Logistics/Property


Summary:

To achieve a ‘soft landing’ administration of a £150m UK Group with c. 20 sites, 28 legal entities and c. 2000 employees

Date:

2008 – 2009 (2 + 12 Months)

Company:

Well known UK Logistics and Property Group of companies; a wholly owned subsidiary of a publicly quoted, ‘top 30’ company on the OMX Nordic Stock Exchange, based in Iceland.

Assignment:

To guide, as far as possible, the UK subsidiary into a ‘soft landing’ Administration at very short notice, to preserve as much value as possible for the Group’s creditors

Role:

Interim CEO

Assignment Length:

2 months to administration, + 12 months to complete residual company liquidations

Background:

The subsidiary group was a £150m sales organisation possessing c.20 sites in the UK and made up of 28 legal entities. With c.2000 employees, client product was stored and distributed on rail and road using temperature and humidity controlled storage and transportation.

The parent company had bought the UK business in 2006 for about €60m (a mix of cash and shares). Its 2007 results showed the ‘parent’ to have sales of c. €1.5bn, operating in 30 countries with 14,000 people. With 180 cold storage facilities globally, it is the largest company of its type in the world. The ‘parent’ had experienced a period of very rapid growth internationally, was profitable and had also funded some of its corporate growth more recently via the sale (and leaseback) of freehold property. The ‘parent’ had a strong expectation that this process of growth would continue in 2008 coupled with improved efficiencies from its new, wholly owned, subsidiaries.

However, as is well documented elsewhere, the international economy became much less welcoming in the second half of 2007, largely due to rapidly tightening bank credit facilities (the ‘credit crunch’) and the violent rise in the price of oil (rising to well over $100 per barrel). Both the N. American and UK economies started to ‘soften’, which put pressure on company performance as a significant proportion of revenue is earned in these two geographies. Higher energy prices had an effect throughout the company.

The subsidiary group had grown over the last 40 years both by acquisition and organically. Well known names in the logistics industry had also become part of the Group. The finance used to fuel this growth was largely through the obtaining of freehold property for a relatively modest sum; improving the facility, usually with the aid of grants, for either warehouse or office use and then initiating a sale and leaseback to produce ‘free cash’ for re-investment purposes. Indeed it was this funding model that was adopted by the ‘parent’ in N. America after it had acquired the UK subsidiary.

Clearly this approach for generating cash to grow the business can have much to recommend it as long as it is kept under tight control and is not allowed to run too far ahead of the actual growth of the business operations and their ability to more than cover the cost of finance (lease and overhead costs).

Looking back, it would appear that the UK subsidiary’s performance was showing signs of stress during 2007 and by the end of the first quarter of 2008 this was starting to become apparent to the ‘parent’s’ main board. In this period, a ‘big 4’ advisory had been engaged by the main board to review company performance across all areas and at the same time, changes had been made to the UK subsidiary board. A review of the UK Group by its Directors produced a turnaround plan for the logistics based operations which offered a full year operating profit (EBIT) of £5m. Unfortunately, this was more than offset by the accumulated rents accrued from the sale and leaseback strategy of £30m. It had become clear that there was no way the operational side of the company could bridge this enormous gap, resulting in the UK subsidiary Directors proposing some form of re-financing by the parent group and/or the sale of the UK subsidiary companies.

By April 2008 when these concepts were being put forward, the ‘parent’ was in no mood to continue to fund the loss making and cash negative UK subsidiary group and started to consider loss mitigating strategies. The ‘parent’ main Board accepted the advice received from their advisors to look at selling the loss making subsidiary and additionally, the Board embarked on a detailed review of how it had come to understand the real position at the UK subsidiary group, so late in the day.

In early May, the then recently appointed CEO of the parent group, with the agreement of the main board, undertook a search for an experienced interim with skill in working in very distressed organisations.

The Brief:

Early meetings with the parent group CEO and the advisors confirmed that there was no opportunity for turnaround with the UK subsidiary group in its current form. Emphasis had to be given to achieving ‘going concern’ sales of those parts of the business that had value to potential buyers and therefore offered a real opportunity for creating as much creditor value as possible.

To facilitate this strategy, very tight control of cash would be required until the sales could be completed.

The Assignment Work:

The parent group main board took the first 3 weeks of the engagement determining the best approach to adopt with the existing 4 local subsidiary Directors. Legal advice was taken in the light of information available and two directors were removed completely from the business, with the other two being removed as directors but were offered the opportunity to stay on as employees. In the latter case, the removal was as a consequence of the sales process reaching more advanced stages and it was recognised that these directors were assembling their own offer for some or all of the business. These directors chose not to stay within the company as employees.

In parallel, the interim was appointed as a director of the UK subsidiary group as a whole and as the sole director of the remaining 27 legal entities.

At that time, the UK subsidiary’s lawyers were also changed to align the service provision with the rest of the parent group’s UK interests.

