After a long and drawn-out process, model retailer Modelzone Holdings managed to complete a £5.6 million management buy-out. James Harris reports.

After a long and drawn-out process, model retailer Modelzone Holdings managed to complete a £5.6 million management buy-out. James Harris reports.

Model retailer Modelzone Holdings began discussions with private equity investor LDC for a management buy-out in early 2008. As the downturn turned into a full-blown recession, LDC was having second thoughts about the deal.

Miles Frost, investment manager at LDC, says: ‘The credit crunch hit in 2008 and backing a retailer was a scary prospect for an investor, especially when Modelzone’s sales were declining. We wanted to see how the company performed over the Christmas period before we committed any funds.’

Manchester-based Modelzone has 32 stores across the country and offers a range of models including plastic kits and remote control vehicles and railways. The company’s subsidiary, Amerang, acts as a wholesale agent for overseas suppliers in the model and hobby industry.

With the pressure to perform at Christmas starting to mount, CEO David Mordecai made some changes to the business. He brought in a new team, from non-executive directors with experience in internet retail to a new sales director. He also introduced a bonus scheme for shop staff. ‘Previously we were quite a sleepy company, suddenly everyone woke up,’ says Mordecai.

The company also made alterations to the stores: ‘Historically we had mountains of stock all over the place. We de-cluttered the stores and made them more appealing to women. It’s more like a high street store than a back-alley workshop now.’

Christmas bonanza

The changes worked as the company enjoyed a robust Christmas period in 2008. Mordecai says: ‘Five years ago, people thought that the model trade would die because of the rise of computer games. What has actually happened is a move towards more traditional games at Christmas. Parents are fed up of buying a game and seeing their children disappear for three days. They want something the whole family can get involved with.’

Even the old self-assembly spitfire models are in demand: ‘In the last couple of years, we’ve seen year-on-year growth in plastic kits – children like to put something together.’

Of course, the company has moved with the times: ‘It’s a bit more sophisticated now. We also have radio-controlled cars and helicopters that sell alongside models of steam locomotive.’

With the momentum from Christmas, Modelzone enjoyed a strong run and the MBO, led by Mordecai and non-executive chairman Terry Norris, finally closed in July 2009, 18 months after the first meeting. LDC invested £5.6 million in the deal, which will be supported by a further £3.6 million of funding over the next three years.

The company shows no signs of slowing down. Weeks after the deal completed, the company acquired Tags Models in Doncaster and has since opened another three new stores. Mordecai says he wants to open another 11 shops this year.

Given the company’s ambitious growth plans, LDC decided against using bank debt. Frost says: ‘It’s a relatively small business and rolling out stores consumes cash, because you have to buy the stores and fill them with stock. Given that we’re trying to grow the business at 30 per cent a year, we didn’t want to be constrained by banking covenants and interest repayments. It was an all-equity deal.’

Mordecai adds: ‘We’ve been through one of the worst recessions ever and we have a loyal customer base. The market has expanded and we want to take advantage of that.’