The sad story of Maplin Electronics


Last week saw two high-profile corporate failures in the UK. Toys R Us finally went into administration after a stay of execution over Christmas. And private equity firm Rutland Partners pulled the plug on geeky electronics retailer Maplin. Total job losses from both failures amount to something in the region of 5,000 across the whole of the UK.

No-one was particularly surprised by the failure of Toys R Us. The company had proved slow to respond to the rise of online shopping and the trend away from large out-of-town retail outlets in favour of small local shops. In the US, Toys R Us filed for Chapter 11 bankruptcy protection (the American equivalent of administration) in September 2017. Despite the American company's insistence that its European operations were not affected, it was almost inevitable that the UK subsidiary would eventually follow suit. British consumers are shifting to online shopping every bit as rapidly as consumers across the Pond, and the trend towards localism is evident in the UK with the growth of convenience stores. Toys R Us, with its big out-of-town stores, poor online offering and lack of high street presence, looked increasingly anachronistic.

But the second failure came as something of a shock. Only a few days before, Maplin had blithely announced the opening of a new store. What went wrong?

The company that has been placed into administration is MEL Topco, which is the top layer of a complex corporate structure created by Rutland Partners in 2014 when Rutland purchased Maplin Electronics Group (Holdings) Ltd. from its previous owner Montagu Private Capital. Maplin Electronics Group (Holdings) Ltd. still exists, however; its 2017 accounts say that it is a "non-trading intermediary holding company". Its sole owner is MEL Bidco. MEL Bidco is a wholly-owned subsidiary of MEL Midco, which in turn is a wholly-owned subsidiary of MEL Topco. The corporate structure below Maplin Electronics Group (Holdings) is similarly complex. Maplin Electronics Group (Holdings) Ltd. is the sole owner of Maplin Electronics (Holdings) Ltd., which in turn is the sole owner of Maplin Electronics Ltd., the actual retailer. So the retailer has no less than six holding companies above it. It also has a wholly-owned subsidiary of its own, Maplin Electronics HK Ltd.

MEL Midco's 2017 accounts were created on a "going concern" basis even though it has no income and a balance sheet consisting entirely of debt. Apparently this is ok because its shareholder, MEL Topco guarantees its solvency. Similarly, MEL Bidco's accounts were also done on a "going concern" basis despite having £83m of net current liabilities. Apparently MEL Topco guarantees those, too. So MEL Midco and Bidco are now insolvent, because MEL Topco cannot honour those guarantees.

Further down the corporate structure, Maplin Electronics Group (Holdings) Ltd. mainly seems to exist to drain Maplin Electronics Ltd. of profits. On the books of Maplin Electronics Group (Holdings) Ltd. is an intercompany loan to Maplin Electronics Ltd. at an interest rate of 10%. The interest charge on this loan was sufficient to ensure that Maplin Electronics Ltd. made a statutory loss in both 2016 and 2017. Meanwhile, the direct owner of Maplin Electronics Ltd, Maplin Electronics (Holdings) Ltd., appears to exist only as a vehicle to hold a £31m revolving credit facility from Lloyds Bank. All of these intermediate companies are effectively guaranteed by MEL TopCo. All of them are now therefore insolvent.

Interestingly, the lower half of the structure pre-dates Rutland's acquisition. It was created by Maplin's previous owner, Montagu Capital, when it acquired Maplin in 2004. So it seems Rutland simply added its own layers on top of the existing structure.

Quite why Rutland has created such a complex corporate structure for Maplin is not immediately apparent, but I suspect it may have something to do with tax, or rather avoiding it. The accounts of the holding companies reveal complex and opaque inter-company loans and transfers which are otherwise hard to explain. I'd like a tax accountant to have a good look at those intercompany transfers.*

However, the complexities of Maplin's structure post-Rutland are not my concern. I'm chasing a different hare.

