in the subsidiary companies and turnaround managers were appointed in their place.
Follow Up
This included:
- Rationalisation of manufacturing operations.
- Stabilisation of major customer relationships.
- Removal of non-performing managers and those not able to accept change.
- Introduction of professional purchasing practices across all companies.
- Change of emphasis from production focus to customer focus.
- Financial restructuring and refinancing of operating subsidiaries through a Newco structure.
End Result
The financial restructuring was completed within six months and significant performance improvements were also achieved in this period. Within the following three years an acquisition and significant further operating gains were made enabling more than the total amount invested under the refinancing to be returned to shareholders by way of dividend. The Group is now twice the original size and highly successful within its field.
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