Managing the day to day cash flow was complicated by the number of legal entities within the subsidiary Group; several of which possessed active bank accounts. Additionally, the finance department was under stress from creditor payment demands, still trying to close out a year end and a month end and having advisors in the department on behalf of one of the company’s banks. A data room was being established to support the sales processes, which was absorbing most of the Finance Director’s time.

It also became apparent that the previous board had taken a completely inflexible line on payments and any potential deterioration to any of the bank accounts or creditor books since the beginning of May. The level of communication in the business, at a point when this is crucial to be frequent and up to date, was very low resulting in the senior management team resigning “en bloc” at that time as ‘directors’.

Unsurprisingly, morale within the company was very low. The industry was rife with speculation about the viability of the UK subsidiary group, causing uncertainty with key customers and an opportunity for competitors to ‘make mischief’.

At the start of the operational assignment, the advisors had already initiated the sales process. Interest had been established for the chilled, frozen, ‘ambient’ and rail operations and the decision was taken to focus on these in the likely time available. The view of all parties involved was that the business may only be sustainable for a few days at most.

A second interim was engaged to focus on controlling cash flow. This was crucial as the banks (RBS, Glitnir and Barclays), prior to the new appointments, had little confidence in the ability of the company to see further than the current day and the credibility of the new management team needed to be high, very quickly, so that the support of all key parties was maintained to enable the sales to be completed.

The senior management team was immediately given a briefing of the current position and good dialogue was established so that all aspects of the company were shared and understood. Full commitment to the strategy of keeping the business operational whilst the sales were concluded was obtained.

Daily conference calls were undertaken with the advisors, the banks and the lawyers, ensuring sales updates, cash flow summary, which payments were to be made and any other relevant business. During the period RBS, as the main banker for the chilled business, reduced the overdraft headroom from £15m to £7.5m and then subsequently to £6.8m. This caused significant difficulty during the period but operational continuity was maintained.

Shortly after the start of the operational assignment, the parent group made a profit warning announcement to the Nordic stock exchange, largely as a result of the losses incurred within the UK subsidiary group. The parent company wrote off the NAV of the UK subsidiary group from within its balance sheet (€74.1m) and publicly confirmed that an active sales process was underway.

Regular board meetings were held (the UK subsidiary group’s two other directors were based in Iceland) to ensure good governance at all times, with the company lawyers in attendance.

There remained considerable ‘behind the scenes’ discussion between the main stakeholders (the parent company, Glitnir and RBS) as a result of concern over the corporate advisors remaining in situ (and therefore representing a potential link to the previous directors). After a couple of weeks, a decision was taken to appoint a fresh advisor, which was achieved after a short handover period.

As the sales processes continued positively and the creditor situation was becoming more difficult, a court appearance was made to give notice of intention to appoint an Administrator. It was subsequently discovered that a group of 15 landlords had formed a syndicate, appointed a lawyer and gone to court to obtain a winding up order over parts of the Group. Once this was understood (the order had not been served) and the sales processes were approaching a finale, a further court appearance was arranged to apply for Administration linked to the sales processes being concluded.

The Achievements:

  • Achieved ‘soft landing’ administration, with £103m+ greater creditor value versus forced sale
  • Kept all key clients ‘on-side’ throughout the process
  • Customer service levels were maintained within contract limits (c.£150m stock ‘live’)
  • Sustained operations as key account overdraft was reduced from £15m to £6.8m
  • Managed multi, month end payrolls (£1.7m) to maintain going concern status
  • Reduced weekly advisory bills by c. 25%
  • Built necessary credibility with the banks to sustain the process
  • Adopted appropriate communications levels to all interested parties
  • Gave support to all staff who were under considerable pressure throughout
  • Enabled successful completion of 4 parallel sales processes:
  • Chilled operations sold to Eddie Stobart via ‘pre-pack’ arrangement
  • Frozen operations sold to Harry Yearsley via ‘pre-pack’ arrangement
  • Ambient’ operations sold to Eddie Stobart via post Administration completion
  • Rail business sold to Corus via post Administration completion
  • Delivered full recovery to secured creditors (£7.5m and £10m)
  • Made £6.4m funds available for preferred (£0.3m) & unsecured creditors (£19.6m)
  • Secured 1900+ employees’ jobs via TUPE to the new business owners (>95% of total).
  • Managed smooth handover to administrator in waiting.

The Outcome:

The final court appearance was successful, resulting in the appointment of BDO as Administrators, the chilled and frozen businesses being sold as going concerns immediately out of Administration (as ‘pre-packs’) and the ‘ambient’ and rail businesses being completed shortly thereafter.

Under all the circumstances, a satisfactory outcome to the work was obtained for the client. In the context of the Icelandic economy, achieving the outputs from this work helped in dampening any public (or political) concerns at that time regarding the stability or otherwise of the larger company players (the ‘parent’ is one of the 30 largest companies on the OMX Nordic exchange).

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