Hilco UK Ltd., the international arm of Hilco Trading Co. in the United States, last month quietly launched a new investment platform focused on distressed opportunities in Canada – Re:Capital Canada LP.
In an exclusive interview with peHUB Canada, Chris Emmott, investment director at Hilco UK, says Re:Capital Canada is the result of the British firm’s success with several Canadian private equity investments over the past couple of years. These include its high-profile turnaround of the iconic HMV Canada brand, which gave impetus to Hilco UK’s decision in April to buy the company’s troubled former parent, HMV Group, for US$76 million.
Hilco UK’s timing couldn’t be better, as there is an “incredible opportunity” in Canada for private equity firms – particularly those focused on helping consumer-related enterprises challenged by “transformative shifts occurring in the market,” such as digital disruption, changing customer expectations, and other competitive pressures, says Adam Brown, partner in the turnaround and performance enhancement practice of Deloitte.
“Many Canadian retailers need to adjust their business models to the new realities,” says Brown. “There’s heavy lifting involved in meeting this objective, and in our experience the companies that have proved most successful are those focused on making the necessary strategic changes. Private equity can be an important catalyst in this regard.”
Re:Capital Canada is not a conventional private equity partnership. Rather, the investment platform is an extension of Hilco UK in Canada that will source promising transactions to be funded by the firm on a case-by-case basis. It will target restructurings, refinancings and related opportunities in market segments not currently being served by other investors, says Emmott. For the most part, he notes, these will be mid-market companies requiring investments of between $5 million and $75 million. And while Hilco UK has earned much of its reputation as a distressed asset specialist in the retail space, the investment platform will be sector agnostic.
Re:Capital Canada is managed by six senior investment professionals, including Emmott and CEO Paul McGowan. Emmott is currently hiring Canadian personnel to work in the firm’s Toronto headquarters.
Until recently, Hilco UK spent most of its past 10 years concentrated on deal flow in Europe. The broader Hilco organization’s role in Canada has historically been that of a provider of valuation and liquidation services, says Emmott. Everything changed in June 2011, however, when Hilco UK bought HMV Canada for $3.2 million, and injected an additional $25 million of working capital.
At the time of the acquisition, HMV Canada was a profitable bricks-and-mortar music retailer with 121 stores nationwide. Its new backer saw “a positive story” in the company, says Emmott, despite the fact that it was suffering from declining performance due to price deflation and competition from online retailers and discount chains such as Wal-Mart.
Hilco UK partnered with company president and CEO Nick Williams and his team to get things back on track. A key initiative, says Emmott, was simplifying HMV Canada’s product mandate, which was “selling too many things at too many different price points.” After restoring a core focus on audio and visual entertainment products and affiliated merchandise, the company embarked on new marketing and promotion that emphasized simpler and clearer pricing – a goal that was reached partly through discussions with suppliers. HMV Canada also introduced a new digital services offering called the Vault and a new loyalty rewards program.
Hilco UK’s financial and operational support of the business paid dividends in a relatively short period. By the end of 2012, HMV Canada’s stores were reportedly bustling with customer traffic. And fueled by better-than-anticipated holiday sales, the company posted full-year revenue of more than $270 million – this at a time when HMV Canada’s 90-year old British former parent had suspended trading in its shares and called in administrators.
HMV Canada’s fortunes have continued to improve this year. The business showed 1% growth in year-on-year sales in the first five months of 2013, and a gross margin increase of 2.1%, along with expanded domestic market share.
Emmott, who with McGowan serves on HMV Canada’s board of directors, says the turnaround “re-energized” the business and extended its life in what remains “a declining market.” He says Hilco UK will apply the same principles used in restructuring HMV Canada to rescue HMV Group, which despite major challenges might offer a greater upside because of its potential in the advanced digital market of the United Kingdom.
Hilco UK’s second Canadian transaction engaged a number of companies under the umbrella of the Kraus Group, a Waterloo, Ontario-based manufacturer and distributor of carpet and flooring that was hit hard by the U.S. recession and housing crisis. In June 2012, Hilco UK purchased $130 million of the company’s debt and security from a syndicate of seven secured lenders.
While the turnaround of Kraus is in its early phases, the business was profitable last year and increased its productivity and output, reports Emmott. Further gains are expected from additional cost savings, new product initiatives and the March arrival of new president and CEO, Steve Malinowski, who oversaw the turnaround of Mississauga-based frozen food producer Janes Family Foods.
A third deal, also done in 2012, saw Hilco UK establish Denby Canada in Etobicoke, Ontario, to act as the Canadian marketing and distribution branch of British pottery manufacturer Denby, Burleigh and Poole.
Taken together, Hilco UK’s investments in HMV Canada, Kraus and Denby Canada – which reflect combined revenues of $475 million and 2,500 employees in North America – will form the nucleus of Re:Capital Canada’s portfolio this year.
Photo of Chris Emmott courtesy of Hilco UK.