Norfolk, 1983. A young man is shovelling coal in the yard at the back of his parents’ house. His father has just died and his mother has multiple sclerosis. In order to prevent his two younger brothers being taken into care, he’s given up his plans of going to university in order to look after them – which means going into his father’s old business and carrying coal to heat local homes.
‘It was quite a switch for a snotty-nosed grammar school boy who hadn’t done a day’s hard work in his life,’ says Gordon Banham. ‘But I knew that I had to stay in the business for ten years to get my brothers through university, so I decided to make a go of it.’
Banham’s resilience in the face of difficult personal circumstances was a mark of what he would go on to achieve. Twenty-six years later he’s CEO of Hargreaves Services, which he acquired for £4 million in a management buy-out and is now worth £200 million at its current modest valuation.
Hargreaves’ expansion since the MBO has been both consistent and rapid. Turnover has swelled from £79 million to £503 million in the past four years, with pre-tax profits up from £2 million to £26 million. Shareholders have more than trebled their money since the company’s 2005 AIM float. Some of this has been achieved through acquisitions, paid for partly by debt, but that doesn’t overly worry Banham as he’s just secured a three-year £115 million facility from a syndicate of banks.
‘I find when you come down here [to the City], there are five different people giving you their opinions on how to run your business,’ he remarks. ‘Hargreaves is 20 per cent owned by management – I have a 15 per cent stake – and when you own 20p in every pound, you are very focused on the dangers of over-gearing. You also don’t want to give away equity too cheaply.’
Banham’s ten years ‘carrying coal’, as he puts it, or more precisely building a company shifting 10,000 tonnes of coal a year, provided a good schooling in business basics. Nevertheless, when his enforced stint of entrepreneurialism came to an end, there was a sense of liberation – nearing 30, he could finally ‘go and have a life for myself’.
He sold the business to Charringtons, a distributor of coal throughout the South of England. As fate would have it, though, he was invited to run the whole operation as general manager – with sales of £40 million, 300 staff and 40 depots. ‘I was quite interested in that, moving from running a private business to managing a more structured organisation,’ Banham recollects.
A year later, in 1995, Charringtons was itself acquired by Coal Products Ltd (CPL). The acquirer wanted to combine it with British Fuels in the North of England – but instead of Banham getting the boot, he was again put in charge of the merged business as distribution director. He was now in charge of 100 depots delivering 1.2 million tonnes of coal, from Scotland to the Channel Islands.
Five years later, aged 37, Banham was still in his father’s old business, though at a much exalted level. He decided it was time to move on. ‘I felt I’d had a number of years in coal distribution. I wanted to go back to Norfolk and get into housebuilding,’ he says, adding that he had kept a number of freehold sites in the area when he sold his former coal business to Charringtons.
But something kept pulling Banham back to the coal business. ‘[At CPL] I’d had a big contract with Bob Young, who ran a haulage business in Durham. He said, “I know you’re leaving – will you come and work for me?”
‘CEOs waste a lot of time worrying about share price’
‘I thought, you’ve got to be joking – why would I go up to Durham where it’s damp and cold rather than stay in the dry down here? I really wasn’t interested. But he said, “I’m 60. If you like the business, I’ll let you do an MBO for £4 million of net assets.”’ With his eye for a deal, Banham decided to keep the Durham iron in the fire, but he was still reluctant to give up his dream of running a property business. His solution was one that few ordinary mortals would have attempted: working in Durham from seven in the morning on Monday to seven on Friday night, then driving down to Norfolk for a weekend checking up on the housebuilding company (which is still active). It’s small wonder he had no time for marriage or children.
The City beckons
Experienced as he was in the corporate world, Banham had yet to cut his teeth in the public markets. A meeting with Peter Dillon, who had taken several companies through IPOs, changed that. As Hargreaves’ FD, Dillon convinced Banham that an MBO followed by a float on AIM could take the company to a new level.
The buy-out was backed by Barings Growth Fund, which structured the deal by taking a relatively small stake in the company, leaving 80 per cent for the management team, but with a high interest rate on the debt portion of the transaction. ‘They thought the deal would be about the income stream from the debt – they never thought the company would float,’ recalls Banham. ‘I understand the guy who gave them that advice isn’t with them anymore.’ Eighteen months later, the company joined AIM as planned and the rest has been more or less plain sailing – or rather powerboating, with annual compound growth in earnings per share of 50 per cent for the past four years.
There’s been a steady stream of acquisitions, many of them pushing the business in new directions: coke producer Monckton in 2005, Simon Bulk Warehousing and Imperial Tankers in 2007, and coal distribution business Coal4Energy earlier this year, which started off as a 50-50 joint venture with UK Coal, but is now wholly owned by Hargreaves. One acquisition Banham himself did not plan for was that of Maltby Colliery in South Yorkshire in 2007, saving the pit from closure. Perhaps it was a natural extension from carrying coal to digging it out of the ground.
‘The golden rule of acquisitions is don’t overpay’
The deal caused controversy in the City, mainly because of Banham’s decision to use long-term forward contracts to fix the price of the mine’s output against future fluctuations. ‘Two years ago we had contracted forward at a set price per tonne and the market had gone far above that,’ Banham recalls. ‘There were people who regarded that as an opportunity missed. But while we’ve missed the huge commodity spike, we’ve also avoided the huge commodity trough. Hopefully, the past 12 to 18 months has proved the robustness of our model.’
A greener future
Though his vision for the company is ambitious, with increasing involvement in continental Europe and the renewables sector, Banham clearly wants to portray himself as a steady hand on the tiller. His take on acquisitions is succinct.
‘The golden rule is don’t overpay. If we buy anything, it’s because it’s good value. I’m cynical about “strategic acquisitions” – the theory that you pay a premium because it’s strategic – I’m not a follower of that fashion.’ In an interview with Business XL’s sister magazine Growth Company Investor from early 2008, Banham insisted that ‘we only make acquisitions at net asset value or on a price-to-earnings multiple of seven or lower’.
As for the company’s own valuation – rather ungenerous considering its rapid growth and consistency at hitting profit forecasts – Hargreaves reckons, ‘CEOs waste a lot of time worrying about their share price. I take a very simple view on this. You go to the City, you tell your story, you deliver what you said you would deliver and then it’s up to the market to decide.’
The only aspect of Hargreaves’ management that does not appear so conservative, at least on paper, is its net debt of £69.2 million at the end of May, representing gearing of 97 per cent. Banham concedes that such a level of gearing is unfashionable at the moment – ‘people are still very cautious in this climate’ – but points out that the company’s source of funding is assured. The recently signed £115 million deal with a syndicate of banks led by Royal Bank of Scotland offers relatively cheap finance for three years, which Banham says should give investors confidence.
‘Brewin Dolphin [the investment banking firm] has estimated that we will start throwing off surplus cash in 2011 and bring the debt down,’ he states, before adding quickly, ‘That is, provided there are no more acquisitions.’
Given the headroom offered by the new facility and Banham’s record to date, that doesn’t seem likely.