When Rutland Partners acquired Maplin in 2014 it funded the purchase with debt. That debt was loaded in its entirety on to the books of MEL Topco, in the form of £15m of bank loans at Libor + 7.5% and £72m of shareholders' loan notes at 15%. The 2017 full-year accounts show that MEL Topco generated an operating profit. This turned into a statutory loss after goodwill amortisation and interest charges. Richard Murphy, in his brief analysis of MEL Topco's 2017 accounts, says that it was the high interest charges on the shareholders' loans and accrued interest that rendered MEL Topco insolvent.

It is fair to say that the shareholders' loans were significantly more expensive than the bank loans. But that does not necessarily mean that the interest rate was exorbitant. Shareholders' loans are deeply subordinated debt instruments with equity-like characteristics. Really, they are equity dressed up as debt to take advantage of the "tax shield" on debt. So that 15% interest rate can be regarded as equivalent to the after-tax return that Rutland Partners, as shareholder, expected to receive from its acquisition. Was that an unreasonable expectation?

For a long-term acquisition of a sound company with stable cash flow, 15% would be a fairly high return, though not exceptional - many shareholders would expect a return on equity of the order of 12-15%. On the face of it, therefore, an interest rate of 15% on shareholders' loans doesn't look exorbitant.

But a sound company can finance itself with senior debt, so would pay a lower interest rate. By using the interest rate on Maplin's bank loans as a benchmark, Richard Murphy effectively assumes that Maplin was a sound company. If he is right, then Rutland's high interest rates are extortionate

But I'm afraid he is wrong. The hard truth is that Maplin not only is insolvent now, but was when Rutland Partners bought it. In fact it has been insolvent for a very long time. It is a zombie company.

The story of how it became a zombie is interesting, and ultimately, very sad. It is a story of a family business that was too successful for its own good.

Maplin was originally created in 1972 by two geeks who were frustrated by the difficulty they had obtaining components for their home electronics. They started up a mail order business from their attic room, producing a catalogue of electronic components from which fellow geeks could order. The business quickly expanded beyond simple mail order, though: Companies House tells us that Maplin Electronics Ltd. was incorporated in 1976, when its owners opened their first retail electronics store. Originally, it was called Maplin Electronic Supplies Ltd, but in 1988, the name was changed to Maplin Electronics Ltd.

Maplin's first audited accounts, in 1982, reveal a fast-growing small company, still owned by its founders. Its turnover had risen from £2m to £3m in one year, it was generating substantial profits and had just made its first acquisition, a company called Mapsoft. It was a little slow paying its bills - trade creditors were high - which suggests it had cash flow problems. The normal response to this would be to obtain working capital finance. But Maplin went much further than simply easing its cash flow difficulties. In the 1985 audited accounts, trade creditors were lower, but Maplin's bank overdraft was well over £1m. It appears that Maplin had bought itself new freehold premises and paid for them entirely with short-term finance - hardly the most prudent financial management. In 1987, it mortgaged the property.

Nonetheless, Maplin continued to grow fast, riding the 1980s boom in home computing and electronics. By 1988, it was a solidly profitable company with a sensible mix of short and long-term financing. And it continued to expand. In 1989, it created a National Distribution Centre for its products. Four years later it opened its first overseas office, in Taiwan.

Maplin's final accounts as an independent company were issued in 1994. Later that year, it was acquired by the private equity company Cannon Street Investments plc, later renamed Saltire plc. However, this appears to have been a friendly merger, since Maplin's original owners remained as directors, and additionally became shareholders in Saltire. It certainly wasn't a leveraged buyout. Maplin continued to finance itself sensibly with bank loans and retained earnings, though in 1995 it took a hit to its revaluation reserve when it was forced to write down the value of its substantial property portfolio in the wake of the UK's property market crash.

Maplin's business continued to expand under Saltire's ownership. It made further acquisitions, opened more stores, and expanded overseas, establishing a Hong Kong subsidiary. But as operating profits rose, the company gave increasingly generous dividends to shareholders. In 1998, its dividend policy even turned a respectable operating profit into a loss. The need to keep Saltire happy was distracting attention from longer-term investment.

