Tuesday, 14 July 2009

Acquascutum - an MBO explained

Fashionista has noted the recent events at Aquascutum with interest. It was reported back in October 2008 that chief executive Kim Winser, who was brought in by Japanese parent company Renown to revive the ailing Aquascutum brand in 2006, was preparing for a management buy-out. However, it was announced on 22 May 2009 that Winser had stepped down. According to Drapers sources close to Aquascutum, her shock exit is a result of Renown's rejection of her "generous" offer for the business.

Fashionista's private equity friends have explained that a management buy-out (MBO) is the acquisition of a company by the existing management team, usually supported by equity finance from a private equity provider and bank debt financing from financial institutions. A group of new companies is normally set up to acquire the target business. A simple structure will typically comprise of a top company (Newco), which will act as the investment vehicle, and a wholly-owned subsidiary of Newco (Newco 2), which will act as the purchasing and bank debt vehicle.

The private equity provider then makes an equity investment in Newco by typically subscribing for a combination of shares and loan stock. The management team will usually also subscribe for shares in Newco as an ongoing incentive and will be employees of Newco entering into new service contracts. The private equity provider will typically look to make an exit from the target and fully realise the return on its investment within three to seven years of the date of the investment.

MBOs are an essential feature of corporate transactions and there have been several high profile retail MBOs: for example the acquisition of Kurt Geiger in 2008 backed by Graphite Capital. This change of ownership was driven by the management's desire to aggressively expand the brand. Management themselves often initiate MBOs where they see an ideal investment opportunity to take the business forward. Winser was brought in to turn Aquascutum around and it is widely accepted that she had made significant progress. It was reported in December 2008 that the brand was on target to achieve profit by 2010, which could explain why Winser felt that this was the ideal time to make a bid.

MBOs are also a popular method for parent companies to divest of or restructure subsidiaries in a times of recession. A sale to the management team is an ideal way to achieve an exit as they understand the business and will usually be prepared to take on a larger degree of risk than other bidders. Renown purchased Aquascutum in 1990 for £113.2 million and in 2006 injected a further £40 million into the business in an attempt to rescue the brand. However, after a fourth consecutive loss in the year to the end of December 2007, Renown now appear keen to find an exit.

Renown has announced that its preferred bidder is Hong Kong based distributor YGM Trading, which distributes Aquascutum in Asia. However, although YGM issued a notice of intent to make an offer for Aquascutum at the beginning of June 2009, a bid is yet to materialise. Interest has reportedly been shown by both David Hewitt, former managing director of Daks, and Crombie chairman and chief executive Alan Lewis. Meanwhile Aquascutum's entire workforce has been put into consultation and its future remains in doubt so Fashionista will be watching this space with interest.