UK Conglomerate Eyes LBO Market

As EVCJ went to press, shareholders of UK conglomerate Wassall were preparing to vote on the group’s proposals to turn itself into a hybrid private equity fund and industrial holding company,while retaining its quoted status.

Founded ten years ago by three of its directors, headed by chief executive Chris Miller, Wassall has made a practice of seeking underperforming and orphaned companies. The only turnaround acquisition exited by Wassall to date was General Cable, which the group bought in 1994. Under Wassall’s ownership, General Cable’s profits were lifted from the 1993 level of $2 million to around $100 million last year. The sale of General Cable netted Wassall GBP463 million, corresponding to a transaction IRR of 50%.

Wassall is currently sitting on a cash pile of some GBP300 million (ecu 460 million). The group proposes to invest its own capital alongside capital from other institutional sources, possibly through the medium of off-shore private equity structures and to apply greater leverage than has been possible under its current structure. If shareholders agree to the conglomerate’s transition into an “LBO fund”, the way will be clear for Wassall to attempt far larger acquisitions than previously.

“What we are proposing is a change of structure, not of strategy”, said director David Roper. “Rather than making a 100% acquisition every two years, we would like to have the flexibility to act more like a private equity house, undertaking joint ventures with other providers of capital”. In such structures, Wassall would always seek management control, even if it did not hold a majority of the equity on its own account, David Roper said.

He maintained the proposed structure would offer shareholders the benefit of exposure to potential unquoted equity returns combined with the liquidity of a quoted share, while a diversified portfolio of holdings in, say, 10 companies should be a lower risk proposition than Wassall in its current form.

The restructuring proposals include a change in Wassall’s remuneration system, which would incorporate a profit-sharing scheme for managers and shareholders. Discussing this proposal, which some market observers have suggested will prove a stumbling block with existing shareholders because of the potentially much higher rewards to management, David Roper argued “If we want to behave more like a private equity house, we must be able to retain and attract a certain type of individual”.

Since Wassall’s share price has lagged the FTSE All-Share over the last three years, some kind of shake-up would appear inevitable. By moving to a structure that could command a lower cost of capital, Wassall would be in a better position to compete with other private equity providers for deals.

Whether now is the optimal time for a new player to attempt to break in to a crowded and highly priced market is, however, debatable, and Wassall’s current shareholders may well find this prospect less inviting than do its directors; its share price has fallen by 15% since the group announced its plans in March. But if shareholders do vote in favour of the metamorphosis, Wassall is unlikely to have to search too hard for co-investors. David Roper pointed to a “population of investors with a huge amount of capital faced with a shortage of management teams”, and confirmed that Wassall is already in contact with “a number of people with deep pockets”.