In 2000, the dividends stopped when Maplin declared a loss due to a major restructuring. Possibly to protect itself from takeover, Maplin took itself private in March 2001. But the sharks were already circling. In June 2001, the private equity firm Graphite Capital - of which Maplin's director Keith Pacey was a director and shareholder - led a leveraged management buyout of the company.

That's when Maplin acquired the first of its current holding companies. Maplin Electronics (Holdings) Ltd. was formed in 2001 as a vehicle for the debt financing of Maplin's acquisition by Graphite. At that time, it was loaded up with nearly £40m of debt, made up of a mixture of bank loans and subordinated loan notes. Balancing this was an enormous goodwill asset that dwarfed the retailer's substantial tangible assets. The 2002 accounts show that a reasonable operating profit was turned into a loss by the interest charges on the debt. Sounds familiar, yes?

No, this wasn't the start of Maplin's zombification. £40m wasn't a huge amount of debt for a fast-growing medium-size company, and the company was without question creditworthy. So by 2004, it was looking a whole lot healthier. It reported a respectable profit and had refinanced the subordinated loan notes with cheaper bank loans. Admittedly, Graphite was draining the company to some extent: the £5m dividend that year was paid by increased borrowing. But at this stage, Maplin was a healthy profitable company. In September 2004, Graphite sold it to Montagu Capital for £244m, six times what it paid for it. Graphite still lists Maplin as one of its most successful corporate acquisitions.

Montagu Capital took the same funding approach as Graphite. It created the second of Maplin's holding companies, Maplin Electronics Group (Holdings) Ltd., and loaded it up with acquisition debt. But because Montagu Capital had paid so much for the company, the amount of debt loaded on to the new holding company was far more. Right from the start, it proved an intolerable burden.

This is the long-term debt of Maplin Electronics Group (Holdings) Ltd. as at January 2005:


And these are the types of debt, with the interest rates charged:

Of course, some of the bank loans were existing Maplin borrowings brought through to the new holding company on consolidation. But by far the largest proportion of this debt is new. It seems that Montagu Capital financed the acquisition with a mix of bank loans and unsecured debt. But there's something distinctly odd about the Series A loan notes. The interest rate was significantly higher than it should have been for senior unsecured debt, even in 2004. It was higher than the interest rate charged by Rutland on its deeply subordinated shareholders' loans. And not only was the interest rate high, some of the interest was capitalised, thus compounding the interest. That suggests it was mezzanine debt. So, were the Series A loan notes subordinated? If so, why? Maplin was a healthy, fast-growing company which had delivered a stellar rate of return to its previous owner. There was absolutely no need for such an expensive form of financing. I'd call that extortion, personally.

Not only were the Series A notes extortionate, Maplin was never able to refinance them as it had Graphite's subordinated loan notes. The interest on all that debt, together with amortisation of the balancing goodwill asset, completely swamped Maplin. The January 2005 accounts show that an operating profit of £1.84m was wiped out by £11.74m of interest charges, resulting in a statutory loss of £9.6m. As the holding company didn't have any equity to start with, that loss rendered it insolvent by the same amount.

By December 2005, things were even worse. Operating profits were £16.43m, but goodwill amortisation of £12m and interest charges of £37.24m turned that into a loss of nearly £33m. The shareholders' deficit (the amount by which the company was technically insolvent) grew to £42.4m.

Every year thereafter, Maplin Electronics Group (Holdings) reported a loss. Because interest was being capitalised, the interest charges continually rose, so even though the company's operating profits improved every year until 2011, they were never enough to eliminate the losses. By 2012, the net debt had grown to nearly half a billion pounds, of which £68.9m was accrued interest, and the shareholders' deficit was £320m. Montagu Capital's extortionate charges had turned a healthy growing company into a zombie.

