Chasing Rain-MBOs

The risks and rewards of taking the MBO/MBI route

Marketers love taking risks, as long as the risk is somebody else’s. They can bask in glory if their strategies work well, knowing their companies will foot the bill if it all goes wrong. For those in big corporations, the chance to make serious money seldom arrives. A safe salary cheque at the end of the month ensures they never have to chance their arms too far – but neither do they stand to reap the rewards of the real risk-takers.

The work-a-day marketers must look with envy at entrepreneurs like Chris Anderson, the founder of Future Publishing, who is about to make himself £125m richer from the flotation of the management buy-in he headed. Or at Paul Judge, whose management buyout of Premier Brands netted him £45m when it was sold off in 1989. Then there is Pat Burnett, managing director of high street fashion chain Wallis, who is understood to be heading a £90m management buy-out of the business from parent Sears. She and her team could pocket a small fortune if the buyout is successful and a buyer is found.

But for every ambitious manager that reaps the financial rewards of a successful MBO, there are plenty of others who are never given the chance. One source says: “There can be hostility to giving that opportunity. Bureaucrats in the holding company may not want to see the local managers netting a load of cash in a few years’ time.”

Quitting the company altogether and joining a management buy-in team, while establishing good relations with a venture capitalist company is one way to get in on a good deal. It pays to take a view on where MBOs are likely to take place. John Spayne, head of consumer products at investment bank Robert Fleming, says: “There is a polarisation happening between the very large, global branded companies such as Heinz and Nestlé, which focus on a few core product areas with global potential, and small but good quality businesses in unwanted areas.”

But he cautions: “You have to ask how do you define the success of an MBO? The new management might turn around a business, but they need to be able to secure an exit, through a sale or a flotation, to make their cash.”

Management buyouts and buy-ins are not for the faint-hearted. For many marketing professionals, MBOs/MBIs are an unsettling prospect and best avoided. They are driven by tight business plans which are usually centred on financial concerns rather than marketing.

The institutional backers lay down draconian debt repayment timetables which the venture misses at its peril. Consequently, MBOs/MBIs operate in an environment where a missed financial hurdle means the plug will be pulled on marketing initiatives that don’t deliver immediate results.

The requirement to hit financial targets means the marketing goal posts move around, and neat three-year marketing plans are seldom delivered to the letter. The purist approach to marketing frequently gives way to hands-on pragmatism. There are even stories of marketing directors having to roll up their sleeves on the production line to help hit a debt repayment deadline rather than sipping coffee over the latest qualitative research report. What’s more, if the MBO never achieves a lucrative exit (usually meaning either a float or a trade sale), this pressured environment will persist for some years.

So why do some marketers relish the idea of taking part in MBOs/MBIs if the risks are so great?

The financial rewards can be very significant. On joining an MBO/MBI, a manager might be invited to take an equity stake for a few thousand pounds, which could be worth a healthy six-figure sum if the MBO manages a successful stock market flotation or trade sale. This will happen within five years if the venture capitalists have their way. So the MBO option seems a smarter alternative to more conventional employment, where performance related bonuses rarely account for more than 20 per cent of basic salary.

But for many marketers, MBO/MBIs have appeal beyond financial reward. Particularly for individuals weary of the slow-moving grind of marketing in large corporations, the entrepreneurial excitement of a new, thrusting MBO is just the dynamic antidote they are looking for.

Marketing in MBOs/MBIs is often very different to more conventional marketing. Take new product development (npd), for example; in an MBO there simply isn’t the luxury of being able to meticulously plan slow-burn npd initiatives that add complexity to the business, dilute focus on the core cash generators, and which are unlikely to pay back within three years. Fast-track or guerrilla npd, which capitalises quickly on expedient new business opportunities, are much more suited to MBO marketing. The results would not pass muster in the cathedrals of packaged goods marketing excellence because they are not researched or test-marketed thoroughly prior to launch, but the satisfaction of contributing to the MBO’s bottom line through a hastily introduced product or an exclusive customer brand can be immense.

This faster, streetwise approach usually suits the marketer who is experienced and confident enough to break the marketing rules. Such entrepreneurs are also more likely to have enthusiasm for finance, production and logistics, and eschew the ivory tower attitudes common among classic blue-chip marketing specialists.

Finding out about future MBO opportunities is not that easy because often they are triggered by some unforeseen event – the plethora of buy-outs that have occurred in the drinks industry are the direct result of the Government’s Beer Orders, requiring the large vertically-integrated brewers to divest either their pubs or their breweries.

However, it is often possible to examine the likely scenarios for individual companies or industry sectors. The tell-tale signs are a division of a larger group that does not fit with its corporate parent, impending regulation or some technological change on the industry horizon. So, for example, perhaps the desire to focus on Internet products will trigger some of the large publishing houses to offer MBO opportunities for their magazine titles. Or perhaps an industrial group like RMC owning a retail business such as Great Mills raises a few questions on the possibility of an MBO/MBI. Both these examples illustrate how thinking about future scenarios can identify possible MBO/MBI opportunities.

Given that several thousand MBO/MBIs have passed under the bridge in recent years, it is possible to identify the key success factors.

