Private to Public: The trouble with turnarounds

It’s been a while since a private equity firm got the sort of media savaging inflicted on UK turnaround group OpCapita recently, following the collapse of its portfolio company Comet. An electrical retail chain that has been around in the UK since 1933, Comet fell into administration in November, putting some 7,000 jobs at risk.

A high-profile failure like this will always lead to finger-pointing. And in this case, most fingers have been pointed at OpCapita, the low-profile turnaround firm that bought Comet a year ago from listed French business Kesa Electricals (now Darty) for a token £2.

It hasn’t helped that at the time of the deal, OpCapita undertook to keep Comet going for at least 18 months, which clearly it has failed to do.  But what really prompted the hand-wringing and condemnation were reports that OpCapita would still make a profit on its investment, despite the company’s failure. Inevitably, this led to accusations of asset-stripping.

So far, the firm has chosen to keep its counsel, refusing to conduct any interviews on the subject until Comet’s administration process is further advanced. Not unreasonably, it seems to think there is little point putting the head of its boss Henry Jackson (who has the misfortune, if only in PR terms, to be married to a pop singer) above the parapet, at least until the situation calms down a bit.

It’s an understandable strategy, but it’s also a risky one. The danger of not saying anything is that journalists become emboldened to put any spin they like on events – and it will invariably be a negative one. Equally, when criticisms go unchallenged, some people will assume them to be true.

One thing is certain: keeping a low profile has not succeeded in making the story go away. In fact, the Sun, a low-brow UK tabloid newspaper, even started a ‘Where’s Henry’ campaign, asking readers to send in any sightings of the OpCapita boss.

The rights and wrongs of the matter – exactly what happened, why it happened and who was to blame – are a subject for a different column.

What we’re interested in here is how significant the very public nature of this row will turn out to be.

One interesting question was posed by George MacDonald, executive editor of UK industry bible Retail Week, who suggested that private equity exits from retailers could have been “put back years” by the Comet saga – because investors would be far less willing to believe a GP’s sale story next time around.

This seems relatively unlikely. After all, Comet’s problems ran much deeper than OpCapita: it lost over £30 million in the year before it was sold, which is why Kesa was willing to stump up a £50 million ‘dowry’ just to get the business off its books – and why OpCapita was the only bidder willing to take it on as a going concern (thus ensuring those 7,000 jobs survived into this year, incidentally). Sophisticated investors will surely be able to distinguish between a failing business like that and better-positioned retailers with a more defensible market position.

The more intriguing issue, however, is the effect it may have on turnaround investment more broadly.

To some extent, coverage like this is an occupational hazard for firms in this line of business. These are, by definition, extremely risky deals, for companies in significant operational and/or financial distress. Chances are that some will succeed, and some will fail. When it works, it can work spectacularly – but if it doesn’t, particularly if the firm concerned is a well-known one like Comet, you’re always going to be hit with negative headlines (one of Comet’s biggest assets was its brand; but that’s a double-edged sword if things don’t work out as planned).

However, the ferocity of the reaction to Comet’s collapse is bound to make life more difficult for turnaround investors in the short term. Clearly OpCapita will be worst affected; in light of the firm’s previous failure to resurrect stricken furniture retailer MFI, some newspapers have even been talking about ‘the curse of OpCapita’, which is not exactly the kind of phrase you want in a vendor’s mind when you’re trying to negotiate your next deal. But all of its peers can probably expect a bit more scepticism too. Some may even decide that high-profile turnarounds are more trouble than they’re worth.

But actually, that may not be the worst case scenario. In some quarters, this row has prompted calls for an overhaul of Britain’s insolvency regime. If it’s possible for firms to structure rescue deals in such a way that they can make money regardless of the outcome(the argument goes), something must be wrong.

This may or may not be true. But if you’re a turnaround specialist who has raised a fund or built a reputation based on the way things currently work, the idea that politicians might suddenly bow to popular pressure and move the goalposts is a little scary. And while the general public might not care too much about the finer feelings of Jackson et al, they might care if there’s nobody around to try and save the Comets of the future.