The aftermath of the financial crisis cost Maplin dearly. In 2011, its operating profits slumped as sales growth fell. When the downturn continued into 2012, Montagu realised the game was up. While operating profits were improving, it could pretend that the company would eventually deliver a profit. But now that operating profits were falling, reporting losses year after year while claiming that the company was still a going concern was no longer a sustainable strategy. Trading while insolvent is illegal in the UK. The directors of Maplin were risking disqualification, and Montagu Capital was risking legal action by its customers for failing to take action to recover their money.

In January 2014, Montagu cancelled the accrued interest and injected £542m of new equity into the company. It also impaired the goodwill asset by £85.4m. The goodwill impairment and debt for equity swap weren't enough to return Maplin to solvency, but that wasn't the intention. After all, when your gravy train hits the buffers, you get off it, don't you? So all Montagu aimed to do was make Maplin sufficiently attractive to interest a buyer. It was putting makeup on a corpse.

The buyer that Montagu managed to attract was Rutland Partners, a distressed debt specialist. Rutland paid £89m for Maplin, most of which went to clear Maplin's remaining debt. The first set of accounts for MEL Bidco, the holding company Rutland created as a vehicle for the funding of Maplin's acquisition, say that the real consideration was only £14.7m after debt settlement. But since Maplin was actually insolvent at the time of the acquisition, arguably even this amount was too high. The right price was probably a nominal £1 plus a further cash contribution from Montagu to help settle Maplin's debts. To my mind, Rutland did not drive a hard enough bargain. It must really have wanted Maplin in its portfolio. I wonder if some of its directors are closet geeks.

This brings us to the financing of Rutland's acquisition. In the circumstances, financing with bank loans and/or senior debt, as Richard Murphy suggested, was out of the question. Even financing with bank loans and commercial subordinated debt, as Graphite had done, was impossible. Rutland had to put its own money at risk - or rather, its customers' money. Interest rates are far lower now than they were in 2004, of course. But I find it hard to see that 15% was an exorbitant hurdle rate of return on what was by any standards an extremely risky acquisition.

However, this does not mean that Rutland bears no responsibility for Maplin's failure. Like Montagu, Rutland paid far too much for Maplin. And like Montagu, it funded the overpayment with debt, then loaded that debt onto Maplin's books. Once again, Maplin was loaded with debt it could not service. Had Rutland paid the right amount for Maplin, debt service would not have been so onerous, and Maplin might still be alive today.

Of course, if Rutland had tried to drive a hard bargain, Montagu might have opted to put the company into administration. Indeed, it could have done so anyway. The fact that Montagu sold Maplin to Rutland rather than putting it into administration kept it alive, and its staff in work, for four precious years. The job prospects for its staff now are better than they were four years ago. Perhaps that is something to be grateful for.

The sad story of Maplin Electronics might lead people to damn all private equity investment. Indeed, this is the conclusion that Richard Murphy reaches:
The time has come to question whether the venture capital business model adds value in the UK. The evidence is it may not because it places real business under too much financial stress to survive, let alone prosper.
But Maplin was owned by four private equity companies during its long lifespan. And under two of them, it flourished. Only when it was loaded down with debt and systematically drained of profits because its owners had paid far too much for it, did it get into trouble. Perhaps the problem is not so much the venture capital business model itself, but the greed and folly of some of those who make investment decisions.

And there is one final twist in this tale. We don't know exactly why Rutland pulled the plug, but we do know that Maplin's external financiers were getting cold feet. Maplin recently had its trade credit insurance revoked, which for retailers is usually a precursor to failure, whether or not they have a private equity owner. In an interesting article, Computer Weekly argues that Maplin has been unable to respond to the challenge of online sales and has become over-reliant on its stores. So the sad story of Maplin may simply be an old-fashioned tale of over-expansion, loss of core focus and inability to respond to a fast-changing market. Just like Toys R Us.**



Related reading:

All the accounts cited in this piece can be found on Companies House website. I have not linked directly to them here because the links expire after a short period.

FT Alphaville has written Maplin's epitaph

Corporate insolvencies - or potential insolvencies - are quite a thing at the moment. Here are a few more that have interested me recently. 
 
