Staying on the home front

By Ian Fraser

Scottish Business Insider

Deals & Dealmakers Yearbook 07

August 2007

Instead of a hugely unsettling trade sale, perhaps to a foreign buyer, the all-Scottish MBO of Ken Cairnduff’s Internacionale satisfied all round.

The management buyout of Internacionale Holdings could be seen as an archetypal Scottish deal in that a home-grown, entrepreneurial success story was sold by its founder to its Scottish management – and the team was backed by a private-equity house that is also Scottish.

It also illustrates the importance of personal chemistry in these sorts of transactions.

The deal followed six months of negotiations between the business’s founder, Ken Cairnduff, his management team, venture capitalists and bankers. Also involved were deal arrangers KPMG and several firms of lawyers including Dickson Minto, advisors to Cairnduff, and Glasgow-based Harper Macleod, advisers to the management team.

Cairnduff, who founded the business as Razzle Dazzle in 1979 but rebranded it as State of Independence before finally settling on the name Internacionale, was eventually able to sell the business to its management last October in a £45m deal. He reportedly walked away with a £30m fortune.

The deal enabled Internacionale’s chief executive Norrie Stewart, who has been at the company since the mid 1990s, to take an 18% stake in the business, with the rest of the management team – David Milton, Gerard Gavan and Graham Clements – sharing a 25% stake between them.

They were supported by a £10m injection of private equity funding from a consortium led by Glasgow-based Penta Capital, with London-based Graphite Capital and US-based Bear Stearns Private Equity also chipping in. Barclays’ leveraged finance unit – which in Scotland is led by Ally Scott – provided the £28m debt funding package.

The MBO saw special purpose vehicle Ossian Retail Group buy out a total of 147 Internacionale (women’s wear) and Au Naturale (homeware) stores across the UK.

Glasgow-based Ossian now employs more than 2700 people across the UK and makes operating profits of £5m on turnover of £125m.

Stewart recalls that talks about a possible MBO, which Cairnduff had identified as the best way to overcome succession planning problems, first kicked-off two summers ago. However the talks stalled because of the need to focus on the Christmas 2005 trading season. They recommenced in March 2006, after strong operating results for the previous year persuaded Cairnduff he might command a reasonable price for the business.

Stewart reveals that Cairnduff never really had much of an appetite for a trade sale – partly out of suspicion this would cause more disruption to the business through leaks to the media. Stewart believes a trade sale would have “been hugely unsettling for customers and staff.”

Penta first became involved in June 2006. To start with the Glasgow-based venture capital group remained in competition with an unnamed bank for the deal.

“In the end we felt our timescale was more aligned to that of Penta and Barclays,” says Stewart. “The [other] bank was enthusiastic but had structured its debt in a fairly long-term way.” The latter route is understood to be out of kilter with the management’s his desire to seek an exit of their own within a two to three year time horizon.

Stewart says advisors KPMG played a critical part in the whole process and that the management team immediately forged a strong relationship both with Penta’s Torquil Macnaughton and with Barclays’ Ally Scott. He says these relationships also played a key part in the success of the winning consortium.

“Often it’s as much about people as it is about mathematics,” says Stewart. “We immediately felt Torquil was a man we could trust. He is the acceptable face of venture capitalism. And Ally Scott impressed us because of his unbundled enthusiasm.”

Stewart says the deal took slightly longer than expected to complete, partly because it was punctuated by the summer holidays.

When it finally concluded in September 2006 Stewart says this came as something of an anti-climax. This was partly because no sooner was the thing concluded than the management team found themselves embroiled in the minutiae of last Christmas’s trading season.

“We very quickly had to shift from one hot seat to another,” he says.

The two key lessons Stewart took out of the deal were that “it can be a major diversion from running the business in terms of deflecting time and energy. You should never under-estimate that.” He also says that management needs to be aware they will be trading in a different environment once an MBO completes.

“Working in a highly leveraged environment usually entails a step-change in performance expectations. You really do need to plan for that in advance.”

Ossian is now focusing on refurbishing stores, reconfiguring distribution and investing in tactical advertising as it steps up its drive into England.

Bruce Walker, corporate finance director at KPMG, says: “In a climate where we are seeing more and more Scottish businesses being sold to foreign corporates, it is great to see one of this country’s leading retail companies retain its strong Scottish identity.”

This article originally published in Scottish Business Insider’s Deals & Dealmakers Yearbook 07 published in August 2007. © Copyright Ian Fraser 2007

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