MBI case study – First Flight Placements in the pink deal

How MBI specialist First Flight Placements introduced would-be entrepreneur John Evans to his dream retail business. By Patrizia Rossi.

Pink Soda’s “chi-chi” Tulip Skirt has featured in the weekly fashion glossy Grazia as a “hot buy”, but the term could equally lend itself to the seven-figure transaction that saw two of Pink Soda’s three shareholders exit and Canadian acquirer John Evans take a 75 per cent stake in the women’s fashion house.

The £4.5 million-turnover wholesale clothing business was acquired in a £1 million deal backed by Royal Bank of Scotland (RBS), and completed in just four months by Evans, a veteran retailer with stints heading up operations in North America and Europe for Colombia Sportswear and Timberland.

Chris Steel, client relationship director at MBI specialist First Flight, laboured alongside Evans to identify the target, secure the funding and negotiate with the vendors’ advisers through to completion.

“We identified John as an ideal MBI candidate. He was looking to come out of the corporate world and become an entrepreneur. He wanted to buy a UK-based fashion business and be able to grow a brand in the UK and overseas. He was also looking to build a family business,” says Steel.

First Flight works with prospective purchasers to find suitable MBI deals and negotiated Pink Soda’s deal structure with adviser to the vendor Jade Securities to get an “excellent deal” worth £800,000 in net assets and £200,000 in goodwill.

As a first-time dealmaker, Evans was happy to accept Steel’s advice on corporate lawyers and accountants, appointing Thring Townsend Lee & Pembertons and H. W. Fisher to conduct legal and financial due diligence. Steel also helped to secure the funding to complete the transaction.

Evans recalls: “Chris worked shoulder to shoulder with me for four months to get the deal done. After signing the heads of terms agreement, the challenge was to find a bank that would come up with the financing that the company could live with.”

“The first bank we talked to was enthusiastic to do the deal, but then got nervous about companies that had anything to do with retail. The second bank seemed interested, but proceeded slowly and we had a deadline of the end of October to pull this deal together. Ultimately, the third, RBS, was more responsive to our needs, working in a more timely fashion.”

Downward slide

Pink Soda had lost its way as a brand in terms of revenues over recent years, says Steel. The company posted revenues of £8 million in 2005, compared with 2007 when sales took a turn for the worse, almost halving to £4.5 million.

Steel believes a withdrawal from overseas markets and out of concessions were tactical errors and behind the decline in revenues. “Pink Soda needed someone that could see beyond these figures, and that was John.”

Evans adds: “Chris and the team know how to present to banks because they have done it a bunch of times. He talks the talk and this was clearly of value. I needed his advice because I had never done a deal before.”

MBI deals

First Flight puts together MBI teams from a 1,400-strong database of potential purchasers across all sectors. As with Pink Soda, the deal structures often include a MBO element. At the fashion house, the existing creative director remains with a 25 per cent stake in the business. “BIMBOs are always easier to get the bank to support because there is greater continuity with an MBO element,” Steel states.

During the third quarter of the year, First Flight arranged three deals: the BIMBO of Pink Soda, the MBI of Devon-based metal fabrications company Centristic and the BIMBO of precision sheet metal maker for the defence and aerospace industries James White Engineering.

First Flight acted for the purchaser and was introduced to James White by Thames Valley accountancy firm James Cowper, with the brief that the vendors were keen to move on from the Reading business and were looking for a trade sale. First Flight saw it as an MBI opportunity and put together a group of MBI candidates, led by Ian Tubbs, and a £2.4 million offer was tabled for an 80 per cent shareholding.

The offer was accepted and on completion a payment of £2 million was made with a deferred consideration totalling £400,000. HSBC backed the deal with a debt and asset finance package.

First Flight brought in the MBI team and three existing key managers remained with the business with a 20 per cent interest. As a result of Tubbs falling short on MBI experience “to get HSBC comfortable with the deal” First Flight also provided an experienced investing non-executive chairman.

Since closing the deal in July, Tubbs has reinvigorated the business, picking up a new £1 million contract.

Doing deals

Chris Spencer-Phillips, MD at First Flight, says the MBI specialist remains active in the marketplace in spite of the current conditions. “We match candidates to businesses, some of whom want to acquire their own business for the first time like Evans, and others who have exited from previous MBIs and are looking to use their funds to get into a new business that is a good deal and a good fit.”

Scrutinising targets is also crucial, says Spencer-Phillips. “So far, we have nearly always been able to close the deal once we have got to heads of terms. The reason for this is that we screen out target companies. Many people send us information on companies for sale, but we don’t do anything with the vast majority because we’ve got to make sure the vendor’s valuation is realistic and that the deal can be funded under current lending criteria – and of course, it’s much more difficult to get deals funded now than it was a year ago.”

Funding structures tend to involve lining up debt, equity and an element of deferred consideration for businesses with an enterprise value between £1 million and £6 million, says Spencer-Phillips. “If the deals are any bigger, private equity or VC money has to get involved and this makes it much more complicated.”

Steel insists that smaller deals, such as Pink Soda can be harder to finance than larger deals. “Banks don’t like smaller deals and these tend to go to their retail sections where advisers don’t really know what they are talking about. I prefer to deal with the commercial or corporate sections.”

First Flight recently appointed Carl Allen to develop MBI opportunities in the North West. “It would appear to be a fertile region for deals as he is working on 15 projects from a variety of industries,” adds Spencer-Phillips.

Family way

Two weeks after joining creative director and new partner Robert Rose at Pink Soda, Evans is still thrilled that the deal was closed and shows few reservations about his choice of venture in spite of the challenges that currently face the retail industry.

“When you step into something like this, there is an exhilaration of owning something and experiencing something new. You know that the world has changed when you read the newspapers, watch the news and speak to people, but you can’t be distracted by what’s going on. You have to come in early and go home late to make sure you are one of the winners.”

His corporate vision is to build the Pink Soda brand in Europe and North America, introduce a “Pink Soda way of doing things” to the company as well as to launch a retail outlet close to Oxford Street early next year.

Equally as important for Evans was building a family business. “My daughter [works] here and her desk is just two away from mine.”

Deals at a glance:

TARGET: Pink Soda
Sector: Retail
Value: £1 million
Advisers: First flight, Thring Townsend Lee & Pembertons and H. W. Fisher & co

Patrizia Rossi

Patrizia Rossi

Patrizia was Editor of M&A magazine, a sister title to GrowthBusiness, from 2006 to 2009.

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