Clearing out Carillion's cupboards
The misery of Mitie
The Fallout from Carillion's Failure: Could Interserve Be the Next Domino To Fall? - Forbes
After Carillion, Capita's profits warning comes as no surprise - Forbes

* Various people have pointed out that layers of holding companies are often used in PE buyouts because they create structural subordination of various classes of debt. It's entirely possible that this is the reason for Maplin's complex structure.

** It seems there are more similarities between Toys R Us and Maplin than I realised. An article in the FT says that Toys R Us's decline and eventual failure stemmed from its buyout by Bain Capital, KKR and Vornado in 2005. Or rather, the headline does. The actual article indicates that Toys R Us was already declining at the time of the buyout - indeed that was the reason for it. I think we have to be very careful about correlation and causation. A company declining after a leveraged buyout does not necessarily imply that the buyout is the cause of the decline. Arguably, private equity buyouts kept both Toys R Us and Maplin alive and their employees in work for longer than would have been the case without them.

The original version of this article lacked the final paragraph. The Computer Weekly link was in Related Reading. I have now brought it into the post to tie up with the Toys R Us discussion at the head of the post. 

Comments

  1. This is really good financial writing. It held my interest even though I had never even heard of the company.

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  2. This was very interesting. :-)

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  3. Very good article.
    Unfortunately this is happening to a lot of business once some private equity firms get hold of these strong family built business.
    It reminds me of another excellent business in the US that had a fantastic product but the greed of the private equity firm raped it until it was no more.
    It is a shame as Maplins was a fantastic company for electronics and nothing comes close in the UK and I feel most sorry for it's loyal staff who through no fault of their own will now be looking for jobs in an already competitive market.

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  4. Andrew S. Mooney7 March 2018 at 09:42

    Rather than there being a financing issue, I think it is more a fundamental problem with what it is exactly that they are selling and how they are selling it. It was never really sensible for them to become a high street retailer.

    High street electronics retail arguably suffers from a problem in the form of the fact that the product has no limits upon time frame for sale - It is instructive that Toys R Us has folded at the same time as the issue is similar. The products: Toys and electronic goods, are non-perishable and so there is no premium for sites and customer convenience as there is with say, supermarket food retail or even the fashion industry where the seasons shift. There is also the simple issue of the massive cash flow that they must need to have simply to retain store inventory, which tempts you to be in debt.

    Effectively the business worked when it was a mail-order/catalogue retailer, and logically then even works as an online proposition - They have a massive retail/distribution facility at the back of Wath On Dearne, of all places, (For the uninitiated it is not much of a location.) but when you start having to stock an entire high street shop chain with your products and they don't sell, you're stuck with all of the debt, and there is no ability to cut prices to offload them/stimulate discretionary spending, because you paid what you paid for them in the past.

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    1. I realised after publishing this that I had not tied the argument back to my brief discussion of Toys R Us at the start of the post, which was my original intention. So I've now added a paragraph which essentially says that the business problems of Maplin have nothing to do with private equity and everything to do with losing ground to the online marketplace. As you say, it's similar to Toys R Us. The private equity ownership is a red herring. But I also wanted to point out that Maplin has been in deep trouble for years. Montagu Capital was an absolutely terrible owner. That's when Maplin over-extended, lost its core focus and became essentially a grown-up version of Toys R Us. Its fate was inevitable from then on.

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    2. I think it's a little glib to say "nothing to do with PE" when "complex debt structures used by PE to avoid tax and extract money from the business, leading to lack of investment and unusually constricted cashflow" is such a common mode of failure for PE businesses in both troubled and booming sectors.

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    3. Anyone who looked at their huge catalogue would get a feel for how big their inventory must be at their stores.The two that I've been into in NE London are on prime sites next to the likes of Wilko and Next.The pattern of my experience is to go in the store, have a look at the product,check the price then find it so much cheaper on- line.And it has been apparent from inside the store how few customers were buying anything.
      If anything the surprise is how retail co.s like these manage to hang on despite their obvious poor sales.We can all immediately think of others we regularly walk by and hardly ever see a customer in there.

