Banks set to return formerly failed businesses to the market

A wide range of businesses that were close to bankruptcy a little while ago could soon be put on the market after being rejuvenated by financial organisations.

A number of financial institutions turned to distressed debt investing during the recession, in the hope of turning firms around, breaking them into smaller, more manageable divisions and reselling quickly. Analysts questioned by Reuters claim that now could be the time to grab a bargain, providing buyers are willing to keep an open mind.

One of the investment bankers questioned by Reuters explained, “There are some great brand names that are being rehabilitated and repurposed into healthier companies.

“There will be demand for them when they come off the shelf,” he added.

Most of the experts Reuters spoke to told of financial owners, such as hedge funds and investment banks, buying up firms - including retailers, media businesses and tech companies - that were close to, or at the point of, collapse during the depths of the recession. Now, with market conditions looking more positive and buyers eager to spend the money they have been accumulating throughout the recession, they are expected to put the recovered firms back on the market. Some of the larger retailers could be sold off in smaller parts, presenting attractive propositions for those looking to buy smaller retail businesses.

Businesses of all sizes are desperately seeking a route to growth and for many the obvious way to achieve this, in light of limited organic growth opportunities, is through mergers and acquisitions.

One of the most recent examples of the trend for financial firms turning formerly troubled businesses around for re-sale is KPMG’s decision to put Aero Inventory up for sale. KPMG spent millions of pounds on the business after it fell into administration in 2009. As a result, the accountancy giant has safeguarded some 300 jobs at the aeroplane parts manufacturer.

Another example, which demonstrates an ongoing trend for purchase and turnaround deals in the UK retail market, is Lloyds Banking Group’s recent move to sell high street hardware chain Robert Dyas. The retailer was purchased in a successful debt-for equity deal, which cut its debts by 50 per cent – helping in its recovery.
The Garden Centre Group is another retail chain bought out by Lloyds. It reported strong results in the first half of 2011 and has even announced the purchase of a rival, Country Homes and Gardens. It, too, is being mooted for sale and will undoubtedly attract some keen offers and a good return for taxpayers, who own 41 per cent of Lloyds.

Lloyds’ eagerness to sell off some of its success stories could be down to the fact that it has a new Chief Executive, Antonio Horta-Osorio. Michael McDonagh, a private equity partner at KPMG told the Wall Street journal: "Banks are not traditional long-term holders, but the new chief executive may well be accelerating the pace of sales - he would rather not have the exposure."

It’s not just Lloyds that bought up swathes of struggling businesses during the recession - hundreds of companies are now owned by UK banks that bought them through debt-for-equity swaps. RBS, for example, was another bank to take part in the buying-up of struggling brands over the past few years. Its Strategic Investment Group (SIG) is reported to now own as many as 350 businesses with some of the more high-profile deals including the takeover of Swedish shopping centre group Centrum. The group owns ten shopping centres, with a combined value of around EUR800 million. RBS is expected to look for buyers or investors soon.

As a result of this new trend, those looking to buy a business could be faced with more choice than expected when these companies hit the market in the coming months and years, according to bankers. One, who was questioned by Reuters, said a wealth of opportunities is on its way for anyone looking to buy media firms, which are still being taken under the wing of financial buyers. He said, “Some of the now-bankrupt media companies still have broad customer bases and strong franchises. Once that gets fixed and repackaged, these can be viable companies again.”

So why are the banks so keen to sell off the businesses they have worked so hard to revive? Very simply, it comes down to money. Buying a firm, quickly reviving it and selling it on is seen by most of these distressed debt investors as the most efficient way to perform a successful turnaround.

David Resnick, the chairman at Rothschild, explained, “[Turnaround deals] are measured by their return on investment, so [financial owners] are very sensitive to getting something done sooner rather than later.”
Retail is one of the sectors most affected by the banks’ new turnaround tactics and analysts believe the trend may continue well into the economic recovery. This could make buying from financial firms more common within this sector.

For buyers looking to purchase a business of any kind, doing a deal with a financial owner, where the hard work of turning the firm around has already been done, is extremely attractive. After all, the process often involves having to scrap loss-making divisions and even close branches, which can lead to job losses.
In many cases, a larger, loss-making chain will have been split into smaller divisions, ready to be sold as manageable, flexible businesses.

The investment needed to turn a loss-making firm back into a viable prospect is also considerable. Despite the fact that there is, undeniably, value to be generated by buying a business that is on the brink of collapse, many more risk-averse buyers are likely to be extremely interested in purchasing a known brand or a firm with a clear future from a financial institution that has already dealt with the mess.

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