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| Magic Carpet Ride |
| Tuesday, 13 March 2007 | |
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EN speaks to Steve Watt about the £41 million deal that has seen management take a majority stake at flooring firm Gradus.
Macclesfield-based flooring and contract interior accessories firm Gradus has undergone its fourth change of ownership in just over a decade to finally give its managing director of ten years’ standing, Steve Watt, a controlling stake. Under the terms of the latest deal management have taken a 75 per cent share in the 40-year-old firm, with Bank of Scotland Integrated Finance taking the remaining 25 per cent under one of its signature equity and debt packages. The £41 million deal provides an exit for Close Brothers Private Equity, which backed a £32 million MBO in 2001. This exit represents an internal rate of return of 28 per cent over five years for Close, with a money multiple of 3.1 times its original investment of £11 million. Bank of Scotland has also refinanced the debt from the 2001 deal, which at the time was provided by a panel of lenders led by Rothschilds. Debt leadership changed to Barclays around 18 months ago. Although Close had passed the traditional five-year VC exit horizon, Watt told EN the investor would have been happy to carry on with its existing arrangement and that the latest buyout was instigated by management. He said, “We had five superb years with Close but the interest we were paying them was always going to get more and more expensive. We did the initial deal just after 9/11, when there was little appetite in the market so there were some quite expensive loan notes in there. “The structure of the interest made it quite lucrative for them to stay in there but, as time moved on, it became more and more imperative for us to restructure our finances: you get to a point when you are paying down loan notes rather than buying a new machine.” Last year the company went through a major reorganisation of its manufacturing facilities, including new £2 million factory, which had to be completed before the business could be put up for sale – otherwise, Watt said, a deal would have happened earlier. “We started the sale process last summer,” he said. “KPMG facilitated the auction, and we had interest from trade buyers as well as VCs. By Christmas we had whittled the bidders down to two. “Close would have been very happy with a trade sale but, from a management standpoint, most trade buyers were put off by our protectionist position with regard to our sovereignty.” Bank of Scotland’s Integrated Finance package, he continued, gives the management of what is a mature business with steady rather than “toppy” growth (Gradus last year turned over more than £40 million, up from just under £38 million the previous year) “a great deal more stability” than a traditional private equity deal with its three-to-five year exit cycle. “You don’t have that sword of Damocles hanging over you,” he said. “This deal is a bit like buying a house: it gets worth more to us over time as we pay off some of the debt. BoS’s debt structure goes out for a long, long time. We will eventually have to look at a major refinancing, but the first call will be with them. “The most important thing is that the financial structure is one of stability now – and eventually we can plan in advance our handover to the next generation of managers when we decide to retire.” Management was advised on the legal aspects of the deal by Dave Rimmer at DLA Piper, and by Andy Hales of KPMG who, interestingly, also represented Close Brothers. This arrangement was appropriate, Watt explained, until it got to the point of selecting the final candidate and thrashing out the final price, when management had to distance itself a little from the hitherto shared accountants. “There comes a time when management have to start acting like the buyers of newco rather than the vendors,” he said. “At that point, we had to start trying to secure the business for the right price for us going forward, which is clearly a different set of interests from that of the exiting investor.”       |