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    4. Andrew S. Mooney7 March 2018 at 21:35

      To Frances Coppola: That Maplin have been in trouble over a *long* period is potentially grist to my mill, in that cashflow categorically incentivises you to be "optimistic" when you ask for extensions upon bank credit, and it also potentially explains the baroque corporate structure where debt is being masked off. - Like Enron and the "Jedi" accounts.

      Richard Branson, at the height of the "dirty tricks" affair with British Airways had to constantly contend with British Airways' PR department and the idea that Virgin Atlantic was paying in cash for aircraft fuel. This was my personal, odd indoctrination into the idea that this is the kiss of death to an otherwise perfectly viable company, in that it quietly and constantly implies it has no bank credit. There is nothing such here, of course, but slowly and progressively running out of capitalisation is death, but relying upon the ability to keep your stores stocked is an ongoing expense.,

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    5. Andrew S. Mooney7 March 2018 at 21:47

      I would just ask to clarify that Montagu capital - Private equity - under the circumstances, of the realities of the business model, did not constitute a good choice.

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  5. So long as the shareholder loans are subordinated in all respects (including restrictions on payment of accrued interest), banks and credit funds will treat these as 'equity'. The main decision to choose between common stock, prefs and shareholder loans is usually a matter of (a) tax and (b) potential imbalance of share of economics and control amongst management and possibly between management and shareholders.

    On (a) tax, I would note that back in 2000s interest on shareholder loans could be deductible if it were on an arm's length basis. This often involved getting a friendly lender or adviser to give an indicative quote as to the rate they would charge if they were to provide this subordinated piece.

    Also, for this reason and many others, banks pay little attention to book equity, preferring to focus on cash flows, interest cover and debt leverage ratios. If cash flows remain strong then net losses are of limited concern. For example, pension revaluations may not reduce cash flows in the next 3-5 years, though in time they may indicate that the company needs to increase its cash contributions. MTM on swaps may similarly be irrelevant.

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    1. Yes you are right, at that time the high interest acted as a tax shield (not anymore) and so not really expected to be repaid (except in the most optimistic of circumstances). The level of interest did give rise to worries by insurers but regular meetings kept them on side during the Montagu period much of the bank debt was repaid. Maplin's woes was in new management convincing Montagu that they could move from their current business model to be something of an Apple type . The reality has always been that Maplin succeeded at connecting things together with some innovation products on top. New management ladled in costs on overheads and initiatives that could never work, that plus the financial load eventually caused the issue.

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  6. I think you misunderstand the nature of shareholder loans a bit here. They have two main purposes:
    1. To reduce the tax bill (as you say). In many countries the extent you can do this is restricted but the UK is still pretty generous. (As an aside, and somewhat surprisingly, a restriction on interest deductibility was introduced in the US as part of the Trump reforms)
    2. To differentiate returns, and specifically to incentivise management. The balance of ownership of shareholder loans and ordinary equity is varied particularly between management and the institutional owner. The institution gets a preferred, more secure return, the management own more of the ordinary equity and hence benefit more from upside.
    But these purposes are only really relevant if things go well: if things go badly, it's likely there would be no tax to save anyway, and the ordinary equity will be worthless. It is generally understood by all concerned that in these circumstances the shareholder loans will not be repaid. Indeed bank lenders (and rating agencies if they're involved) will ensure that they can't be.
    So fundamentally they aren't really a 'burden', and the question of whether the rate charged is 'appropriate' or not is a red herring. Look at the Montagu case: when things went wrong they effectively cancelled the debt. They didn't really lose anything by doing so: the debt is only ever worth what the business is worth anyway.
    Maplin went bust because of the internet, and perhaps some poor management. Shareholder loans had nothing to do with it.

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    1. I may have been a bit inconsistent in my discussion of shareholders loans. However, my comments were in response to Richard Murphy, who claims that the 15% interest rate on Rutlan'd's shareholder loans is the principal reason for Maplin's failure. I disagreed with him about this. I regard Rutland's shareholder loans as equity and the interest rate as the target rate of return on the private equity investment.

