Hydraulics


Summary:

To establish very short term actions to improve operating cash flow: to work as a board to avert insolvency through obtaining an appropriate ‘white knight’ investor.

Date:

2006 (3 months)

Company:

An AIM listed PLC with a c.£105M sales and about 750 employees. Manufacturing sites (4) were based in the UK, Spain and Poland, with sales and distribution operations also present in the USA, Italy and Germany. The group was vertically integrated for the use of new and recycled copper metal to be formed into a very large range of fittings for use in commercial vehicles and domestic heating systems. Additionally, extruded plastic and rubber hoses were produced for the industrial market.

Assignment:

To assess where immediate savings could be made to improve cash flow. This was quickly expanded to handle the ramifications of trading in difficulties whilst trying to raise funds from alternative sources. This lead to seeking either a ‘white knight’ investor or a soft landing administration to save the company.

Role:

Main Board Director

Assignment Length:

3 months

Background:

The company had been the subject of a turnaround previously (a £7.2M loss to a £9.6M profit and cash generative), resulting in profitable performance. However, for some months, the price of copper, representing c.40% of total costs at the start of the period, had risen precipitately, tripling in price over about 6-9 months. The impact of this commodity hyper-inflation was to completely remove all profitability and generate a rising bank debt. This had reached over £30M and was continuing to climb towards the lending ceiling rapidly. As a result, the bank had requested an IBR and the involvement of KPMG to monitor and control company spending on its behalf.

The Brief:

The board appointment was made to review options for the business to achieve sufficient funding and time to manage operational activity into calmer, more profitable waters.

The Operating Situation:

Throughout the period of copper hyper-inflation, there had been no price increases passed on to the customers. Given the approximately 3-fold increase in the commodity price, which was 40% of costs at the start, it was plain that this situation had to change.

A review of the working capital employed in the business was undertaken. In particular, it was clear that de-stocking was quite possible as warehouse control was inadequate. Cost savings of approximately £3M were identified.

As a result of the IBR, the Board assessed the option of a Rights Issue but it quickly became clear that the time required to undertake this process, according to AIM rules, would be too long. Additionally, the bank and existing shareholders were not prepared to extend any further financing, having seen that the developing cash flow position was likely to be terminal.

Property sale and leaseback was also discussed but it was clear that time was against any such deal being concluded in the relevant few weeks remaining.

It was quickly confirmed that the sales force could achieve price increases to offset much of the copper price rises and that this could be dealt with contractually for the future, so that such a change would not cause further difficulty. This was put in place immediately.

The stock reduction programme was initiated but would take much longer to obtain the full benefits than the company had time prior to running out of cash.

Due to the cash condition of the business, the board determined that it was prudent governance to recognise the threat of insolvent trading and adopted much more frequent board meetings, with independent legal advice present at all stages.

Alternative banking facilities were investigated. After a number of progressive meetings with a third party bank (Landsbanski), a final decision was taken by its main board not to approve the new facility.

In parallel, a ‘white knight’ investor was being sought. A rapid review of likely investors identified a recently established PE business (Endless LLP). Initial meetings revealed potential appetite for a deal. More detailed discussion was entered into, resulting in an agreement to acquire the group from administration, which was subject to acceptance to carrying over 100% of creditor commitment and an offer to all shareholders of 2 options to preserve a significant element of shareholder value.

Achievements:
Key deliverables on behalf of the business, creditors and shareholders were:

  • Immediate cash injection of £10M by the PE firm, post deal
  • A £3M stock cost saving programme was passed on to the new owner
  • Product margins had been restored by the time of the sale.
  • The time for the deal was only possible thro’ the cash controls implemented
  • New bank finance had been obtained for the new business.
  • No group trading company became insolvent in the process.
  • The Newco established profitable trading, achieving £12M+PBIT in the first full year.
  • All creditors were transferred to the new group at 100% of debt.
  • Shareholders were offered an option of cash or a swap for shares in Newco.
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