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Hilco: Turning Bad Money Into Good

Published on Jan 12 2011 9:31 AM in Retail

Hilco: Turning Bad Money Into Good

Hilco has a fantastic reputation for making the most out of failing retailers. Kevin Kelly talked to its owner, Paul McGowan, dubbed King of the Restructurers, about the art of crisis management.At the Berlin World Retail Congress in October 2010 a 1,000-strong army of delegates – retailers, suppliers, academics, consultants (Bain, McKinsey, Accenture, Deloitte, KPMG, PWC) and great software firms (Oracle, IBM, NCR) – met to talk business as the global economy began to stutter back into life. Among such vaunted company, it was hard to stand out, but one name caught our eye. Hilco, a retail restructuring company, is seen by many in London’s Square Mile as a star at saving struggling businesses. In these difficult times, any company with the alchemic gift of turning bad money into good is going to make a name for itself. Although it has worked largely in non-food retail, Europe’s ultra-competitve grocery industry may offer Hilco huge potential in the future

Of course, there are those who see companies that rely on the failure of other businesses to make profit as ‘ambulance chasers’, but Hilco is much more than a classic asset stripper. It wields its own financial muscle, giving the company more flexibility when trying to sweat or turnaround the distressed assets it acquires.Hilco’s client list does not read like a retail obituary column, although many have indeed vanished from the high street. But some big names have been taken through the recovery process and successfully sold on. Hilco’s special touch has seen it become the leading player in the market, ahead of  competitors Gordon Brothers and Great American Group. As one banker put it: “When we dealt with Hilco, it did what it said on the tin. From a banker’s point of view, it is very straightforward and honest.”ESM spoke to Paul McGowan, the chief executive and largest shareholder of Hilco UK, who explained how a deep understanding of the retail business has helped the company claw back maximum amounts of cash from crisis situations.For the last ten years, this quietly spoken Belfast-born chartered accountant has been acquiring distressed assets within the UK retail sector. He set up Hilco UK, a joint venture with the Chicago-based Hilco operation in the US, and the new entity’s performance has been impressive. In 2005, McGowan sold a 33 per cent stake in the Hilco UK business to Goldman Sachs and Cerberus, the big US hedge fund, which proved he had arrived as a major player on the global stage.Today Hilco UK is located in Bond Street, one of London’s most prestigious addresses, and is run by COO Andrew Pepper, who heads up a 50-strong team of chartered accountants. Pepper, a perfectly attired and charming English gentleman with a huge reputation in the accountancy world, has an impeccable CV. Educated at Manchester University, he has reached the level of partner in the big three accountancy firms, but clearly the attraction of having a slice of the action at Hilco persuaded him to join. McGowan headhunted Pepper from Kroll, an American security company that also has a highly-regarded financial restructuring organisation. Interestingly, Kroll has been involved in some of Hilco’s most successful and strategic ventures to date.Hilco does a lot more than buy a distressed asset, strip the value and run. It has a turnover of £700 million and a growing portfolio of retail outlets, some 57 Habitat stores in the UK, France, Germany and Spain, 55 Allied Carpet stores and 74 Denby Stores.The Habitat deal is fascinating. Its owners, the mega-rich Kamprad family, heirs to the Ikea fortune, were so keen to get rid of the company it gave Hilco a “golden dowry” of £45 million. McGowan was not impressed by what he found. One year on, the store chain started by design guru Sir Terence Conran is on the verge of making profits for Hilco.McGowan says Hilco likes to work closely with directors to try and rescue businesses, but they also work with lenders to maximize the takeout. Unlike many in the dark world of  receivership, Hilco is happy to put its money where its mouth is. “Valco Capital Partners, the investment arm of Hilco UK, provides investment and acquisition finance and working capital funding to stressed businesses where the Hilco approach and restructuring expertise can add value,” McGowan explains.McGowan told ESM that the company is are fully funded to acquire debt at speed from £500,000 to £250 million. One competitor conceded it was a potent mix and that at the first sign of any distress the Hilco hit squad would sense an opportunity and move in quickly. White knights or scavengers? Either way, they can write a cheque within 24 hours. Clearly this is something that Deloitte, KPMG, PWC, Accenture and McKinsey can’t do.I asked McGowan to describe some of the more effective deals they have been involved in. High on the list was the purchase of £150 million of the Allders Department Store chain debt, which went into administration. Hilco provided an extra £15 million of working capital to extend the administration period and hence secure a more orderly disposal of the assets. Managing the stores, Hilco was able to sell £200 million of stock and negotiate deals with concession houses which realized a further £30 million in sales. Some 30 stores were transferred to secure high street retailers – Debenhams, BHS and Primark – and some 3,500 jobs were saved. Nevertheless, picking over the remains of struggling companies will always attract a degree of bad publicity. McGowan is realistic – and sanguine – about this. “Hilco is often a last resort for owners,” he says. “When a business has failed, we employ a clear methodology for the administrators that maximises the recovery of money for creditors and banks. But this tends to put us in the firing line from a PR perspective.”Neil Collins, a former business editor of The Daily Telegraph, looked into the Allders deal. “It is hard to blame the likes of Hilco for exploiting the rules as they stand,” he wrote. “When you bought something for 26p and see an opportunity for something near 90p, it would require forbearance on a scale unknown to a banker’s mind not to go for it.” He added: “The website of Hilco is a window into a whole new world; this obscure financial company offers complete retail solutions.”Another successful deal was the debt and operational restructuring and £30 million MDO of Denby Pottery. Faced with more than £60 million of debt, a substantial unfunded last salary pension scheme, high fixed costs and a decline in the traditional route to market, the outlook was bleak. Administration, it was expected, would lead to closure and the loss of 600 jobs.This was not a closing down operation. Valco provided working capital to stabilise the business. A rise in like-for-sales was soon achieved, boosted by improved sales materials and promotional activity. A rapid expansion strategy was implemented – the number of retail outlets and concessions rose by 100 per cent in 18 months – and a review of the brand’s architecture led to a switch in emphasis from manufacturing to a more brand-focused approach. This led to successful brand extensions into kitchenware and cutlery.Strategic partnerships were developed leading to the launch of Derby Monsoon in 2009. “Our executives have been using our extensive contacts to create a step change in the routes to market,” McGowan explains. “Last month Denby supplied a diffusion range to Tesco and is now rolling it out to France, Germany and Spain.”At the Insolvency and Rescue Awards, Valco got the ‘Business Rescue of the Year’ award in the £21-50 million turnover category. Other successful Hilco deals include the acquisition of Woolworths and Allied Carpets (see boxes).Earlier this year Hilco opened an office in Düsseldorf. McGowan sees Germany, the Netherlands and Belgium as significant opportunities for his company. In October an Irish office opened in Dublin. The distressed nature of the Irish economy clearly offers opportunities for the Belfast man, who lives in the Republic of Ireland.Mainland Europe, however, is where the big business for Hilco lies. And, while traditionally its main focus has been in the fashion departmental area, McGowan believes there is significant under-performance by some grocery retailers.We leave the last words of the story to the ‘King of the Restructurers’, McGowan. “Many retailers have dedicated teams for opening stores,” he says. “We have dedicated teams for closing them down, but closing them down while sweating the assets and getting the best value for our clients.”It looks like a very successful formula.

© 2011 - ESM: European Supermarket Magazine

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