      I would also say the same of Montagu's shareholder loans. But the Series A notes are not described as shareholder loans in Maplin's accounts. They are simply called "unsecured notes". I therefore assumed they were commercial debt rather than shareholder loans, and questioned the interest rate and the capitalisation of interest on what should have been senior debt according to the description. However, I may have made an incorrect assumption.

      In my view the real problem in 2012-14 was the serious deterioration in operating profits, not the rising net debt. And Montagu recapitalised the company in order to dress it up for sale. I'm sorry if that isn't clear.

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    2. Thanks for the clarification.
      Rutland (like any private equity investor) will have looked at the return on loans and ordinary equity together. The target return would have been higher than the rate on the loans.

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    3. No doubt, but the interest rate would have been a substantial component of the target RoI.

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  7. The threeco structure (topco/midco/bidco) is a feature of debt financing so that the bank (senior) can be secured in bidco, and if needed in an disaster scenario enforce their charge over shares in the operating company and take ownership without other debt claims in the same bidco entity to resolve. Likewise with loan notes or mezz in the midco, and equity in the topco.

    There is no tax advantage as all part of a group. Assuming all the same instruments were in a Bidco the overall tax should net to be the same. Historically all debts would be in the bidco with an intercreditor but this structure is now prevalent in virtually all LBO's for security enforcement purposes.

    As per other comments - failed business model was the critical issue. Montague overpaid and didn't keep up with the shift online, taking a massive writedown (crystallising a cash loss) on the exit to Rutland. Rutland paid £14m on the basis they believe they could turn it around and failed.

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    1. Thanks. I'm not a private equity expert so genuinely didn't know the reasons for the threeco structure.

      I completely agree with your diagnosis. Montagu overpaid, Rutland was overoptimistic and both of them got the business strategy disastrously wrong.

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  8. How much was a shrinking of demand due to technological change the cause of Maplin's downfall, irrespective of the issue of online competition?

    Specifically, how much did the advent of very cheap computers (such as the Raspberry Pi) cause tech enthusiasts to shift out of electronics design in favour of computer coding?

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  9. This is really interesting Frances, great work.

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  10. I think it's the underlying shift to online retail. I did buy a USB mic from Mapline online last year as it was competitive for what I wanted, but a lot of their components stuff was two or three times more expensive than buying through ebay or amazon. The high markup works for casual purchasers who just want someone to tell them what cable to buy for their TV, but tech savvy purchasers will go somewhere more competitive.

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  11. Very interesting and informative .... I wonder if you would be kind enough to comment upon another related topic which a lot of people are not aware of.

    It is to do with many companies such as Maplin, Tesco, Asda, John Lewis, Dixon's Store Group, Sainsbury's (Argos), Samsung, B&Q, Wickes, Home Bargains, Boots Chemist, Phillips, Tefal, LIDL,
    ALDI, delongh, etc etc

    In short .. I was at a Sunday Carboot Market in Birmingham which was operated by City Council for almost 41 years. There was a trader who had a van full of Maplin goods from cakes to computers to tooling , electronic components ... Some of the goods were clearly new and unopened and there was also goods which had been returned by customers to Maplin for whatever reason ...they were still in the original Maplin bags with the reception of payment still attached.

    People could buy goods for a few pounds saving them over 90% of what they would have to pay at Mapping. After a few months the amount of goods decreased as people would buy goods from the market and if they were faulty ..they would buy a identical item from Maplin ..then swap the faulty item from the Carboot market and go back to Maplin for a full refund ...

    I wondered where these goods were coming from ? I have been told that all the goods should have been destroyed by a accredited recycle company to avoid landfill with the WEEE Directive (the logo of a Wheely bin with a cross on it was on the goods somewhere)

    This legislation is widespread across major brands and manufacture's /retailers.
    I was told that the company did not loose out on the goods as they would claim the cost from the EU.

