SME's - Quarterbridge

‘Market Matters’ – September 2018

Buying companies as a going concern is fun. Sometimes. Despite purchasers’ best efforts when sniffing around accounts, staff contracts, order book, supply contracts and other ‘due diligence’ they inevitably spend a couple of years digging up buried bodies:‘ Oh sorry, didn’t you know the HQ is built over an old mineshaft? Well tough luck – the legal concept of ‘caveat emptor’ applies. In other words ‘buyer beware’ or ‘tough luck – you should have asked the locals’.

One of the biggest liabilities for a purchaser is often staff pensions.

One of the biggest liabilities for a purchaser is often staff pensions. Hence the unholy row when Sir Philip Green’s Arcadia Group sold BHS for £1 complete with a large hole in it’s staff pension fund. Then BHS went bust. Valuation theory says the price paid by a purchaser reflects the liabilities it has assumed and the seller is home and dry now someone else is carrying the can. That’s the theory, but life is more complicated than that.

Mike Ashley is arguably the best corporate retailer of his generation

The Chinese have a saying: ‘The best time to collect firewood is after a storm’ i.e. timing is everything. Mike Ashley, billionaire owner of Sports Direct is an expert at timing. He bought the 59-store House of Fraser chain for £90m hours after it went into receivership thus avoiding liability for the staff pension fund and £70m of unpaid bills owed to suppliers. This was his latest strategic bet at buying financially-distressed retailers. Since he founded Sports Direct in 1982 he’s never been able to resist a bargain. He bought heritage brands Karrimor, Lonsdale and Everlast to promote as own-label merchandise then sold-on Dunlop to the Japanese for a tidy profit. Mike Ashley is arguably the best corporate retailer of his generation – a successor to Ralph Halpern of Burtons and Sir Philip Green of Arcadia.

Mike hasn’t got a gong (yet)

Just like them he is famously combative. He refused to appear in front of a Parliamentary inquiry to answer questions about working practices at his distribution warehouses. After arm-twisting with threats of gaol in the Tower of London he did appear but unlike Philip Green he didn’t call for the resignation of Frank Field MP, Chairman of the ‘biased’ Work and Pensions select committee. As Mike hasn’t got a gong (yet) there was no kickback from the Commons Forfeiture Committee to have his knighthood annulled.

Frank Field MP is one of the most experienced and widely-respected members of Parliament

Frank Field MP is one of the most experienced and widely-respected members of Parliament and doesn’t want another public inquiry punch-up. He politely suggested this is an opportunity for the new House of Fraser owner to cover himself in glory. ‘Mike Ashley should take responsibility for the pension scheme’said Mr Field. ‘It is in surplus and…he would be smelling of roses compared to his rivals on the High Street.’ That was one way to offer unwanted advice and twist the knife in Sir Philip at the same time – despite Philip’s voluntary donation of £360m to the BHS pension scheme. Sir Vince Cable, LibDem leader and former business secretary was worried the Government Pension Protection Scheme will have to fund another bail-out.He proposed administrators be made to report on large deals e.g. House of Fraser to MPs. ‘The danger is an agreement which is reached is unfair to one or other parties. It could be the unsecured creditors like the suppliers, or it could be the taxman, or in this case there are worries that it’s unfair to the pensioners’. Quite so – but what reporting to MP’s would achieve is unclear.

‘The new Harrods of the High Street’

Many High Street Landlords had been terrified at the thought of business rates on empty properties and lost rent with H of F closing down. They breathed a collective sigh of relief at the buy-out then cracked open another Bollinger when Mike announced he would create ‘the new Harrods of the High Street’. Ashley certainly has the financial muscle to do so but has left staff and suppliers wondering if it will be at their cost. Wholesale suppliers only get paid after goods are delivered and there is – allegedly – £70m owing to them and sales floor concession-holders are only paid after goods are bought by customers. Albert Arkwright, nice but rather dim leader of Mudford-on-Sea Council said: ‘Phew that’s a relief – for a moment I thought our Mudford store might be for the chop…’

Other troubled retailers are worrying about a potential takeover

Other troubled retailers are worrying about a potential takeover, particularly those in whom Ashley holds a stake e.g. Debenhams. He has a 29% holding in the chain and their credit rating was downgraded last month when credit insurer Euler Hermes reportedly reduced cover at concerns over inability to pay bills in full and on time. Debs are holding redundancy talks with staff whilst Chief Exec. Sergio Bucher attempts to secure £10m of cost savings this financial year and double that each year in the future.

Mary Portas, business commentator and so-called ‘Queen of Shops’ has relaunched her retail consultancy service

Meanwhile Mary Portas, business commentator and so-called ‘Queen of Shops’ has relaunched her retail consultancy service by affirming her belief in SME’s (Small and Medium-sized Enterprises) at ‘Business Spotlight’ sessions sponsored byNatWest Bank.

‘British means well-designed and well-made. China is desperate to achieve that recognition but ‘made in China’ just doesn’t cut it’.

