Packaging News

Walking the MBO tightrope

If you know your business inside out, buying it from its owners can be a canny, if sometimes risky, move. Packaging News looks at the highs and lows of staging a management buy-out

For those with an entrepreneurial spirit, getting involved in a management buy-out (MBO) makes sense. Putting a team together to take a business out of its existing owners can help it to grow and give you the freedom to make speedy decisions, rather than go through endless layers of management to get a project moving.

But it can be a risky venture. While it’s tempting to break free from a company’s previous constraints, anyone considering a management buy-out needs to have a strategy in place and be aware of where your market is headed. Thanks to past experiences, it’s worth expecting the unexpected.

"Deals done in 2006/07 that appeared reasonable at the time have since got into difficulty – what happened [in the financial markets] surprised everyone," explains Asim Mullick, executive director at Pöyry Capital. "Sometimes investors think that poorly performing companies will be easy to turn around with some additional investment but the combination of high leverage, investment and restructuring costs can be disastrous."

Paul Holohan, chief executive at Richmond Capital Partners, adds that any MBO will invariably require investment capital; venture capitalists tend to get involved and want a healthy return
on investment, usually within three to five years. Securing the MBO usually means forming a ‘newco’ to act as the vehicle for the acquisition.

"There are risks associated with MBOs as with all ventures," he adds. "But in the right circumstances they represent an excellent way of resolving issues and realising personal wealth for the existing owners or management."

Often MBOs come about because a large company decides to hive off one of its subsidiaries or divisions by selling to the management team. Another scenario could be a family business whose owners are retiring or looking to realise their wealth.

There are plenty of success stories out there and, in this feature, Packaging News looks at two recent deals in which staging an MBO proved to be the right path to go down.

INSPIREPAC
Chris Marples, Inspirepac chief executive, describes the MBO as the best thing the company did from a "business, people and personal point of view". It’s certainly helped the firm accelerate its investment plans and given it the freedom to make speedier decisions. Insirepac has sites in Wetherby and Chesterfield and specialises in shelf ready packaging for the drinks sector. It has a turnover of £36m.

"People are key to any business and I strongly believe they are our finest asset," concludes Marples. "Before investing in an MBO, fully explore your chosen market and ensure that your offerings more than satisfy your goals to ensure that you grow and remain viable.

GEKA
When, in February this year, the County Durham-based facility of German cosmetics packaging business Geka Brush was slated for closure as part of a Europe-wide restructure, things didn’t look good. With more than 100 jobs on the line in a part of the country that has suffered from a number of recent industrial closures, the demise of the factory would be bad news, not just for its staff and their families but the region as a whole.

But managing director Raymond Oliver was determined not to let the factory, which makes a range of cosmetics packaging formats for some of the biggest names in the beauty world, cease production. The plant had been operating in the town of Stanley since 1981 and Oliver himself had a very personal interest in the business staying open, having spent 25 years working at the plant. The solution? An MBO.

Oliver teamed up with another former director of Geka Manufacturing, Walter Schmidt, to put together a plan to stop the closure. The pair sought help from the local business support network, the County Durham Development Company, which put them in touch with a number of local advisors including lawyers Endeavour Partnership and business advisors Clive Owen & Co. Some funding was also secured from the North East England Investment Centre, as well as a number of other sources.

But putting together the MBO deal, which finally completed on 1 August, was not plain sailing. Oliver says: "In the present economic and political climate the business plan was a complex exercise. We had to continually amend and, in the last  few weeks, had to alter the plan due to the current uncertainty in the external environment."

Crucial to the deal’s success was a three-year supply deal that Oliver negotiated with the former parent company that will cover 60%-70% of production at the plant, which runs 15 injection moulding lines, six extrusion blow moulding lines and nine automated assembly lines. The arrangement has given Raymond and his team some breathing space to develop a new customer base both within and outside the cosmetics market in the coming months, without the threat of work drying up.

Now that the deal is complete, the plant is to rebrand as Sone Products and Raymond says he is grateful to staff for their dedication in the difficult period between February and August. "Our first aim was to make sure the factory did not close. Now that we’ve secured the jobs and the business, the challenge is to grow a new customer base – and hopefully create more jobs in the region," he says.

PACKAGING MBOs
September 2007 Cambridge-based packaging printer Firstan completed a secondary buy-out from Lloyds TSB Development Capital. The company was originally bought in an MBO in 2000 by managing director Andrew Hartwig and production director Paul Hartwig.

August 2010 A £75m MBO at Allied Glass was backed by Barclays Private Equity, which bought a majority stake in the firm. It was the second MBO in the last decade at the company, which employs 600 people across two sites in Lees and Knottingley. Alan Henderson took on the role of managing director and explained that Barclays input would help build the firm’s customer base.