Harriet Green’s departure from Thomas Cook after two and half years where she had presided over a 892% increase in the share price adding nearly £2 billion of enterprise value may have stunned the City but in reality it demonstrated all that is good and different about a Turnaround Manager. Once the turnaround is done make way for the more collegiate style where change is not the order of the day and evolution not revolution is required. Ms Green left her successor in place and is poised for challenges anew. Her departure may not have been as well ordered as she would have preferred but that is how it happens. When a Board feels the crisis is over and that they will be more comfortable without the “force of nature” that she undoubtedly is then they will seek a more conventional management style. But she will move on and find new challenges to fix.

An amazing statistic I read recently; 50% of management time is spent in meetings. Even if only half true, given that the law of diminishing returns sets in quite soon in meetings what can they be achieving? I once worked for a noted knight of the realm and owner manager who forbade any management meeting before 4 00pm in the afternoon. It was the most productive place I have ever worked in, albeit exhausting. Harriet should take comfort to know that out there in the big wide world are a whole group of CEO’s creating the very crises that she or someone like her will be needed to fix.

Turnaround management is a different game. It requires different skill sets and a fearless approach to change based on prompt actions and focused execution. There will be casualties on the way and some collateral damage but the goal is clear; in a crisis stop the bureaucracy, shorten lines of communication, cut out unnecessary costs, and focus on the good parts of the business to the exclusion of all distraction. What is surprising is that so many Boards still think that a conventional management style can fix a crisis and that hiring a turnaround specialist is an affront to their management credibility. Maybe an 892% increase in enterprise value will concentrate a few minds.

 

Alan Tilley – Principal, BM&T

27th November 2014

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Interesting news over the weekend that four people have been detained as a result of the ongoing investigation into the alleged fraudulent acquisition of Rangers Football Club. It has since been confirmed that three are partners from the firm appointed to handle the administration of the club when it became insolvent in 2012. It is not clear why they have been detained but there had been previous complaints that they were conflicted in taking the appointment due to prior involvement with the business of the club.

It would be wrong to speculate on exactly why they were detained but it does seem that conflicts of interest are hitting the headlines at the moment and attracting the interest of the authorities. See the comments on Comet below as well as comments on non-insolvency related conflicts. The message seems clear. Any perception of a conflict of interest undermines confidence and should be avoided at all costs.

 

David Bryan – Principal, BM&T

18th November 2014

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BM&T would like to pay tribute to the work of its US partner organisation, Conway MacKenzie, in supporting the restructuring of Detroit’s debt.

The city of Detroit filed for bankruptcy last summer – the largest municipal bankruptcy filing in US history – but earlier this month a US judge confirmed the city’s plan to adjust $18 billion of debt paving the way for it to exit bankruptcy.

Conway MacKenzie played a leading role in Detroit’s restructuring and revitalisation while working on a plan to restructure failing city services in connection with the bankruptcy.

I have lived in the Detroit suburbs myself and know the city well. It has clearly been a very difficult period. We are proud to be associated with a firm that played such a prominent part in the plans to get Detroit back on track. It is great to see a Detroit firm playing a big part in the city’s fightback against great odds and a historic comeback that few thought possible. Congratulations to all involved at Conway MacKenzie.

 

David Bryan – Principal, BM&T

10th November 2014

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Following on from the last blog post, Fiona Woolf has now resigned. The perceived conflict led to victims groups saying they had no confidence in the enquiry and at that point her position became untenable. All a bit predictable and just goes to prove that it is the perception of a conflict that destroys trust irrespective of whether there is one or not. One has to question why she took the position in the first place and why the authorities didn’t spot the problem up front. Third time lucky for the Home Office?

 

David Bryan – Principal, BM&T

3rd November 2014

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At BM&T we have long been concerned about the conflicts of interest that exist in the UK with Insolvency Practitioners (IP’s) acting as advisers pre-insolvency and then being appointed as Administrator when the business goes into Administration (see earlier blog re Comet). Cynics will always suggest formal insolvency is the result the IP wants. Similarly, IP’s and turnaround practitioners who are on bank panels are effectively put in by the lender but are engaged and remunerated by the company. Who do they work for? Where do their loyalties lie? Is it the company or do they favour the lenders who are a key source of future business?

