Banks debt mountain is lifted

“Despite all of the distractions of recent years, BWG’s underlying operating performance has remained strong,” writes Dan White
“Despite all of the distractions of recent years, BWG’s underlying operating performance has remained strong,” writes Dan White

After almost eight years of struggling to keep the banks happy, Dan White explains how BWG has found a very suitable parent in the form of Spar South Africa, but laments the fact that in the process another Irish business has been forced to sell out to foreign ownership

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16 September 2014 | 0

The sale of BWG to Spar South Africa for €185m (including debt) represents a huge write-down on the €390m which BWG management paid when the company was last sold in 2006.

BWG chief executive Leo Crawford and his colleagues couldn’t have picked a worse time to buy an Irish retail business. By October 2006 the Celtic Tiger was getting very long in the tooth. Both property prices and retail spending were close to their peak.

From boom to bust

Within two years it had all gone terribly, horribly wrong. The banks which had financed the deal; AIB, Bank of Ireland, Ulster and Bank of Scotland, all effectively went bust in the autumn of 2008. AIB and Bank of Ireland’s deposits were unconditionally guaranteed by the Irish government at the end of September of that year and both banks later had to be bailed out by the Irish state at a combined cost to the taxpayer of more than €25bn while across the water the UK government had to put its hand in the British taxpayer’s pocket to bail out Ulster and Bank of Scotland’s parent companies, RBS and Lloyds.

The banking bust popped the property bubble and sent the Irish economy into free-fall with nominal or cash GNP shrinking by almost a fifth from its peak level. This quickly fed through into lower retail sales as even those who were lucky enough to hang on to their jobs kept their hands firmly in their pockets rather than heading for the supermarket or shopping mall.

Significant sales decline

While grocery sales didn’t fall by as much as overall retail sales, the value of which fell by almost a quarter, they were still down by a significant amount. The CSO’s retail sales index points to a 20% fall in the value of food, beverage and tobacco sales between 2007 and 2011 followed by a 3% recovery in the two years to the end of 2013.

The post-2007 economic collapse meant that it very quickly became clear that Mr Crawford and his colleagues had massively overpaid for BWG, which owns the Spar and Mace convenience store brands in Ireland. BWG supplies 850 Irish Spar, Eurospar, Mace and XL stores in Ireland and a further 250 Spar outlets in the south-west of England. It also operates 23 cash and carries.  BWG had total sales of €1.2bn in 2013.

Mountain of debt

The economic meltdown meant that the new owners were fire-fighting from almost the very beginning as BWG struggled under its €300m debt mountain. The fact that BWG, unlike its main rival Musgrave, owned many of its shops, meant that it was directly exposed to the fall in property values, forcing it to take a €100m write-down.

Finally in November 2013 BWG agreed a debt restructuring with its banks. Under the terms of the deal the banks agreed to write down €100m of the company’s debts. While the 2013 deal gave BWG some financial headroom, the banks exacted a very, very heavy price.

At the heart of the 2013 deal was an agreement by BWG’s principal shareholders, who apart from Leo Crawford also included John Clohissey and BWG’s finance director John O’Donnell, to give the banks warrants over 75% of BWG’s equity. This meant that the BWG shareholders had effectively been forced to surrender 75% of their company to the banks.

Playing their cards well

With the banks now in a position to call the shots, the challenge facing Crawford and his colleagues was to find a suitable parent for BWG before their lenders took the decision out of their hands.

Despite having been dealt such a bad hand, they seem to have played the cards available to them very well. Instead of waiting for the banks to foist a potentially unsuitable majority shareholder on to them, they went out looking for a suitable shareholder themselves.

A suitable parent

Spar of South Africa owns the Spar franchise in most of southern Africa. As well as South Africa itself, the company is also the Spar franchisee in Lesotho, Swaziland, Botswana, Namibia, Zimbabwe and, most recently, Mozambique. The company had total sales of 47.4bn rand (€3.4bn) and operating (pre-interest) profits of 1.7bn rand (€121m) in 2013. Even better, Spar of South Africa had negligible debt.

If BWG was going to surrender its independence then Spar of South Africa was a very suitable parent.

Banks off their backs

Under the terms of the deal announced last month Spar of South Africa is paying €55m for an 80% shareholding in BWG. This money will be used to buy out Lloyds’ and RBS’ loans to BWG. After the deal BWG will be left with total borrowings of €130m. This brings the total cost of BWG to Spar of South Africa to €185m.

Spar of South Africa has also promised that it will invest up to €100m in BWG over the next five years. Suddenly, after almost eight years of spending most of their time trying to keep the banks happy, BWG management can now get back to running a retail business full-time.

Strong underlying performance

One of the remarkable things about BWG is that, despite all of the distractions of recent years, its underlying operating performance has remained strong. Spar of South Africa revealed at the time of the deal that BWG’s underlying profits were in the region of €11m. Now that its balance sheet has been sorted BWG is in a strong position going forward.

Foreign transfers

That’s the good news. The bad news is that excessive borrowing has resulted in yet another Irish asset being sold to foreign buyers for what will most likely be seen in retrospect as having been a knockdown price. BWG joins other Irish household names such as Irish Life, Bord Gais Energy and the National Lottery in foreign ownership.

What we are witnessing is the largest transfer of Irish assets to foreign ownership since the 17th century land confiscations.

We had better get used to it. With many Irish companies still massively over-borrowed, their banks will force them to sell out to foreign buyers. Ironically a recovering economy, which increases overseas interest in Irish assets, will accelerate this process.

 

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