Dishing up the Debs delight
IF Gate Gourmet, the catering firm that provoked this summer’s industrial dispute at British Airways, is the unacceptable face of private equity, then Debenhams shows its more attractive side.
Private equity players are often accused of buying companies on the cheap, then pursuing a slashandpolicy designed to strip costs and enrich themselves.
The reality at Debenhams is rather different. Baroness Retail, a private equity consortium led by Rob Templeman, bought the department store in 2003 for £1.7bn and was accused of paying too much.
Far from sacking and asset stripping, investment under Templeman is higher than it was as a stock market company, and there are now 2,500 more staff than a year ago.
Costs have been reduced, with new store openings and refurbishments being done at a fraction of the previous price, though the claim is that the new management is more efficient and simply gets more bang for its buck. Templeman is a hands- on boss who believes in prowling the shop floors and devolving responsibility to staff. His formula has paid off even in the current brutal environment for retailers.
There are those who say it is all too good to be true. Rivals contend that the £1.9bn of debt is too high, and that Templeman will have to run like an Olympic sprinter on steroids to keep up the pace. Debs is, however, generating £360m of cash, and says it has plenty of headroom on borrowings.
Other criticisms have been raised, including the fact that suppliers have to wait longer, on average, to get their money. Then there was Debs’ involvement in the Red Letter Days debacle, though its financial loss is thought to be relatively small. These points aside, it would be unfair to lay into Templeman. But the inroads made by the private equity sector into the stock market do raise legitimate worries.
Private equity- owned firms are not subject to the same scrutiny as listed companies, so it is easier for them to get away with indiscriminate cost- cutting and unpleasant labour practices.
And, unlike the directors of a plc, who must disclose what they make, the big guns in the private equity world – including Templeman, who is thought to be worth about £50m – can amass their fortunes in privacy.
There is another problem with private equity, as former investors in Debenhams might ruefully reflect. When it all goes right, investors at large do not have much chance to share in the success.
Achilles heel
THE Bank of England’s decision to keep interest rates on hold at 4.5pc was so unsurprising that the British Chambers of Commerce actually circulated its reaction before the white smoke officially rose from Threadneedle Street.
Governor Mervyn King is attempting to fine-tune. Expectations that inflation will remain above target make a cut less likely – but on the other side industry and retailers are complaining about a slowdown in growth and the failure to reduce borrowing costs this time.
King will also have a weather eye on the challenges confronting his American chum, new Fed supremo Ben Bernanke.
The US trade deficit ballooned to another record in September, at the same time as booming China announced a record monthly surplus. A large trade deficit is not in itself a bad thing for the US, and there were special factors at play, including Hurricane Katrina.
But the current account shortfall is coupled with the huge budget deficit and the agonising throes of traditional American industry, such as the stricken General Motors. It highlights the Achilles heel of the world’s biggest economy, dependent on foreigners to finance its borrowings.
Royal Sun also rises
THE recovery at insurer Royal& SunAlliance is now well under way. Chief executive Andy Haste has reduced the exposure to US liabilities, put a lid on the problems with the staff pension fund, contained costs and is seeing decent growth in the UK.
The problematic British life assurance business has been sold off, leaving RSA with a general business which it believes will prove more profitable.
The company, which fell foul of asbestosis claims in America, is not yet out of the woods and has some long-running exposures.
One index of its renewed confidence is that it has been making acquisitions, albeit small ones, including a leading insurer in Chile.
Expect more of the same, though big deals are unlikely for the time being. Despite his surname, Haste has no desire to repent at leisure.