La Portas suggested a new breed of boss is emerging; one who is more fun, more thoughtful and freer of the old hierarchies which hold back innovation. And they’re not worried about Brexit because there is ‘huge equity and power in the British brand. British means well-designed and well-made. China is desperate to achieve that recognition but ‘made in China’ just doesn’t cut it’. But she also said the Government should be doing much more to help small businesses export their goods and services. She also encouraged Local Authorities to support the ‘tide of innovative and creative new enterprise’ by building cheaper operating spaces in towns and cities. ‘I wish the Government would support them by building bricks and mortar spaces’ she said. Maybe she had overlooked Market Halls.

‘Any brand that connects with women in a deep and meaningful way is going to win’

Mary suggested British businesses are strong innovators in food, wellbeing, health and beauty.‘Anything that makes us feel and look better’ she said. More should be be done to sell to the female half of the population. ‘Any brand that connects with women in a deep and meaningful way is going to win’ she opined. Future businesses will be more inventive, more principled and less restricted than those of today. ‘I just wish I could be around in 50 years’ time to see it all happen’ she said.

Mary who…?’

When asked to comment, Mike Ashley reportedly said:‘Mary who…?’

So how are the January sales for you? Lots of Shoppers seem to be voting with their feet and deserting the High Street in favour of online sales. ‘Why suffer cold and wet feet traipsing in search of bargains when you can stay at home and do it online?’ was the thinking behind another Government-supported attempt to revive our emptying High Streets. First there was the DCLG-sponsored ‘Portas review’, then the ‘Town Team’ competition and the private ‘Grimsey Review’ and now it’s the turn of the ‘Distressed Town Centre Property Taskforce’ sponsored by the HM Treasury. You can download it from http://policy.bcsc.org.uk/beyondretail/index.asp

Some Councils like Birkenhead and Rochdale are promoting their High Street Markets as ‘retail differentiators’.

It covers the usual big issues – lack of funding, online sales, fragmented land ownership and parking policy etc and outlines interesting initiatives such as the ‘retail business incubators’ in Wolverhampton and Tamworth. Also how Rotherham provides revenue and capital support for fledgling businesses. Some Councils like Birkenhead and Rochdale are promoting their High Street Markets as ‘retail differentiators’ and there’s a good argument to be had about why this hasn’t happened before. But like the reviews before it this one offers little else but local policy support for SME’s (‘Small and Medium-sized Enterprises’). There’s a nice piccy of Stockport Market Hall and some welcome discussion of ‘provision of mentoring and…social media for independent retailers and small businesses’ but I can’t help thinking the review is still missing the blindingly obvious.

SME’s are less deterred by the cost of rent and rates than the administrative burden of paperwork they encounter as they expand. If HM Treasury is serious about encouraging SME’s as ‘the engine room of the economy’ then it needs to take a long-term approach to relaxing Vat rules, tax thresholds, NI and employment legislation which apply to small businesses. Those costs are outside the control of any independent retailer and a very real disincentive to growth. You can always negotiate your rent downwards with a landlord but just you wait and see what happens when you miss your Vat return. Didn’t David Osborne promise a ‘bonfire of paperwork’ in one of his budget speeches? That’s the way to cure SME’s cold feet.

The Independent Parliamentary Standards Authority created to set MP’s pay and expenses in the aftermath of the expenses scandal proposes to increase MP’s salaries by 11% to £74,000 p.a.in 2015.

Someone else has definitely got cold feet – MP’s. The Independent Parliamentary Standards Authority created to set MP’s pay and expenses in the aftermath of the expenses scandal proposes to increase MP’s salaries by 11% to £74,000 p.a.in 2015, despite objections by all parliamentary leaders. The best bit is that MP’s have no way of stopping the increase unless they change the law they introduced a couple of years ago. Labour has said ‘any rise in MPs’ pay must be considered in the light of…the cost-of-living crisis facing people across the country’ and the Prime Minister has threatened to abolish IPSA if it force-feeds MP’s with another eight thou. per annum. He didn’t mention anything about HS2 though. Great stuff. I wonder how many will vote in the abolition debate.

Scientists conclude the ‘regulars’ who turn up first always secure the best pitches in the middle.

And finally, some not-so-cold cold feet: German Scientists have discovered how Penguins manage to keep their feet (and the baby Penguins which sit upon them) nice and cosy during a blizzard. A similar problem is shared by many Traders on Open Markets. Apparently the Penguins bunch together and shuffle around in a sort of Mexican wave whilst squawking about the weather and how few fish there are, or whatever. This keeps the ones in the middle toasty warm whilst they struggle not to get shuffled out to the edge. With cold Teutonic logic the scientists conclude the ‘regulars’ who turn up first always secure the best pitches in the middle whilst the ‘casuals’ who can’t be arsed are left with the coldest pitches at the edge. This sounds very familiar and I can’t work out why scientists needed to go to Antarctica to confirm it.

So leave your moonboots at home and train a pair of Penguins to sit on your feet. Or if the Toby objects, then seize the business opportunity and start manufacturing Penguin-lookalike boots.

Keep shuffling. Spring is not that far away.