It is therefore interesting to see the current heated debate in the UK on two potential conflict of interest issues, albeit unrelated to turnaround and restructuring. Firstly the selection of a top-flight person to chair the public enquiry into historic child abuse and possible cover ups at high level. The first appointee, Baroness Butler-Sloss was forced to step aside over concerns that her brother had been Attorney General during some of the time that cover ups are alleged to have taken place. Her replacement, Fiona Woolf now faces concerns that she had a social relationship with Leon Brittan, the then Home Secretary, and is facing a judicial review application challenging her independence.

In a separate matter, there have been a number of concerns raised over members of the National Institute for Health and Care Excellence (NICE) watchdog being too closely related to pharmaceutical companies that produce the drugs NICE has to make recommendations on. A group of leading doctors and researchers has complained to the Health Select Committee.

Whatever the fine detail of the relationships, surely anything that gives the slightest appearance of a potential conflict of interest should be avoided. The general public will never have confidence in matters where there is any hint of a conflict, whether it is public enquiries, health watchdogs or business failures. The fine detail doesn’t matter because to the public at large, perception is reality.

There seems to be a growing tendency for politicians and business professionals to think that the basic principles of conflict of interest can somehow be stretched. They can’t. Minor conflicts are no more tolerable than major ones and Chinese Walls are highly unreliable; a myth intended to suggest that an inherent conflict can somehow be worked around.

The public are already showing signs of strong discontent and distrust of politics and big business and this will only be added to by such behaviour. Our political and business leaders need to wake up and take the lead on this. At BM&T we remain committed to being free of all conflicts of interest and acting independently and objectively in the best interests of our clients and their stakeholders.

 

David Bryan – Principal, BM&T

22nd October 2014

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Following on from the previous blog entry, it is interesting that the bondholders tried to mount a rescue by offering a substantial debt to equity swap. Ultimately it appears this has failed. Trying to do this after the business has gone into Administration means it was probably too late to succeed. Such consensual techniques are not generally used once in formal process.

It is an interesting demonstration of what can be possible when lenders are facing an almost total loss of their money. They very rapidly came forward with a solution that was better for them. This is why consensual restructuring techniques so often work and preserve value compare to insolvency.

It also maybe begs the question of why the business entered insolvency so rapidly once EE declared it would not renew its contract in late 2015. That is some way off and couldn’t the business have taken a little time to better explore the alternatives such as a debt equity swap before the decision was taken to enter Administration?

We may never know but if the lawsuits eventually fly then possibly some of the background will be disclosed.

 

David Bryan – Principal, BM&T

19th September 2014

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Another high profile retail chain goes into Administration. At first sight, not an unusual story but it appears this one has not happened for the usual reasons. Normally we hear stories of falling sales, the impact of internet shopping, out of town retailers destroying the high street etc.

In this case the problem is the suppliers rather than the customers. All four of the large mobile phone networks have terminated or indicated they will shortly terminate their agreement to supply via Phones 4U and that just takes away their ability to do business. The problem appears exacerbated by the Private Equity owners having carried out a dividend recapitalisation last year. This is where they increase the borrowings of the business considerably and use the funds raised to pay the Private Equity owners a large dividend. In this case they recouped all the money they had spent acquiring the business.

So far we have heard the founder of Phones 4U complaining that there must have been collusion by the mobile carriers to drive them out of business. This is of course denied. The situation will also no doubt raise protests about the use of dividend recaps, especially when a business goes under so soon after the recap.

Who will lose out? Well certainly not the Private Equity owners. The lenders? Probably but it will depend on what security they have and what the assets realise. Ordinary trade creditors, landlords and HMRC, almost certainly. And last but not least a very large number of people, a significant proportion of over 5,500 employees, will likely lose their jobs.

There do seem to be some interesting questions. The Three network terminated their agreement in 2012. O2 apparently stopped accepting new customers in 2012 before not renewing their agreement in January this year. Surely some early warning signs? Management have said both Vodafone and EE had said they viewed Phones 4U as a long-term partner implying they had been misled.

It sounds like there were a number of alarm bells that should have been ringing. So why did the lenders agree to the dividend recap? Poor due diligence? Were the risks misrepresented to them? Who knows and no doubt all concerned will deny any blame. But it’s certainly little comfort to those who have lost their jobs and to the many unsecured creditors who will recover little or nothing of what they are owed.

With various threats of litigation flying around it will be interesting to see whether further light is eventually shone on this unusual situation.

