Sometimes it can work wonders, but it can also turn out to be the most expensive investment you have ever made. When Ken Bates paid £1 for Chelsea Football Club in 1982, few guessed he would pocket an estimated £18 million little more than 20 years later when Russian billionaire Roman Abramovich bought control of its parent company Chelsea Village, by paying £59 million for the equity and assuming debts of some £80 million
When John Tower, former head of the MG Rover carmaker, led the Phoenix consortium buy-out of his old company five years ago, he paid a little more; £10 in fact. But Phoenix’s nominal purchase price pales into insignificance beside the £1 million-plus rewards received three years later by him and his three Phoenix partners, Peter Beale, John Edwards and Nick Stephenson.
However, the story later turned sour again when the Tower’s magic ran out and losses returned. Shanghai Automotive Industry Corporation pulled out of a rescue deal, despite the offer of a £100 million Government loan, and MG Rover found itself facing potential collapse.
Entrepreneur Allen Timpany was reading the advertisements in the Financial Times one day 17 years ago when a particular entry caught his eye. An unprofitable company called Vanco Euronext was on sale for £1.
Vanco was having a tough time as a reseller of information technology security systems and had a telecoms licence. Timpany reckoned the deregulation of the UK telecommunications market at that time offered big potential opportunities for converting data systems.
Today, Vanco is a fully-listed ‘virtual network operator’ with a stockmarket value of £151 million, making pre-tax profits of around £4 million a year. The company has weathered the vicissitudes of the industry and grown revenues and profits for many years.
Ex-pop star Mick Fleetwood, of the former Fleetwood Mac group, has presided over another corporate resurrection in the shape of Point Group, which had begun life as a music company with licences to rights to exploit other people’s material. The company was burdened with debts, but Michael Jervis, of accountant PricewaterhouseCoopers, decided that if the music rights were put into an insolvency proceeding, those involved in the company would be left with nothing.
Instead, Jervis sold the music group and its liabilities for £1 to its present owners. It has since prospered, he reports, ‘and has come back from the dead’.
On the other side of the world, AIM-quoted BDI Mining, headed by entrepreneur Lee Spencer, only paid the equivalent of 40p four years ago when it bought Cempaka, a diamond venture in Indonesia, from mining giant Rio Tinto, which saw it as too small for a company of its size to spend time and money developing. Now analysts say the gem reserves in Cempaka’s area could be worth a gross £70 million, though when it starts producing, it will also have to pay some royalties to Rio.
Beware the risks
Clearly, if someone is willing to sell a company for only £1 or similar nominal sum, there is usually a catch and one that most often involves debts and losses. When Bates bought Chelsea, he had to take on its financial commitments too, and when Dutch finance group ING bought the once mighty Barings merchant bank for £1 ten years ago, it agreed also to accept net liabilities capped at £378 million resulting from unauthorised dealings.
Administrators and liquidators acting for bank creditors are often the ones offering to sell companies for £1 and that can bring problems or advantages, depending on the circumstances. Nick Hood, senior partner of business rescue firm Begbies Traynor counsels caution.
‘One-pound purchases always seem a cheap deal, because it feels as if you are buying assets for nothing. But beware the liability side of the equation, which may mean that the business is worth a substantial negative number’.
At present, says Hood, ‘we are marketing an engineering wholesaler with a long history and a great reputation for quality of service. But it has an onerous lease on its premises and it has been suffering from changes in its market, including extreme pressures from nimbler competitors operating through the internet.’
Add high staff liabilities and, argues Hood, ‘this is a classic case where buying the business for £1 is highly dangerous because of the restructuring it requires and the likelihood that relocation may be needed, both of which may trigger considerable contingent liabilities’.
He suggests a deal for just the business and certain assets would probably ‘prove a far better bet for both the vendor and the purchaser than buying a company for £1’. In another case, a printing company bought a smaller company, with big debts to its suppliers, from a receiver, only to find it had inherited so many problems, of reputation, supplier relations and workforce pay differentials, that in the end it was brought down itself.
Test the opportunities
Others are more optimistic about bargain-basement company purchases. Jervis at PwC says buying shares for £1 when that is all a company’s net assets are worth can be much less complicated than buying those assets once a business has collapsed.
‘£1 is not much to pay for an each-way bet, ’ he argues, and it can be cheaper to buy for £1 and put in borrowings secured against the company’s assets than trying to get hold of the assets alone. However, a buyer should watch out for any possible reputation risk the purchase could bring. ‘There is a history of people buying companies for £1 and then putting their businesses into insolvency to extricate themselves from its debts,’ adds Jervis.
The key is to be able to identify latent potential within the cash-strapped company you are thinking of buying, which a £1 purchase price does not reflect. ‘There has to be demonstrable evidence the business has something which will be valuable to you,’ asserts Jervis.
That could be found in new potential scope for its products, opportunities to cut costs or evidence of undue caution by its present owners (as with frequently-noticed over-reserving by insurance companies). He points out that a buyer can sometimes obtain sweeteners from a vendor anxious to shift their companies.
Sometimes, for example, the vendor will offer a ‘dowry’. That could come in the form of agreeing to pay the rent on the premises for a further period of years after selling.
Selling business assets for a song
If a company goes into administration or insolvency, the administrators’ duty is to obtain as much as possible for its creditors, but often the whole process of being in administration and being hawked around can cause so much damage that more and more value is lost and the situation can become irreparable.
That is especially the case in ‘people businesses’, where a company’s chief assets are likely to clear off if the present grows too unpleasant and the future too bleak. Yet sceptics say professionals handling receiverships are not too unhappy to prolong the agony, even to the detriment of reviving the business, as long as enough money remains in the kitty to pay their fees.
Recent changes in the rules allow directors faced with, say, wage bills they cannot meet to call in receivers themselves, start up a new company to buy the old one’s assets, do deals with creditors and landlords and find new sources of backing. This is known as a ‘pre-pack’.
Here, the mechanism allows the company to be sold as a virtual going concern, rather than as a ragbag of second-hand equipment and premises. Last year, finance specialist, Nash Fitzwilliams (NF) arranged such a deal for IPV, a leading world supplier of video browsing technology and broadcast equipment, with British customers including ITV and Channel 4.
Despite its strong market position, the company was sinking under a load of debt and sought urgent advice from NF. The outcome was a pre-pack deal, a refinancing backed by 3i Group, Advent Venture Partners and others. IPV is now back in profit and heading for £21 million turnover this year.
Seasoned entrepreneur John French, who heads several publicly quoted companies, says that, in his experience, liquidators will release assets for a song because ‘they are simply there to get the banks out at any price’. He recalls how one of his companies, AIM-quoted surveillance specialist Croma recently paid a liquidator a nominal sum for an apparently troubled concern, Shawley, which had £200,000 of orders and stock to the same value — it came back into profit a month ago.
Need to know
If you are considering buying a company for £1 or similar nominal sum, Nick Hood of Begbies Traynor advises using the following checklist:
- Always investigate the liabilities, especially the ones that do not appear in the books. These include future rent obligations, which may make relocation difficult.
- If there is a black hole in the pension scheme and it is a final salary scheme, you will have to fill it. Employee entitlements date back to when they started working at the company, not when you bought it.
- Check exactly who owns the assets, such as IT, and what finance charges exist on them.
- Decide whether to keep the vendor on board. He or she could be invaluable in the short term, but could also be a fatal impediment to necessary future change.
- Take care when buying from an insolvency practitioner (who will never give warranties or indemnities).
- Work out how much more you will need to invest in the business and how much time you have to expend on it. Both could turn out to be more than you expect.