Building Businesses in the 21st Century
Wednesday 4th July 2012
Andy Nash – Turnaround Specialist
Simon Peckham - CEO, Melrose PLC
Jon Moulton - Founder, Better Capital LLP
Jeremy Davis - Partner, K&L Gates LLP
Chris Smith - Partner, Clearwater Corporate Finance
Copyright © 2012 by K&L Gates LLP. All rights reserved.
Buy
Improve
Sell
Strictly private and confidential
Melrose PLC
Seminar – 4th July 2012
Simon Peckham, Chief Executive
Introduction
“When a management with a reputation for brilliance tackles a business
with a reputation for bad economics, it is usually the reputation of the
business that remains intact”
Warren Buffett
You can only build from the right “foundations”
There are no short cuts (if there ever were)
Buy
Improve
Sell
2
Our approach to value creation

We buy, improve and sell over a timeline

We create time pressure upon businesses

We operate with a small head office

Decisions are quick

Head office is to devolve the maximum possible
Buy
Improve
Sell
3
Our approach
Buy
Improve
Sell
Buy
Improve
Sell
4
Buy
Good manufacturing businesses
Must be underperforming
Low technology risk
Cash generative
Available at a fair price
Buy
Improve
Sell
5
Improve
Look to speed up and remove politics
Set a 3 – 5 year strategy
Expect operational improvement and margin gains
Invest heavily in businesses
Drive new product introduction
Analyse the profitability of sectors, products, etc
The hard decisions are made
Buy
Improve
Sell
6
Sell
Timescales are flexible, open and management are involved
Return substantial sale proceeds to our shareholders
Will only sell when we have a business that has been improved
Buy
Improve
Sell
7
Melrose

Small, tight head office

Quick and responsive decisions
‒
Share the responsibility

As much as possible devolved to businesses

As little time as possible spent on Group issues by operational management

We want to invest / improve
Buy
Improve
Sell
8
Conclusion

If you buy businesses then the right price is the most important thing

Once you own the businesses

‒
Must have strong markets
‒
Must have momentum
‒
Must drive product innovation
‒
Must understand what makes a profit
There are fewer easy wins now
Buy
Improve
Sell
9
Conclusion
“The investor of today does not profit from yesterday’s growth”
Warren Buffett
Buy
Improve
Sell
10
Building a Business in
Confusing Times – Survival &
Turnaround
Jon Moulton
Better Capital
4th July 2012
Better Capital
• Full Listed share – c. £500m
market cap.
• 9 base deals, 9 add ons since
start of 2010.
• Nearly £1bn in revenues.
• Shares trade at a premium!
2
The essence of the analysis
Is there a decent business here?
Is there a transaction structure that facilitates extracting it?
Are there a few controllable steps to move to profit?
Can the foundations be created that will allow it to thrive?
3
Value transformation
The value we add allows us to pay a premium to break-up
price - even for materially loss-making businesses
4
A little thought experiment...
What would you do with a company which...
•
Always misses forecasts?
•
Has unhappy owners who distrust the board?
•
Has a huge unfunded pension deficit?
•
Has increased overheads in real terms for 13 years straight?
•
Has had negative cash flow for 20 years
.... and projects further negative cash flow?
•
Can only make ends meet by charging customers more and borrowing more to pay
the interest. No credible plan to breakeven?
•
Is betting everything on growth when there isn’t any?
•
Has recently made two large lossmaking acquisitions without any turnaround plan?
•
Cooks the books by missing out liabilities?
•
Has an appalling record on senior management expenses?
•
Bails out its competitors?
•
Had an unqualified finance director of bizarre appearance and a Trotskyist
background?
•
Put 2 Public Relations men in charge who have recently found out what a pasty
is??
5
Current Headlines
6
Current Headlines
7
Why do turnarounds?
• Most PE firms don’t
• Less competition
• Lower price
superior returns
large rapid losses
• Intellectual challenge
• Fun
8
Key steps
1. Buy cheap
2. Early violence required
3. Get stable
4. Grow business
5. Exit
9
• Private Equity people look
for good management.
• Right?
10
• Wrong.
• Not if you are looking for
turnarounds!
• Bad is good.
11
Bad Managers
• Don’t know figures
• Don’t visit
• Usually bad presenters - but…
• Divorcees, lovers (RBS ...)
• Often present in good
businesses too
12
Turnaround actions
Key areas:
– Products, markets, production,
sales, marketing
Fast actions: – Loss elimination (sales, closure)
– Cost reduction
– Cash control
Longer term: – Restore growth
– Restore margins
13
Evaluating turnarounds
• Risks
–
–
–
–
–
–
–
Financing
Commercial
Contingent liabilities
Receivership deals
Imperfect knowledge
Timetable
Increasing technical
complexity – pensions,
employee law
• Opportunities
–
–
–
–
Low valuations
Returns
Compressed timetable
Increasing technical
complexity – pensions
– Maybe less
competition
14
History as a predictor of potential future opportunities
Liquidations in England & Wales as % of Active
Companies
15
Questions
16
Questions and panel discussion
Copyright © 2012 by K&L Gates LLP. All rights reserved.