Having first trained as an accountant, the field of turnaround and restructuring wasn’t the arena that Lee Mowle thought he would find himself in.

After joining plastic goods manufacturer Stewart in the mid-1990s as financial director, the business got under his skin. Over the next 15 years Mowle experienced highs and lows with the business, a cycle that has now culminated in the sale of a majority stake to private equity firm ECI Partners.

‘Stewart really interested me as it had so many elements to it and was a very long-established business, but you could see a lot of inefficiencies – a lot of “this is the way we have done it for 40 years” kind of mindset,’ Mowle explains.

Stewart was sold to NatWest Equity Partners in 1999, but it wasn’t long before the firm itself went through an MBO and suddenly the plastics business found itself being very much “non-core” to the newly formed Bridgepoint.

The business then went through a three-year period of drifting along, Mowle says. ‘As a consequence of that, it fell behind the competition and service levels suffered during that period. We weren’t really reacting, so at the end of that period it had a few months to live.’

Changing Fortunes

The perilous state of the business gave Mowle the opportunity to lead his own buy-out of the business in 2003. However, funding the deal and paying off the existing debt was a complicated affair. At the time Stewart was losing £1 million a year and had no definitive direction.

By combining a £5 million invoice discount facility with a sale and leaseback on company property, Mowle was able to remove the £9 million of debt owed to the Bank of Scotland and still enable Bridgestone to see a return of capital from its investment.

The problem with Stewart never lay with its revenues, Mowle explains. Instead, it was a case of inefficiencies dragging down potential profits and resulting in the company posting big losses.

‘I thought I had bought the business about 12 months, because if we couldn’t turn the fortunes and grow the top line very quickly we would be in a similar state. On top of that I had now saddled the company with £700,000 of rent a year.’

Despite the fact that the company sailed very close to the wind, and lost its sister company Lotus Water Gardens in 2004, Stewart’s fortunes started to change when Mowle employed the help of serial entrepreneur John Lanni.

With Lanni focused on driving down manufacturing costs, Mowle was free to direct the business along the route that he saw as being most profitable.

‘When John left after two years, in 2008, we were doing about £11.5 million, which resulted in £750,000 of profit. Leading up to the deal with ECI we had an EBITDA of £2.5 million following sales of £13.8 million,’ Mowle reveals.

He explains that although the turnover didn’t change during the turnaround, by getting rid of the ‘loss-making business noise’ the company was able to grow the profits considerably.

Mowle attributes part of the blame for the company’s previous lacklustre performance to directors who he believes were promoted beyond their comfort zones. He firmly believes that it is often the second tier of management who do all the work and know where the business needs to be taken.

This is the new wave

With businesses now beginning to raise their heads above the parapets and move out of the doldrums they have been in since the crash, a new wave of turnaround investors has emerged, investing nearly £1 billion into distressed companies during the past 12 months.

Research published by accountancy firm KPMG shows that this new breed of investor has completed 73 deals in the past year, pumping £940 million into UK-headquartered businesses.

Will Wright, restructuring director at KPMG, says that it’s positive news for directors who are custodians of businesses that have potential problems.

He adds, ‘If a business goes through any form of insolvency, there has to be value erosion as a result of the process.

‘What you are seeing now is the restructuring community becoming far more creative in terms of using the period before it fails to try and repair the company.’

Since their high during the first quarter of 2009, company liquidations dropped to 3,874 during the fourth quarter of 2010 (see Chart 1 below). However, with 2011 recording figures of 4,297 for the first three months, it appears that businesses are not out of the woods yet.

The biggest challenges stem from the lack of liquidity to fund business growth, says Bryan Green, president of the Turnaround Management Association (TMA): ‘The economy is still relatively benign in terms of insolvencies. However, there is still a lot of activity in terms of turnaround.’

Everyone on board?

Green believes that one of the issues surrounding successful turnarounds is engaging all stakeholders to share or participate in the restructuring.

The notion of ‘amend, extend and pretend’ is a problem that Green thinks could be multiplied if interest rates go up as they are expected to.

‘Amend the loan documentation, extend the length of the loan and let’s pray this thing will survive,’ he comments.

Wright reckons the rise in the number of turnaround specialists in the market is testament to the exciting opportunities that are presenting themselves.

‘This is a really interesting market, with the evolution of the turnaround professional, combined with the increasing sophistication of investors, contributing towards this.’

Mowle thinks that the benefit gained from getting outside help in structuring a turnaround was pivotal in ensuring the future of Stewart. Despite the fact that bringing someone in meant that he had to take an equity cut, the rationale of this decision is hard to argue with.

‘In terms of value creation, 100 per cent of a pound is a pound and 50 per cent of a tenner is a fiver. I know which one I preferred,’ he explains.

For many businesses, the framework that has been the fabric of the company for so long is often the very root of the problem, with a reluctance to bring about wholesale changes the reason that they fail.

Mowle is no stranger to this issue, and has cut staff levels from a high of 175 to only 80 during his tenure, with output remaining the same.

While Mowle was able to get in early and was part of Stewart as a success story before it began to struggle, the most difficult element for any turnaround investor is identifying the target early enough.

Wright explains: ‘There will always be an inherent block in identifying acquisition targets, in that directors find it difficult to admit to the severity of their problems until it is too late.’

Capital economics

Looking forward to the rest of 2011, the long-expected rise in interest rates is an issue that could lead to more businesses slipping close to the edge and needing to be turned around.

Green says that the current level of interest rates has meant that people don’t have to make decisions as quickly as they would otherwise have had to. He identifies London as having a ‘separate economy’ to the rest of the UK, with businesses based in the capital having a much better time of it than those located elsewhere.

Green comments: ‘You’ll reach a tipping point whereby the interest rates will push them into insolvencies or towards strategies where debt will have to be extended.’

The Time to Pay scheme is another factor that Green believes will influence the ability of businesses to avoid slipping off the edge. It became one of the release valves for struggling companies, he says, but with HMRC beginning to take a tougher stance on late tax payments it may force more businesses to restructure their debts.

The ability to find new strategies to soften the blow of these possible changes will be important in determining the future of struggling companies, with turnaround and restructuring investment proving an ever more attractive route.

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