 

David Bryan – Principal, BM&T

17th September 2014

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News this week confirmed that RBS is being sued in a class action by a number of small firms and their shareholders. They claim they were the alleged victims of unlawful actions by GRG. Is this yet another banking scandal where short termism, distorted ethical values and disregard of customer service has come back to haunt?

GRG was well regarded in years past. However if the allegations are true, it appears that over time bad practice within the bank and cronyism between banks and advisers crept in. Short term gains and fee income took precedence over longer term customer service and value preservation. That’s when the problems began to surface, the alleged abuses became newsworthy and the Government began to act.

At BM&T we have long felt that the bank model of using panel firms who are also Insolvency Practitioners to advise distressed businesses is wrong. It is a manifest conflict of interest and the advisers lack independence and objectivity if working for two masters. If that is coupled with the culture of a profit centre in the bank and large incentives to the staff then it is not surprising that dubious behaviour results. Let’s face it we have seen in so many areas of banking how large incentives result in bad behaviour.

And yet the banks still cosy up to the insolvency profession who act as both “doctors and undertakers”. This onion is also being peeled and evidence emerging of instances where companies have been put into insolvency when they may have been saved by consensual restructuring and more value saved for all stakeholders. But a cynic may ask, “Where are the fees in that”?

Notwithstanding all the scandals and potential new ones, the banking industry clings to the idea that large bonuses are essential despite their link to dubious behaviour. On the other side of the coin the government and regulators impose ever more onerous regulation that is ultimately stifling the whole banking industry. It seems to us that the answer is obvious. Impose a need for greater independence, take away the unnecessarily large carrots and you won’t need such a big stick!

We await the Financial Conduct Authority’s report with interest.

 

David Bryan – Principal, BM&T

16th September 2014

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Following the Tomlinson report RBS’s Global Restructuring Group (GRG) has been very much in the spotlight. The allegation that it deliberately put many small businesses into insolvency to pick up assets at a knock down price is a serious one. The report also suggested that staff in GRG were incentivised to charge large fees and to seize assets where possible with GRG being run as a profit centre.

It is worth reflecting on the history of this. In the recession of the 90’s, all the banks pushed many businesses into insolvency without any attempt to restructure or save them. This was widely criticised both for the devastating effects on the businesses and jobs but also because, with hindsight, it was clear that Private Equity firms had bought the assets cheaply out of the insolvency process and made a killing, mostly at the creditors’ but often at the bank’s expense.

RBS was at the forefront of the response to this and its workout and restructuring group (now GRG) was widely praised at the time for its more innovative approach under Derek Sach to saving value.

Following on from the Tomlinson report commissioned by Vince Cable, RBS commissioned its own report by Clifford Chance. This concluded there had been no fraud. Clifford Chance are on RBS’s panel of lawyers so were criticised for not being independent. As importantly, their terms of reference were to look for fraud – a very high burden of proof – so perhaps their conclusions were no surprise.

RBS also asked Sir Andrew Large to look at the structure of GRG and the way it was run. He concluded that running it as a profit centre was a flawed structure. RBS executives including Derek Sach testified to the commons select committee that GRG was not run as a profit centre and subsequently had to retract that. All a bit of an unethical mess!

So how did something that was so innovative apparently go so wrong? We will probably have to wait until the autumn for the authorities (the FCA) to report in full but the news recently that GRG is to be closed and two senior managers including Derek Sach to leave does create a sense that maybe the FCA report is not going to make good reading for RBS.

 

Alan Tilley – Principal, BM&T
11th August 2014

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News just out that Vince Cable has referred three Insolvency Practitioner partners from Deloitte to the Institute of Chartered Accountants for investigation over the Comet administration.  It appears there are two alleged issues:

  1. Failure to consult properly with workers and unions over potential redundancies which has left the tax payer picking up an £18.4 million bill
  2. A conflict of interest because the firm had worked for Comet before its collapse in 2012

The first issue will depend on the facts and we certainly don’t know enough to pass comment on that. Whilst we don’t know the full story re the potential conflict, BM&T has always thought that Insolvency Practitioners should not be allowed anything but the most minimal role advising a company in distress.

We firmly believe that advice to a company in distress should be independent and objective and the adviser should have no interest in the company entering any formal insolvency process. Anything else will always be a potential conflict of interest.

Deloitte has denied any conflict of interest and we will await the outcome of the investigation with interest.

 

David Bryan – Principal, BM&T
28th July 2014

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