Saturday, May 9, 2015

Brintons: Carlyle Group Special Situation

The Carlyle Group acquired Brintons, a British carpet maker in October 2011. 

Carlyle’s Special Situations & Corporate Opportunities team specializes in making alpha-driven debt and equity investments in companies that offer downside protection but with the opportunity to unlock substantial upside potential. The team specializes in investing in (i) distressed, complex, or underappreciated assets, (ii) cyclical, contrarian, or event-driven situations and (iii) broader market dislocations to identify attractive investment opportunities. 

In an effort to maximize returns and value, the team seeks to exert influence or obtain control in its investments whenever possible.

The Telegraph reported:

Rather than buying the family's equity stake, Carlyle bought the company's debt (at a discount to its face value, no doubt). Once they had acquired the debt Carlyle then used a controversial pre-pack administration to seize control – placing the carpet-maker into administration, then buying it straight back. 
The descendants of the founding Brinton family accused Carlyle of breaking a string of promises to gain control. 

Brintons' upside potential arose from shafting retirees and the public.

By using a pre-pack to acquire the business, Carlyle was able to jettison Brintons' pension fund – complete with its £10.5m deficit. The Pension Regulator is investigating. 

The Pension Protection Fund has been left to pick up the pieces and will almost certainly end up taking over the 1,500-member scheme.

What happened since Carlyle's £40 million backdoor takeover?   The story started out rosy, according to The Telegraph:

“All trade creditors were paid, and no employees fired. With a pension deficit that was going to sink the company a pre-pack was the only option to keep 1,800 people in work,” said Mr Coates. “We were insolvent for only 15 minutes and as a result never stopped making carpets or serving our customers.”

It took just five months to return to profitability. Turnover levels (annual revenues) have now reached £80m with a profit of £3m recorded last year. 
It didn't stay that way.  Carlyle cut jobs, went through a CEO, saw revenue go down and conducted yet another restructuring.

Newly filed accounts revealed that sales at the group fell to £68.7m in the year to 27 September 2014, compared with £82m a year earlier. Pre-tax losses also widened to £6.3m from £4.2m.

Brintons incurred exceptional costs of £3.7m during the period, with £2m of redundancy costs. By September 2014, the group employed 1,398 compared with 1,427 in 2013.

Directors said that there had been "opportunities to improve efficiency and streamline practices and processes" by eliminating unnecessary jobs and roles.
Note the 1,800 jobs saved fell over 400 under Carlyle's "job saving" ownership.   Sales fell 16% in the last year, while employment went down 22% since The Carlyle Group poached Brintons.

Carlyle searches for the key to unlock Brintons significant upside potential.  One strategy is to spend £300,000 on marketing.  Carlyle's counting on that investment paying off big

The question is who owns Brintons' debt now?  Will they consider employing Carlyle's tactics and shaft the equity holder?

Update 1-21-17:  Brintons' revenue picture is up but is a yo-yo over the last few years.