    The pallets of goods are acquired by giving the person who is responsible for the destruction of goods a under the table cash payment for about £60 . The actual resale value can vary but more often than not the pallet will have a item which covers all the costs .. the rest is all profit.

    A company called Valpac seems to be one of the companies where the Maplin Goods came from but there are a few who across-the-board .... The value of rebates claimed is millions and this would be for non existent WEEE goods which are sold to people online and Carboot Markets.

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  12. Greed and folly and we lose what had been a useful retail outlet.

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    1. That is pretty much my impression too. Our blogger has done a good job of summarizing the financial situation, and some commenter have added as to to the private equity point of view, but what is missing here is to stand back and look at it from a business point of view.

      The key details are two: Graphite sold it for six times in four years, and that later owners charged 15% interest, rather then merely expecting 15% profit.

      The business question is: how fast is the investment going to pay for itself, that is double in valuation? For south/London UK property that is 7-10 years: you buy a flat today for £1m, sell it for £2m after 7-10 years, job done. And that's the "risk-free" (that is: pretty much government guaranteed) hurdle rate of around 7-10%: why ever should a person of means deliver their money to a private equity fund for something equal or less to that when they can just buy up London property and be done with it.

      So private equity funds target return rates of 15% or more, that is doubling the investment in 5 years or less, one way, or another. Now Graphite hit the jackpot: they sextupled, not merely doubled, their money in less than 5 years. Then the questions are:

      #1 How was that possible for a so-so retail business? Well, my understanding is that management buyouts often rely on carefully calculated conflicts of interests.

      #2 How is it possible that subsequent speculators, having seen six times in less than 5 years, expected to double their money every five years after that, for a so-so business? Often the explanation for strange hopes like that lies in attached property assets, but not clear here to me whether that applies to MAPLIN.

      Overall the story is as "Demetrius" pithily summarizes it: "what had been a useful retail outlet" was expected to double in valuation, starting from a very high one, much faster than London property, and when it did not it was shut down as a waste of time, even if probably it could have continued to be profitable for quite a while yet.

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    2. Just a little background, when Montagu purchased Maplin they may have been under pressure to use their funds (I couldn't possibly say) so once PE houses have raised their funds they have to put them to work to provide 'above market returns' to investors. In addition the market was frothy and there were several bidders for Maplin, for sure the final amount paid was way too high a fact that might have been acknowledged by some Directors (again I couldn't possibly comment). Whilst this could make for a difficult relationship Maplin paid down a significant slice of bank debt (if not loan notes) and was trading well. Whilst financial instruments can bring a business down it is usually operational ones that actually signify the end, the difficulty in selling Maplin out of administration goes a long way to indicate that the fundamental operational / tactical decisions taken in recent times have broken the business.

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  13. A fascinating post (as are most on this blog, thank you Frances). I will miss the convenience of Maplin. I had no idea of what was behind the scenes. As a layperson not versed in financial wizardry it is difficult not to have sympathy with Richard Murphy's view - the idea of loading the purchase debt onto the company's books seems somehow "wrong" -along with the seemingly ludicrous layers of holding companies it all appears to be about offloading risk to someone else.

    In his replies to comments on his blog he agrees that Maplin was finally brought down by retailer environment problems but says that the financial set-up will have precluded responding to the changing situation by taking a longer term view of the company's prospects. if I understand it right from what you say a series of PE outfits have taken proportionally very large profits out of the company over the years. Can you say whether Rutland will walk away "in-pocket" after the liquidation?

    I read a while back that the Governor of the BoE no less had quoted someone as saying "Profit is no more the purpose of business than breathing is the purpose of living". Whatever view you take about the usefulness of financial structures and the reasonableness of 15% interest rates this seems a good demonstration of a completely opposite viewpoint.

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    1. As Rutland has put the company into administration, it can't possibly walk away in-profit. The only question is how big its losses will be. But it is a distressed debt specialist. Losing money on acquisitions is business as usual.

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