Near the top of the list is getting the team right, particularly its complementary skills and team chemistry, which will be needed to withstand the tensions that invariably arise. Depth of management is important too; second line managers must be capable, empowered and committed because the top team has to spend a lot of time with institutions and advisors, rather than being embroiled in the day-to-day business.

Above all, managing expectations is the name of the game: “under promise and over deliver” is sound advice at the best of times, but with the all-important financial backers, this is the watchword for survival. It presupposes that the business plan and financial model on which the MBO/MBI is built can be achieved. It is taken as read that your business plan is built on growth. Generally this is the easiest to achieve if you have a growing market, so that even if market share stands still, you are delivering expectations. Needless to say MBO business plans assuming share growth in a declining market are often regarded as foolishly optimistic.

Finally, timing is everything. MBOs and subsequent flotations thrive in a rising stock market. So if the sting is in the tail of a bull run, do be cautious about joining up with that MBO next week.

MBO/MBI Players

Future Publishing

Chris Anderson is about to make a £125m fortune by floating Future Publishing, the company he founded in 1985. Last year he and chief executive Greg Ingham bought back into Future with the help of venture capitalists Apax after selling it to Pearson for £52m in 1994. Last week Anderson announced plans to float Future and sister company Imagine Media as a new company.

Anderson says: “Typically MBIs are in fast growing sectors and as long as the company grows rapidly it can pay off its debts. To make things happen in an MBO or MBI, top managers have to put a lot of energy into making it succeed. It is critical that every employee is motivated because success depends on having committed, energetic people throughout the company.”

Golden Wonder

In late 1995, former chief executive of Homepride Foods Clive Sharpe led the management buy-in of Golden Wonder, a company in the Dalgety group. Sharpe led a six-strong team, three from Golden Wonder, three from Homepride, got financial backing from Legal & General, and in the three years since then has worked to turn around the fortunes of the ailing company. Debts have been paid off, sales are back on an upward path and generating operating profits of £10.1m last year. Flotation is expected within the next two years.

IPC

Since the £860m MBO led by Mike Matthew in December 1997 and backed by venture capitalists Cinven, IPC has struggled to fulfil the criteria of having highly motivated and committed staff to make the MBO work. The company has had difficulty securing rapid growth in its existing markets with static and declining ABCs, and earlier this year, IPC was forced to make 200 redundancies, which must have had a damaging impact on morale. In its favour, IPC dominates the weeklies sector which is a huge – though shrinking – market which is generating a lot of cash.

Mills & Allen

When Vivendi, the French communications conglomerate, put its outdoor advertising business Havas Media Communications – Outdoor Advertising (HMC-OA), including Mills & Allen and SkySites in the UK, up for sale, it put out clear messages from a very early stage that it was not interested in management buy-outs and that it would strongly disapprove of any such activity.

There were reports that Mills & Allen chief executive David Pugh and his management team were preparing an MBO, because it was widely expected that certain trade buyers of HMC-OA would have to sell off M&A for competition reasons. But MBOs in any part of the HMC-OA empire were never a realistic possibility. Havas was getting out of the outdoor advertising sector and wanted to sell to the highest bidder – banks and venture capitalists looking for a relatively quick return would not have been able to stump up the requisite amounts of cash for what was becoming an overpriced sector. Also, Havas did not want rumours of MBOs diminishing the selling price of its assets – potential buyers might be put off if it looked as if the line management might be hostile.

Premier Brands

The biggest management buy-out of its day was the 1986 MBO of Cadbury’s grocery operation by top manager Paul Judge. The £97m deal involved Judge and fellow directors risking their homes and borrowing money to find the purchase price. The gamble paid off. Premier Brands was taken over in 1989 for £310m, and Judge pocketed a reported £45m.

Taunton Cider

The Taunton Cider MBO was a classic of the early Nineties. The company was owned by a consortium of large brewers, primarily Courage, Bass and Scottish & Newcastle. The Beer Orders that followed the MMC inquiry into the UK beer market stipulated that the large brewers could not “tie” their outlets to a cider supply, and the commercial rationale for a large brewer owning part of a cider company disappeared overnight.

The brewer consortium therefore decided to sell the company. Rather than offloading Taunton via a trade sale to competing drinks companies, the company was sold to its management for £72m in 1991. When it floated on the Stock Exchange in 1992, its market capitalisation was £153m. It was then sold to Matthew Clark for £271m in 1995.

Tetley

Since Tetley’s 1995 £190m management buy-in from Allied Domecq, operating profits have risen from £10.7m to £41.1m. Even so, plans to float the company were pulled last year as the management balked at the recommended share price. The buy-in was led by specialist Leon Allen, who became chairman, and chief executive and finance director Roger Price, with Tetley GB headed by managing director and chief executive Ken Pringle. It looks likely the business will be sold off rather than floated.

Whitbread

The planned management buy-out of Whitbread’s brewing interests led by managing director Miles Templeman looks less likely to go ahead as the days pass. The Beer Orders require Whitbread to rid itself of brewing so it can buy Allied Domecq’s pubs. But Templeman says a demerger – and possible float on the Stock Exchange – is preferable for Whitbread because “it is something we can control more effectively”.

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